Outlook on the solar sector remains positive over the medium term

This is based on the global trend towards a greater reliance on renewable energy sources, says Fitch.

Fitch Ratings says it remains positive on the outlook for the solar or photovoltaic sector over the medium term, despite current oversupply and planned capacity expansions by major industry players. The comment comes after recent meetings with technology, media, telecommunications-focused credit-investors in the Asia-Pacific region, whose concerns center on the substantial level of inventories accumulated by mid-stream players (wafer, cell and module manufacturers) during Q111.

This is partly due to substantial capacity expansion and partly due to weaker-than-expected end-user demand, particularly as certain European governments are lowering feed-in tariff incentives available for solar panel installation.

Fitch says the positive outlook is based on the global trend towards a greater reliance on renewable energy sources, as illustrated by the German government's recent announcement to close down its nuclear power plants over the medium term, a decision which will allow solar technology to form an increasingly large part of the country's power generation mix.

Secondly, Fitch expects that solar cell conversion efficiency ratios (the proportion of sunlight energy that the cell converts to electrical energy) will continue to improve., This, in conjunction with ongoing price declines in PV systems (largely driven by the current industry overcapacity), will accelerate progress towards solar applications becoming economically viable, even on standalone basis.

Currently, average conversion efficiency ratios for the main crystalline solar cell technology are below 20%, but Fitch expects that technology development will cause this ratio to rise. For example, Sharp Corporation ('BBB'/Stable) has successfully tested a 36% conversion ratio at the research level and demonstrated a 30% conversion ratio in actual field tests.

While upstream polysilicon manufactuers are currently well positioned with high barriers to entry, strong order books and significantly higher margins compared with mid-stream players, a major risk remains the potential for new competition to arise from global companies in related industries with deep financial resources.

In this regard Fitch notes LG Chemical's announcement in early June that it plans to invest USD455m to enter the polysilicon manufacturing business by building a new facility in Korea.

However, Fitch does not expect LG Chemical's announcement to negatively impact major Chinese polysilicon manufacturers, particularly GCL-Poly Energy Holdings Limited (GCL, 'BBB-'/Stable).

This is firstly because Fitch expects it will take at least 18-24 months for LG Chemical to calibrate its manufacturing process and produce polysilicon at competitive yields; secondly because the Chinese polysilicon manufacturers enjoy significant logistic and supply chain advantages, since more than 50% of global mid- & down-stream wafer and module manufacturers are located in China; and thirdly in GCL's case it currently has a very strong order book equivalent to 7.7x its 2011 projected capacity.