Chinese Module Majors Feel The Pinch From Module Price Drop

As financial results for Q3 come in, it is obvious that the pain of dropping module prices is beginning to impact major global players, especially the Chinese majors that dominate global markets. Except for pockets where buyers are from the US and Europe who consciously avoided Chinese players, revenues have sustained only on higher volumes, even as margins shrink, or look set to shrink in the coming quarters as old orders are serviced fully.

Capacity Additions Presage Continuous Price Pressure 

For China’s solar giants, the drop in margins and profitability presages a near future where massive capacity creation is underway, both in China and abroad. With China’s own capacity additions ensuring it stays the dominant supplier with over 80% marketshare or manufacturing capacity, well into 2030 and beyond. According to research firm Wood Mackenzie, over $130 billion have been invested into creating new capacity this year, with much more planned for the next two years across the supply chain. Almost 1 TW of capacity is expected to ensure Chinese dominance of the supply chain to 2032.  For now, the building capacity glut has started to show up in financials of the strongest players, ie, the major Chinese module players.

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Take the example of JA Solar. The Chinese major that has been a consistent Tier 1 manufacturer has a production capacity that is expected to 80GW by early 2024 .According to the firm’s Q3 earnings release,  JA Solar’s total module shipments recognized as revenues in the third quarter of 2023 were 8.3 GW, up 39% yoy and 1% qoq. Of the total, 82 MW were shipped to the Company’s own utility-scale solar power projects.

Net revenues in the third quarter of 2023 decreased 22% qoq and 4% yoy to $1.8 billion. The sequential decrease reflects lower project sales during the quarter and a decline in module average selling price (“ASP”), partially offset by higher solar module shipment volumes.

Gross profit in the third quarter of 2023 was $308 million, down 30% qoq and 15% yoy. Gross margin in the third quarter of 2023 was 16.7%, compared to 18.6% in the second quarter of 2023. The gross margin decline was primarily driven by lower margin contribution from project sales and lower module ASPs, partially offset by lower manufacturing costs.

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Next we look at industry bellweather and leader LONGi Solar. LONGi’s third-quarter revenue and net income fell by 19% and 44%, respectively, as product price declines outweighed shipment growth. With solar wafer and module prices hitting year-lows at the end of October, the fourth quarter is set to remain challenging. Net income is expected to increase in 2024 only due to higher shipments, as solar demand remains robust. LONGi is also relatively better placed to ride out the storm thanks to its vertical integration across the solar supply chain, which gives it better margins.

Finally, consider Jinko Solar, another listed global manufacturer from China. Jinko seemingly bucks the trend in its Q3 numbers, reporting  a strong set of operational numbers in Q3 Fy23.Shipments were up 108.2%, revenue was up 63.1%, net income was up 140.7%, adjusted net income was up 215.1%, gross margin was up 360bp (to 19.3%), OpEx was up just 4.5% and diluted EPS was up 188.7% to $0.63. However, a closer look reveals that revenue growth was considerably slower than shipment growth, pointing to declining ASPs. More importantly, the firm has done well by selling more of its premium Tiger Neo Modules, and higher margin N-type cells. How long it can sustain those premiums will be the challenge heading into 2024, especially if prices continue to remain soft, or even soften further as many analysts are predicting.

Strong Demand Offset Over Production, Till Now 

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As module prices test new lows every week, it has been blamed on over-production, over-supply and inventory build-up across two of the leading end markets of Europe and the US. What has prevented a bigger massacre so far has been the strong demand in China itself, besides other markets like the Middle East, Australia, and even an emerging South America. Of course, Africa remains the next big hope for 2025 perhaps. But even that strong, and rising demand may not be enough against the rising tide of manufacturing capacity coming up, especially in China, that dwarfs capacity creation in other regions. Firms both related and unrelated in China have rushed into what is being hailed as ‘green’ manufacturing, as markets cheered such moves with higher share prices until recently. It remains to be seen of course how many of those announcements convert to actual projects, although reports indicate real orders with equipment suppliers are at an all time high.

So where does that leave module price trends for 2024 ? Safe to say, a stop to falling prices can be ruled out for now, which will please many developers. However, don’t expect falling prices to miraculously revive large, utility scale projects stuck due to the volatility and high prices of 2021-22. Many of those projects face a higher interest rate environment today, and other legal issues that might have pushed them beyond redemption. More importantly, it seems to indicate a window of opportunity for such developers for projects planned till 2025 perhaps, where they can hope to contract for price efficient module supplies well into 2024. Post 2024, we are looking at a period of uncertainty again, as fresh manufacturing capacities in key markets like the US, Europe and even India lead to a clamour for more protection from Chinese imports, which will remain the most competitive on price and quality even then. The beginnings of such demands are already being seen in Europe, and expect the US to step in early next year too. With an election due in May 2024, India too will be the horizon for possible protectionist measures beyond those it has erected, be it the high customs duties or the domestic only ALMM requirement.