The whole solar industry has been facing a massive overcapacity problem since the beginning of 2011. Thousands of solar companies have gone bankrupt, but the solar glut has yet to resolve itself. The biggest solar companies continue to reduce capacity and fire thousands in order to adjust to the “new normal”. China is particularly vulnerable as the country has a huge solar manufacturing base with an estimated 400,000 people being directly employed by the industry. The prospects of sanctions by the EU has sent chills down the spines of the biggest solar panel companies – Yingli Solar (NYSE: YGE), Trina Solar (NYSE: TSL) and Suntech (NYSE: STP). The reason is that China exported almost 20 billion euros worth of solar panels to Europe in 2011.
Why Global Solar Panel Wars are occurring
The rapid decline in costs achieved by the major China companies has thrown the business models of other solar companies in a complete disarray. Chinese solar majors not only managed to drastically decrease the cost of making solar panels, but also expanded capacity at an exponential rate. This has led to a situation that despite the rapid growth in global demand, the industry is facing a massive oversupply of solar modules. Western Countries annoyed by the decimation of their solar industry and jobs have retaliated by either imposing or planning to impose duties on Chinese solar panels imports. Many countries and regions have also tried to protect their nascent solar manufacturers through domestic content rules. These have become contentious issues with Japan and China complaining to the WTO. Read more about the how global solar panel wars have panned out till date.
Past actions on the Diplomatic Front by China
China has been proactively trying to help its solar industry due to the fear of what would happen if the 400,000 jobs in the solar industry disappeared all of a sudden. The industry had become bloated mainly due to the heavy subsidies given by the local Chinese government and banks. Now with capacity almost double that of global demand, the whole industry is sick. The glut of Chinese solar panels has made the other governments angry as thousands of western solar manufacturers have shut down with many of them making media headlines such as Solyndra, Q-Cells, Abound Solar, Evergreen Solar etc. The Chinese Government instead of reducing its support has been fighting through measures like:
a) Protesting about the subsidies given by the US government to the cleantech industry.
b) Filing a case against Europe in WTO about the local domestic content requirements for solar panels by Italy and Greece.
c) Starting an anti dumping case against polysilicon imports as it tries to leverage all its cards. However the problems have kept on growing with India planning to impose duties on imports of cheap solar panelsto protect its dying domestic makers like Tata Power, Indosolar, Websol and others.
New Chinese Moves being Planned
1) Increase Chinese Solar Capacity Target from 21 to 40 GW target by 2015 - China is proposing to drastically increase the domestic installations from around 21 GW by 2014 to 40 GW. This would mean that almost 7-8 GW of solar panel capacity would be installed each year till 2015 giving a lifeline to the beleaguered domestic firms reeling from huge overcapacity and underutilization. It would benefit the biggest solar module companies like Yingli , JA Solar (JASO), LDK and Suntech who have a substantial presence in the domestic market.
2) Polysilicon duties of 30-50% on imports of polysilicon - The Chinese government may impose the AD duties before imposition on European duties. This will help its polysilicon producers 90% of which have already closed down. Only a few companies like GCL, Daqo (NYSE: DQ), Renesola (NYSE: SOL) are producing poly at this point, that too at 50% utilization even as poly imports have surged. This won’t have a big impact on consumers of poly as prices are expected to go to $18-20/kg from $15/kg now which would add at most 3c/watt cost for the overall modules. Note LDK has completely stopped production despite having a 17000 ton capacity.
3) Doubled outlay for Golden Sun Program - Recent reports indicate that China has added almost $1 billion in support under the Golden Sun Program with subsidies going to 100 solar panel makers and developers to urgently boost the cash strapped companies.
4) Bank Support - Chinese banks are an extension of the government and give credit based on government diktat rather than profitability. They continue to support bankrupt companies and are giving even bigger loans to solar companies despite western criticism. Jinko Solar, the 7th biggest module supplier got a $1 billion credit line from CDB.
Which Stocks are the Worst Affected
Chinese solar stocks for the most part trade together as a group and its very hard to pick winners and losers on a sustained basis. However during the last year , the extended downturn has led to a sharp decline in the worst performers such as
1) LDK Solar (NYSE: LDK) - The company with a debt of more than $3 billion and book value of less than $50 million is in the worst shape of all the Chinese solar stocks. I have already reviewed their problems in an earlier post of how they have stopped polysilicon production completely and is firing thousands each quarter. The company is trying to raise more debt to restart operations but outlook looks bleak.
2) Suntech (NYSE: STP) - Suntech Power is the second worst stock in the group and has been spending time in pennydom for the last few months as news of a fraud has made the company lose millions of dollars at a time when it can barely afford to lose even a penny.
The other Chinese solar stocks have also declined as well but they are not in the dire straits as the two discussed above. The best performers have been companies with low debt ratio, low costs and with good operations management eg. Renesola and Jinko. The better solar stocks have also outperformed as the market has started pricing in bankruptcy for the worst companies.
There is no free market capitalism in the solar industry which has resulted in such a deep and prolonged downturn in the industry. The excesses are not going away and the weaker players (LDK, Suntech) continue to survive due to government largesse. The Chinese government continues to prolong the pain by giving billions of dollars in subsidies preventing the industry from returning to a healthy demand supply balance. The recent Chinese moves have led to a temporary rally in stocks. But a sustained up move is difficult unless the noncompetitive capacity and players are removed from the market. That will only happen if the Chinese government stops giving handouts and bailouts. Till then the Chinese solar stocks will keep moving like a yo-yo.
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