Hazards of Sun-Worshiping

How low can solar stocks go? What companies will survive the current bloodbath that is punishing solar stocks?

First Solar, a U.S.-based company that is the world’s largest maker of solar thin-film panels, saw its stock hit a record low on April 27. The stock is down 87 percent in the past 12 months. Its thin-film cells compete against more traditional polysilicon-based solar. But with polysilicon prices crashing, First Solar is getting crushed, despite manufacturing cutbacks and laying off workers.

The solar industry is booming yet many of its leading manufacturers have never been in worse financial shape. Last year, global solar spending jumped by 36 percent to US$ 136 billion, according to Bloomberg New Energy Finance. But this is a financially troubled industry, one whose problems seem to mount by the week.

This is at best a time of profitless prosperity for solar manufacturers, with strong sales balanced by heavy losses and deep-rooted financial difficulties. This is certainly the case in China, where the solar industry exemplifies both the promise and the perils of China’s state-directed investment policies.

A period of extraordinary investment has caused prices of everything from polysilicon to finished solar panels to fall. Falling prices have spurred a boom in sales but ushered in a period of financial distress. In a best-case scenario, the losers will be winnowed out and the survivors would emerge as global leaders in a dynamic industry. But if China’s bankers and bureaucrats decide to keep coddling the weak players by rolling over loans, the result will be expensive for China. An industry filled with weak players will be unlikely to fund the sorts of investments needed for continued technological progress.

The story behind this apparent paradox tells a lot about China’s approach to clean energy. Tens of billions of dollars have been lent by China’s banks to help China develop a leading global position in solar. A big increase in the Chinese manufacturing capacity for polysilicon, a key solar panel ingredient, and solar panel manufacturing capacity, has pushed down prices.

China’s ambition to own the global solar market is no secret. China already makes more than half of all the solar panels in the world. Solar installations in China grew six-fold last year.

How much are these solar ambitions costing China? And can the country’s vaunted industrial policy make the sorts of tough decisions needed to make a stronger industry?

According to published data sourced to Mercom Capital Group, China Development Bank promised US$ 31.8 billion to five solar companies in 2010 alone. The US$ 31.8 billion in credits made up the top five debt deals in the world for the solar industry that year. In short, there’s a lot at stake for China in general and for China Development Bank, in particular.

It’s been a brutal price war that has seen prices collapse for solar panels and polysilicon: The spot price of polysilicon fell from US$ 450 per kilogram in 2008 to approximately US$ 80 per kilogram in the fourth quarter of 2010 and less than US$ 30 recently, a fall of over 93 percent in four years. Bloomberg reported in February that China’s polysilicon makers have cut production by almost one third to try to stabilize prices. Bloomberg also estimates that solar panel prices fell about half last year.

Many of China’s largest solar players have, by international standards, quite high levels of short-term debt. In a report published in October, securities house CLSA noted that four companies in the industry have more debt than equity. On average, about two thirds of that debt is short-term. Some companies are unable even to pay interest on existing loans, even at current low interest rates, except by raising more money. But despite many of China’s major solar players being listed on the New York Stock Exchange and NASDAQ, foreign sources of financing are drying up.

In a note to clients explaining why Wells Fargo was dropping coverage of solar maker LDK’s shares on Nov. 15, analyst Sam Dubinsky wrote: “We see increased liquidity risk due to the severity of the solar downturn combined with the company’s already weak balance sheet (comprised mostly of short-term debt). In our view, LDK’s ability to operate as an ongoing entity will be predicated on the patience of Chinese banks to continue to extend short-term credit; the ultimate payback on debt looks unlikely.”

This is not a small company: In its 2010 annual report, LDK described itself as the world’s largest solar wafer manufacturer. It makes polysilicon and solar modules and is moving into solar farms. LDK in January announced that China Development Bank will finance a series of projects in California and New Jersey. CDB is providing a 15-year project loan for an 8-megawatt pair of solar plants in California owned by LDK Solar. CDB also approved a 15-year buyer’s credit to KDC Solar for 14.7 megawatts of solar power in New Jersey, and two-year financing for an LDK-controlled company that is doing the construction. In the third quarter of 2011, the latest period for which financial data is available, LDK reported an operating loss of US$ 114 million on sales of US$ 472 million.

The heavy investments by CDB and others are part of a deliberate industrial policy designed to give China a leading position in green technologies. A significant part of China’s post-2008 US$ 586 billion stimulus program was designed to be spent on clean tech. Yet profitability seems to be far less important than sales growth. In short, Chinese taxpayers might end up funding cheap solar panels in the U.S. and other Western countries. Despite growth at home, most Chinese panels are exported.

 ”The Chinese strategy is very clear. They are engaging in predatory financing and they’re trying to drive everybody else out of the market. When you’ve got free money you can out-dump everybody below cost,” Bryan Ashley, the chief marketing officer for Sunviva, a U.S. solar company, said in an interview with Climate Progress.

Solar is certainly going to be an important energy source in the future. Already, the cost of producing electricity from solar is approaching that of conventional electricity in many parts of the world. That’s especially true in places with high electricity costs and lots of sunshine, such as Hawaii and California.

In a market economy, bankers or venture capitalists would force industry consolidation. Weak players would be sold as going operations or liquidated, with their equipment and inventory sold off. Will China force its solar players to operate by something approaching market rules? Will it keep pouring money into the industry, keeping all significant players afloat?

Many companies like Yingli and LDK may beat the odds despite their questionable financials, as long as the Chinese government continues to lean on the state controlled banks to roll their short term debt. “A rolling loan gathers no loss,” analysts joke about China’s tendency to keep rolling over debt. So far that is what has happened in China.

Meanwhile, consumers in the West and elsewhere benefit from China’s largesse in funding so many solar companies. The question for China is whether these tens of billions of dollars in investments will pay off by allowing the country to establish a sustainable and profitable market and technological advantage. Beijing’s bankers and planners need to ask some hard questions about how much more money they want to pour into a swathe of loss-making companies and what the strategy is for profitability.

Asia Business Council Adjunct Fellow Jill Baker contributed research for this article.

This article originally appeared in Caixin: http://english.caixin.com/2012-04-28/100385489_all.html