In many ways the solar power industry has never been better, as the race to slow the pace of global warming drives demand for panels to a record high.

Try telling that to investors in the world’s biggest solar equipment makers.

Shares have slumped as falling prices compress margins and factory expansions raise fears of overcapacity, while investors are drawn to new sectors like artificial intelligence. The combined market capitalization of the four largest panel producers, all based in China, has dropped by more than 40% since August.

“It’s an industry where it should be doing fantastic, but instead a growing number of firms are increasingly struggling,” said Cosimo Ries, an analyst with consultancy Trivium China.

The slump follows a stunning rise that saw Longi Green Energy Technology Co., the world’s largest solar equipment maker, increase its share price more than fivefold from the start of 2020 to late 2021.

Demand for panels has surged, driven by government climate targets and concerns over energy security, while supply-chain improvements have sped up installations. The world is on track to have a total of 5,300 gigawatts of capacity by 2030 — about the volume of solar that is required in scenarios under which global net zero targets are met, BloombergNEF said last month.

But that hasn’t been enough to keep momentum going for solar companies. Longi Green is down 54% from the end of July 2022, and fell as much as 2% on Wednesday in Shanghai. Trina Solar Co. has lost 49% over that same period, while JA Solar Technology Co. and Jinko Solar Co. are at least 22% lower.

Things began to turn in the second half of last year. New factories came online to clear up a bottleneck in the production of polysilicon, the key material out of which panels are made, triggering a decline in prices across the supply chain. Citigroup Inc. recently downgraded Longi to “sell” on concerns its margins could be cut as supply grows faster than demand.

Fund flows are also having an impact, with investors looking to shift some money out of the clean energy space and into areas like artificial intelligence, according to Dennis Ip, an analyst at Daiwa Capital Markets.

Manufacturers are boosting their capacity to produce solar equipment across the value chain. There are enough factories right now to produce 657 gigawatts of solar modules a year, with another 336 gigawatts announced or under construction, according to BNEF data. Total installations this year are expected to rise to 344 gigawatts.

Longi recently sounded the warning bell on excess capacity, saying more than half of China’s solar manufacturers could be forced out in the next two to three years if the current aggressive expansion of manufacturing capacity continues.

“There’s no way that the industry can keep up with this sort of capacity expansion,” Trivium’s Ries said. “Some event that we might not be able to foresee could just tilt the whole thing and start a new wave of consolidation.”

Not all solar manufacturers are languishing. First Solar Inc., a US-based firm that produces far less than its Chinese competitors but is expected to benefit from the Biden administration’s Inflation Reduction Act, has seen its shares more than double in the past year.

But the industry has gone through downtimes before. Suntech Power Holdings and Yingli Green Energy Holding Co. were the world’s biggest panel makers in 2010 and 2012, respectively, according to BNEF. Suntech later filed for bankruptcy while Yingli had to enter judicial restructuring.

--With assistance from April Ma.

(Updates share price in seventh paragraph.)