China's solar sector bounces back

Industry consolidation and soaring demand have helped mainland panel makers to return to profitability after a painful slump

PUBLISHED : Monday, 10 March, 2014, 5:59am
UPDATED : Monday, 10 March, 2014, 7:54am

Mainland solar panel and parts makers are seeing a resurgence in profitability after a round of industry consolidation weeded out high-cost players, while soaring domestic demand helped offset lower exports to Europe due to trade barriers.

But looming trade restrictions from the United States may pose fresh challenges to producers seeking to maximise profits by boosting output in the notoriously cyclical industry.

"The solar industry is no longer in overcapacity. Supply of solar panels is lagging behind now," Liu Jie, party secretary of Xinyu city in Jiangxi province told reporters last week on the sidelines of a panel discussion during the National People's Congress parliamentary meeting.

Minister of Commerce Gao Hucheng told a press conference that the mainland's solar industry has been "reborn", largely thanks to policies designed to bolster domestic panel demand and partly due to efforts by Beijing and Brussels to reach a deal on preventing a fully fledged trade war last year.

Xinyu is the production base for LDK Solar, one of the nation's largest solar panel makers, which last month received from investors a seventh extension on a deadline for repayment of bond interest owed as it was close to implementing a debt restructuring programme.

The industry has matured considerably from the shake-out in 2012
Stefan de Haan, analyst

LDK was one of the large solar panel makers that suffered steep losses and experienced financial difficulties during the 2011-13 industry downturn.

The slump was sparked by cutbacks in subsidies for solar panel installations in Europe, a production facilities building binge by mainland producers, and trade barriers erected by the European Union and the US.

Liu said LDK is running at full capacity but analysts point out that the industry as a whole is still suffering from too much capacity.

"There is still overcapacity, but it is manageable because so much has been mothballed," said CLSA head of sustainable research Charles Yonts. "You can see from the fact that panel prices have been drifting south in the past three months that there is no major shortage of supply."

He said some top-tier producers such as Jiangsu-based Trina Solar and JinkoSolar, which have plants in Jiangxi and Zhejiang provinces, have acquired equipment from weaker rivals, so mothballed capacity is coming back, albeit in a "relatively managed fashion".

Yonts noted panel prices have declined 3 per cent in the past three months. After bottoming out at just above 60 US cents per watt in the middle of last year, they then climbed to 68 US cents and are now back to where they were in the middle of last year.

Stefan de Haan, a solar sector analyst at consultancy IHS, also disagreed that industry oversupply has gone.

He forecasts global demand rising 22 per cent this year to 44 gigawatts (GW), the strongest growth in three years.

Overcapacity in upstream parts and materials is less of a concern, with demand for solar cells at 52GW, for wafers at 54GW and for polysilicon at 59GW.

He said makers are reacting to demand recovery and a new capital spending cycle is starting.

De Haan forecasts global spending on manufacturing equipment to make solar panels and parts will grow 42 per cent to US$3.37 billion this year, and another 25 per cent next year to US$4.22 billion.

"The industry has matured considerably from the shake-out in 2012," he said. "Leading manufacturers will both acquire existing plants that were shut down and also invest in new capacity."

According to consultancy NPD Solarbuzz, prices of solar panel parts and production costs, as well as the installation cost of solar systems, have fallen by at least half in the past three years.

As uncompetitive players closed or were consolidated, the number of producers fell by 40 per cent to 205 between 2010 and last year, NPD Solarbuzz said. Capital spending last year was the lowest in the past eight years, it added.

Taking advantage of sharp falls in panel prices that made it more affordable for Beijing to subsidise installation of solar panels, in 2011 the central government rolled out a pilot tariff-based subsidy system for solar farm owners.

The scheme was expanded last year to a nationwide policy that saw panel installations double to more than 11GW.

While that has more than offset lower exports to the EU, which accounted for the bulk of mainland panel makers' sales a few years ago, a general manager of one of the largest panel parts makers said another potential trade war with the US could hit exports this year.

The firm's exports to the EU were cut by about 40 per cent despite a deal between Beijing and Brussels to prevent a trade war, he said.

The US may extend import duties on mainland solar panels and parts to cover panels made with parts from Taiwan to close a loophole that allowed companies to avoid duties.

The US International Trade Commission last month decided there were grounds for an investigation into Taiwan-based producers for allegedly hurting their US rivals.

This came after the US unit of German solar products maker SolarWorld complained that mainland makers circumvented duties imposed on them in 2012 by shifting production of solar cells to Taiwan.

Additional reporting by Victoria Ruan