July 28, 2009 – Inventories are spiking in the solar supply chain due to oversupply coupled with lackluster demand, and the glut will cause price erosion from raw materials to cells, according to a report from iSuppli.

“The worldwide solar industry for the first quarter added the equivalent of one-and-a-half months of excess inventory in just one year,” notes Henning Wicht, iSuppli’s principal analyst for photovoltaics (PV) research, in a statement. “With new polysilicon capacity coming online this year, the PV industry will suffer further price erosion, at all nodes of the value chain.”

Average days of inventory for solar module and cell makers, polysilicon, and wafer suppliers (and other integrated firms) spiked 64.3% in 1Q09 to 121 days, up from 74.2 days in 1Q08. Heading the other direction are spot prices for polysilicon, which were $180/kg at the beginning of 2009 but will drop to $50 by year’s end (-72%), notes the report.

Average days of inventory in the PV industry. (Source: iSuppli)

On the demand side, Spain’s push into PV took a nosedive after the nation pulled back its incentives. Nevertheless, solar-cell makers’ long-term contracts mean they still have to take deliveries from their polysilicon suppliers — who, on the supply side, have to keep churning out product to cover the fixed cost of new billion-dollar facilities.

Also being hit hard are integrated companies including REC, Yingli, and SolarWorld, whose participation in all three supply chain points (poly-Si, wafers, and cells) ties them to their own capacity and exposes them to demand dropoffs at every step — and causes lag in other sectors. Inventory levels for this segment nearly doubled to 161 days in 1Q09, vs. 86 days in 1Q08, iSuppli notes. Cell and module manufacturers are seeing inventories build up even faster (105 days in 1Q09 vs. 47 days in 3Q08), due in part to pressure from poly-Si and wafer suppliers demanding adherence to contracted pre-downturn shipment schedules.

Those suppliers have done better than others in maintaining inventories (up to 98 days in 1Q09 vs. 74 days in 1Q08), but the report notes there’s additional capacity about to come online from majorexisting and newer players, which will cause everyone to push excess to the spot market in order to cover even variable costs. The analyst firm “expects to see inventories at this node in the value chain to rise throughout this year and persist into 2010.”