Chinese solar companies Suntech Power (STP), Trina Solar (TSL), Yingli Green Energy (YGE), JA Solar (JASO), LDK Solar (LDK), and China Sunergy (CSUN) have all performed terribly recently as have their U.S.-based counterparts First Solar (FSLR) and Evergreen Solar (ESLR). A look at China’s rise to become the global leader in solar energy shows how the country has, in the process, destroyed the basic economics of the industry – hurting both Chinese and American solar companies.
The New York Times ran a frontpage article today titled “China Racing Ahead of U.S. in the Drive to Go Solar.”
The article’s takeaway is that despite President Obama’s ambition to make the United States “the world’s leading exporter of renewable energy,” China is actually walking the walk rather than just talking the talk:
“I don’t see Europe or the United States becoming major producers of solar products — they’ll be consumers,” said Thomas M. Zarrella, the chief executive of GT Solar International, a company in Merrimack, N.H., that sells specialized factory equipment to solar panel makers around the world.
Since March, Chinese governments at the national, provincial and even local level have been competing with one another to offer solar companies ever more generous subsidies, including free land, and cash for research and development. State-owned banks are flooding the industry with loans at considerably lower interest rates than available in Europe or the United States.
Tellingly, Chinese-based Suntech Power Holdings [[STP]] will become the second-largest supplier of photovoltaic (PV) cells in the world this year behind Arizona-based First Solar, Inc. [[FSLR]].
But there is a darkside to China’s impressive growth for those looking to capitalize on the rise of Chinese solar companies:
Chinese companies have already played a leading role in pushing down the price of solar panels by almost half over the last year.
Indeed, less than two years ago the average U.S. retail price of a 200-watt module was $1500 while now it is less than $650.
From an investment-perspective, the real story here is that, thanks in part to China’s aggressive strategy for growing its solar industry, the solar market is flooded with products for which there is no demand. Demand for solar panels is largely dependent on government subsidies because solar energy is still more expensive to produce than using fossil fuels or even wind power (even with the drop in the price of solar panels), and these government subsidies worldwide are being scaled back due to tax revenue concerns. The decrease in subsidies is only compounded by dampened demand due to the worldwide economic downturn. Basically, the economic downturn is a double-whammy for solar demand: it hurts demand the way a recession hurts demands for all kinds of products while also decreasing government revenue on which solar subsidies (and much solar demand) depend. Global demand for solar panels is expected to drop nearly 20% this year.
Even worse, this decrease in demand is being met not with a decrease or even flat supply, but with an increase in supply – total solar cell manufacturing capacity will be up more than 50% this year, and is projected to grow at an astonishing annual rate of about 50% for the next 5 years.
This sobering mismatch – increased supply and decreased demand – is taking its toll on Chinese solar companies’ stock prices over the last month:
- Suntech Power Holdings [[STP]] is down 29%.
- Trina Solar Ltd. [[TSL]] is down 16%.
- Yingli Green Energy Holdings [[YGE]] is down 29%.
- JA Solar Holdings [[JASO]] is down 29%.
- LDK Solar Co. [[LDK]] is down 25%.
- China Sunergy Co. [[CSUN]] is down 17%.
This terrible performance is during the same period that the S&P 500 gained 5%. American solar companies are not immune, given the global nature of the solar market:
- First Solar, Inc. [[FSLR]] is down 24%.
- Evergreen Solar, Inc. [[ESLR]] is down 27%.
Looking back 12-months leads to an even less flattering profile for most of these stocks, with many losses far greater than 50%.
The simple fact is the blood-letting is probably only going to continue. Save for First Solar and Trina Solar none of these companies are profitable – and with the very bad economics of the market right now there is no reason to think any of them are going to become profitable or get more profitable any time soon.
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