The capex derivative & solar--Part 2

In a previous post, I discussed how steep upward growth for a market doesn’t necessarily mean steep upward growth all along the supply chain. In fact, solar cell manufacturing is an example where sales can go wildly negative even as the power generators see upward growth. In the original post, I considered three different scenarios that made my point very nicely. But what happens when we plug in some numbers that may be more or less what we expect the solar market to be?

I’ve done that in this figure. The first thing to notice is that the cumulative generating capacity—the top curve and what the power companies think about—goes up all through the forecast.

The next thing you notice is that the new module shipments—that’s the middle curve—takes a dip in 2009. This isn’t too surprising, given the recession, tight credit, and low oil prices. The dip isn’t too big and it’s in record territory again by 2011.

But what is really interesting is the bottom curve. That’s the new factory capacity that’s needed to make the modules each year. This correlates directly to lasers sold for making cells. That curve actually goes to zero, even negative, for a couple of years. And even in the recovery it only hangs around the 2008 level through 2013. In other words, the laser sales will not rocket upwards like the module sales through 2013.

Of course, there are some problems with this simple chart. The new factory capacity (laser sales) probably don’t go negative. That would mean companies were taking equipment out of commission. While I have heard of this happening in 2009, it’s not widespread. Companies want to be ready for the recovery. And, there are always new suppliers, and old suppliers expanding and upgrading equipment. That raises sales above zero.

On the other hand, there is also inventory in the supply chain and used equipment for sale. That pushes the recovery further into the future.

To a first approximation, the chart is a good model, and a good example of what I call the "second derivative paradox." At least it’s better than looking at the other two curves and assuming something similar.

January 13, 2010