PV module deliveries suggest a more assertive solar industry in 2013; and a return to profit for some

12. April 2013 By:  Robert Dydo, SolarPVInvestor

While the last couple of years have been hard on the solar industry, photovoltaic module deliveries in the first two months of the year suggest a more assertive solar industry in 2013, writes SolarPVInvestor’s Robert Dydo. He further explores the presence of Chinese PV companies in the U.S. and Japan; discusses why Suntech is not a blueprint for all Chinese PV manufacturers; and looks at which companies could achieve profitability in 2013.

Yingli solar photovoltaic plant

The last two years have been hard on solar companies.

While the last couple of years have been hard on the solar industry, photovoltaic module deliveries in the first two months of the year suggest a more assertive solar industry in 2013, writes SolarPVInvestor’s Robert Dydo. He further explores the presence of Chinese PV companies in the U.S. and Japan; discusses why Suntech is not a blueprint for all Chinese PV manufacturers; and looks at which companies could achieve profitability in 2013.

The last two years have been hard on solar companies, and general media, which has (almost always) been highly skeptical of the industry, took no reprieve in making sure that every event was reported on in a way that demonstrated this. It was even easier for the critics to obtain further validation in the fact that leading companies continued to operate without profit.

Profit disappearance was explained by tariff wars and supply chain overcapacity, which produced an oversupply of photovoltaic modules. In addition, a lack of subsidies, was identified as the missing factor needed to create value in the future.

In the absence of subsidies, it was assumed that grid parity could not provide benefits to either diminishing, breakeven or negative gross margins. The ultimate consequence of the glut in photovoltaic module inventory was a retreat in average selling prices, which dramatically undercut the means to make money by way of manufacturing.

From destruction to recovery

Remarkably, the above statements are now becoming difficult to sustain, as facts indicate a change from scenarios of destruction to those of recovery. Unfortunately, however, this has gone widely unnoticed, since the general attitude and guidance of investors has remained unchanged.

Despite this, recent results indicate improvement in photovoltaic module shipment levels. The initial impact of tariffs in the U.S., and future implications of tariffs in the EU, offer different conclusions than those originally anticipated, and what is generally accepted by markets. 

After the U.S. introduced tariffs for Mainland China-produced modules, the European Union has vowed to bring justice to its PV industry, which essentially vanished from the map due to what the Chinese called "cost competitiveness," and others, "subsidies and dumping."

While much bandwidth has been dedicated to analyzing whether Chinese photovoltaic products are subsidized, or whether the market has dumped product, it is no longer relevant whether or not the Chinese were subsidized or dumped product; the tariffs have not stopped overall Chinese expansion in the U.S. – they have merely killed off a few of the smaller players.

Furthermore, the EU's policies of establishing the harm done by Chinese will perhaps prevent the imposition of tariffs, or at least will help to contribute to a lower level of tariffs. If tariffs are introduced, it is likely that the Chinese will move production to Europe or outsource it to European companies. So, for those who believe Chinese solar companies are going to vanish entirely, they are likely to be sorely disappointed.

What has happened in the US since tariffs?

While businesses have had to adjust, a good 250 MW worth of photovoltaic modules were shipped from China to the  U.S. in Q4 2012: ReneSola Ltd. (NYSE: SOL), Hanwha SolarOne (NASDAQ: HSOL), Canadian Solar (NASDAQ: CSIQ) and Yingli Green Energy (NYSE: YGE) were the volume leaders.

Meanwhile, in first two months of Q1 2013, the numbers increased slightly, although the main players changed leadership positions. As such, Yingli, Trina Solar (NYSE:TSL) Canadian Solar and Hanwha SolarOne were the volume leaders.

Canadian Solar has an impressive EPC project pipeline totaling 780 MW, both in Canada and the U.S. GCL Poly, which sells polysilicon and wafers, and in return buys modules for its own EPC projects from Canadian Solar, Hanwha and Trina, also has a 1.2 GW solar pipeline planned for the U.S.  Hanwha SolarOne, meanwhile, has 400 MW in standalone projects in the U.S.: it is using its parent company’s Hanwha "Q.Cells" cells, which are not restricted by tariffs.

On the day when Wuxi Suntech's bankruptcy was announced, GCL Poly and Yingli Solar announced a collaboration, which will lead to teamwork between the largest polysilicon producer in the world with the largest global manufacturer and shipper of solar modules in 2012. Yingli has plans to ship over 3.3 GW of modules in 2013, which represents 9.5% of global demand. Yingli has 325 MW of binding contracts to deliver to the U.S., and OEM arrangements for 125 MW in Canada.

Clearly, the U.S. offers a lot more to the Chinese than the added cost of Taiwanese- or Malaysian-made cells.

China eyes Japan

Japan: A tough, highly guarded market to enter, with high quality requirements, right? No. Not only do the Chinese manufacture more cheaply, but they also offer similar quality, which is certainly on par with the innovation of today's Japanese modules.

In fact, recent data points out that the majority of Japanese modules are built using cells from Taiwan, and wafers from China, which are then sold in Japan via one American company. However, while American media is touting SunPower's (NYSE:SPWR) superior efficiency of its modules, n-type wafers manufactured by the Chinese Comtec Solar are the backbone of the company’s technology.

So, how are the Chinese “commodity” makers managing in Japan? A total of 316 MW were delivered to Japan in Q4. Usual suspects Suntech Power Holdings (NYSE:STP), Canadian Solar, JA Solar (NASDAQ:JASO), and Hanwha lead the pack. Kyocera (NYSE:KYO), which produces its modules in Tianjin, China, shipped 111 MW on top of that amount.

