Here’s Why The Recent Chinese Solar Rally Isn’t Sustainable

10.37
Trefis
TSL: Trina Solar logo
TSL
Trina Solar

The Chinese solar sector has had something to cheer about in recent times. Earlier this month there were reports that the E.U. and China could be closer to settling the trade dispute over the alleged dumping of Chinese solar panels and more recently, the Chinese government announced its intentions to quadruple installed solar capacity in the country over the next three years. Chinese solar stocks have also been performing relatively well, with some of the larger companies such as Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL) gaining nearly 40% and 30% respectively since early June. While these recent developments are quite positive, we believe that they are no panacea for the industry given the depths of the overcapacity situation as well as the changing pricing dynamics of the global solar market.

See Our Complete Analysis for LDK Solar|Suntech Power|Yingli Green Energy|Trina Solar

Planned Capacity Boost Will Partially Alleviate Panel Glut, But Not Eliminate It

Relevant Articles
  1. Do PERC Panels Pose A Threat To First Solar And SunPower?
  2. Key Takeaways From Trina Solar’s Q3 Results
  3. How Will The Slowdown In Chinese Installations Impact Trina Solar’s Q3 Results?
  4. Trina Solar Posts Solid Q2 Growth, But Downstream Projects Remain A Key Factor To Watch
  5. Why The Solar Industry Could Face Headwinds In The Near Term
  6. Going Private Is A Good Deal For Trina Solar Shareholders

China’s State Council has outlined plans to quadruple solar power capacity in the country to around 35 gigawatts (GW) by 2015. This would translate to the addition of nearly 10 GW of capacity for each year over the next three years. While we believe that this target is quite achievable given China’s need for energy independence, this target will need to be supported by attractive subsidies to induce consumers to install solar power systems. While the additional domestic demand would definitely absorb some of the excess capacity that Chinese firms have, we believe that it is not going to eliminate the oversupply situation. Total manufacturing capacity in China alone stands at around 45 GW per year while global demand for solar panels in 2013 is substantially lower at around 35 GW. [1] More importantly, American and European competitors could also gain more ground in the global markets as they deploy more advanced and efficient panels while Chinese firm’s still largely compete based on price.

Potential Settlement With The E.U. But Europe Is No Longer The Booming Market It Once Was

China and the E.U. are believed to be closer to reaching an agreement to resolve their trade dispute over the alleged dumping of Chinese panels into the European market. The deal could possibly involve setting a quota for Chinese panel exports into Europe in addition to fixing a base price for panels so that the higher anti-dumping duties could be avoided. (Related Read: E.U. And China Work To Smooth Over Solar Panel Dispute) While the potential deal would definitely benefit the Chinese solar companies we cover given that they would otherwise face punitive tariffs that average nearly 50%, we believe that the European market could become less important for Chinese companies in the long run for two reasons.

Firstly, the subsidies that powered the solar market growth in Europe are declining. For instance, Spain which was one of the largest markets for solar power in Europe has been cutting tariffs and has even introduced retroactive cuts, which are likely to hit installations. [2] Germany, which is Europe’s single largest solar market, is also witnessing a slowdown after the government began cutting its generous subsidies last year. Feed-in-tariffs in Germany’s rooftop market for installations below 10 kilowatts from around $0.24 to around $0.15 per kilowatt-hour. [3] Additionally, Europe is less price sensitive compared to other markets, meaning that customers are likely to choose higher end panels rather than the cheaper Chinese panels, as the prices continue to decline.

Panel Prices Are Becoming Less Relevant To The Purchase Decision

While Chinese companies have been investing in developing higher efficiency panels, they still compete primarily based on price. Over the last few years the price of solar panels has fallen at a much faster pace than that of the balance of systems components such as mounting equipment, switches and batteries. A solar panel now accounts for less than 40% of a total solar power systems cost, making price a less relevant factor in the panel purchase decision. Most polycrystalline Chinese panels sell for around $0.70 per watt or less while higher end panels from U.S. manufacturers such as SunPower (NASDAQ:SPWR) sell for over $1 but offer better performance and efficiency. Additionally, these high-efficiency panels will need less mounting equipment which could actually help to offset some of their initial costs. We believe that these changing total cost dynamics could potentially skew global demand away from low cost and lower performance panels in the long run.

Understand how a company’s products impact its stock price on Trefis

Notes:
  1. Reuters []
  2. Solar Server []
  3. UPI.com []