Average days of inventory among solar module and cell makers, polysilicon and wafer suppliers and vertically integrated companies that provide all these items surged to more than 121 in the first quarter of 2009, up from 74.2 during the same period in 2008.

"The worldwide solar industry for the first quarter added the equivalent of one-and-a-half months of excess inventory in just one year," said Dr. Henning Wicht, principal analyst, Photovoltaics (PV) research, for iSuppli.

"With new polysilicon capacity coming online this year, the PV industry will suffer further price erosion, at all nodes of the value chain."

iSuppli estimates the spot price per kilogram for polysilicon, the key raw material for making solar cells, will drop to $50 by the end of the year, down by 72 percent from $180 per kilogram at the beginning of 2009.

The attached figure presents average days of inventory for the major segments of the solar supply chain.

The perils of poly
On the demand side, the solar market is coping with a demand sinkhole that was left after Spain's PV demand collapsed.

Despite this, solar-cell makers are still compelled to take deliveries from their polysilicon suppliers due to their long-term contractual obligations.

On the supply side, polysilicon providers recently invested billions in new facilities, forcing them to produce in order to cover these new fixed costs.

Integrated firms holding the bag
Some of the hardest-hit entities in the PV industry have been the fully integrated players. These companies, including REC, Yingli, and SolarWorld, have operations in all three nodes of the value chain: polysilicon, wafer and cells.

Inventory levels for this segment jumped to more than 161 days in the first quarter, up from 86 days during the first three months of 2008.

One major reason these companies have borne the brunt of the inventory surge is their integrated structure. These firms possess integrated wafer and polysilicon production that help secure raw materials during periods of a supply bottleneck in the industry. However, the integrated firms found their hands tied to their own capacity at various nodes when demand dropped off a cliff at the end of 2008.

This, in turn, created a lag time relative to other sectors in the industry that is now just reacting to the business environment, causing the severe inventory build-ups that led to margin compression.

Cell and module manufacturers
Cell and module manufacturers are currently experiencing significant increases in inventory, with levels rising to 105 days from the third-quarter level in 2008 of 47 days. This is due, in part, to pressure from wafer and polysilicon suppliers desiring that their customers adhere to shipment schedules negotiated in 2007 and 2008.

Polysilicon and wafer manufacturing have done the best job of maintaining inventories in this dynamic environment. With only a modest increase to 98 days from 74 days a year ago, it would seem that things are not looking so bad at this node compared to that of cell and module manufacturers.

However, as the year rolls on, this node in the chain will be hit with additional capacity coming online from major existing and relatively new polysilicon players. Such a development will lead to severe turmoil at this section of the value chain as the spot market will be flooded with excess capacity, with many looking to only cover variable costs. iSuppli expects to see inventories at this node in the value chain to rise throughout this year and persist into 2010.

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