In Q1, in only two months, the Chinese shipped 350 MW, while Kyocera actually shipped less than 67 MW. There is a particularly good chance that the Chinese will ship at least 3 GW into Japan, which will probably supply as much as 50% of the expected installations in Japan this year.

Suntech collapse

The collapse of Wuxi Suntech, a subsidiary of Suntech Power Holdings, is an example of the wrong time and the wrong bond. It happens that collateral given to the company was a worthless piece of paper, instead of German bond certificates.

Since the company did not have a way to obtain $576 million to pay off its convertibles, the government in Wuxi, where its principal subsidiary Wuxi Suntech resides, took the assets under control. Wuxi Guolian, a state owned enterprise in charge of the reorganization of Wuxi Suntech, is planning to cut the capacity and leave 600 MW of the most efficient, mostly automated lines, to provide for existing contracts.

Suntech is neither a Chinese banking system collapse, nor a failure of the Chinese solar business model; it is a fiasco of not being careful with money and being the victim of fraud. Like it or not, if the company were able to sell a genuine bond, there would be no bankruptcy. It is also a proof that Chinese companies are as unique as any other international organization, vulnerable and resourceful at different times.

While Suntech's demise, due to mismanagement, is good for capacity levels, it apparently made banks in China think twice about lending money to solar entities. Shortly afterwards, the media made another effort at throwing everyone into the same bag, regardless of background and common sense.

Trina Solar, with $807 million in cash on hand, was questioned over whether it can pay $83 million in convertible debt due in July. JA Solar, which has a $113 million in convertible bond due in May, also has $486 million in cash, but was called being at risk. This is despite surprisingly good balance sheets owned by each company, a good thing in this debt-laden industry.

The message of death due to the absence of funding has been lauded as another opportunity to beat the drum and alert the masses – a spurious attempt, when most are not looking for funding at all.

Since borrowing has been always viewed as a sin, due to a seemingly strong support system offered by China’s ruling regime, it is confusing that the current state of the liquidity drought has lent an opportunity to fear, where it should be a reason to celebrate.

The reason is obvious: without funding, there is no money; in addition to an already established lack of profit. When there is no cash flow, operations cannot continue, thus leading down a straight line to consolidation and reduction of capacity.

The fear case has been further weakened by members of the peer group obtaining loans as they have always done before. ReneSola and JinkoSolar (NYSE: JKS) have received $50 million each from the China Development Bank, confirming differentiation among companies and convenient access to funding. They remain supported, because they offer value in efficiency and processing costs, which will take at least a couple of them to profitability by the second half of 2013.

Profit - the most understood indicator?

Who can become profitable this year? Perhaps Canadian Solar, which has some 300 to 500 MW of EPC projects waiting to be recognized as revenue this year – a prospect that is unexplored by financial media, although those projects offer in the vicinity of 20% in gross margins, and despite CEO, Shawn Qu speaking about full fiscal 2013 profitability.

While the company is concentrating on developing an EPC model, it has been extraordinarily strong in Japan, the U.S., and it is dominating Indian markets with deliveries, so far this year.

ReneSola, which started as a wafer producer, is becoming a serious polysilicon maker and an even more aggressive solar module manufacturer. It is expecting module sales of 1.6 GW (more than double the 2012 total of 716 MW of modules) in 2013, partly by outsourcing production to Indian and South African companies.

In my view, the company can reach profitable levels in Q3, but some see it even sooner. Very strong deliveries to the U.S. (41 MW), Greece (40 MW), and Australia (30 MW) during Q4 continue with a large presence in Greece and Australia during this year. Due to its own cheap polysilicon and efficient processing costs, ReneSola is one of the profit contenders in 2013.

Trina Solar, in the words of Chairman Jifan Gao, is expected to return to profitability in Q3 2013. The company is planning to ship around 2.3 GW in 2013, versus the 1.6 GW shipped in 2012, resulting in growth of 44%.

This situation has been created by opportunities in the Chinese market, but when reviewing global markets in Q1, Trina made advancements in the U.K. (where it is the leader), Australia (again, the leader), and Japan (in the lead pack). Like Canadian Solar, it plans to embark on an EPC journey, but its pipeline lacks market visibility today. When executed, this can become an instant boost on the path to profit.

JinkoSolar boasts the lowest processing cost, which should allow the company to be profitable this year. While it made a significant commitment to China in Q4, it is now staging a comeback in global markets, including high levels of deliveries to India and to the European continent.

How big? The company doubled the Q4 worldwide deliveries in the first two months of Q1. It is also planning to outsource module production to meet its 1.5 GW sales target, having only 1.2 GW of own capacity. JinkoSolar is also taking part in the South African market with a recently announced 115 MW deal.

Overall, the South African region has been supplied in Q1 with most deliveries from Suntech and Hanwha SolarOne. Deliveries to South Africa grew from 16 MW in Q4, to 110 MW in the first two months of 2013.

In addition, Chinese companies confirmed they would ship around 550 MW of modules in total in 2013, with Hanwha planning to ship around 150 MW, Suntech with 100 MW, BYD Co. China about 75 MW and Trina 32 MW. Only 80 MW were shipped in 2012, out of a 550 MW commitment, and there are at least an additional 170 MW in unconfirmed volumes as announcements have not been made, but insiders have reported.

While of course a lot depends on module ASP (average selling prices), most of the mentioned companies are able to achieve profitability, with pricing returning to $0.70 and their all-in costs dropping to $0.55 per watt.

The demand this year is around 35 GW, and the existing capacity levels in China for bankable module production are estimated at no more than 31 GW. It is relatively easy these days to achieve an all-in cost of $0.60 per watt and potential of expansion of ASP to $0.70 per watt, which will allow for gross margins to go back to 14%.

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Disclaimer: The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.

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