If you’re like most investors in the western hemisphere, the notion that China could be “dumping” solar panels (selling them for below cost) on the European market was more than feather-ruffling. Indeed, you probably support the fact that the European Union has announced a probe into the matter.
If China’s major solar panel manufacturers are found to be knowingly and willfully selling panels at prices that are not only unprofitable but also damaging to the solar panel industry, the dumping decision could mean the EU strikes back with punitive tariffs on imports of those Chinese solar panels in the future.
Investors of any and all solar panel makers are on pins and needles watching the story unfold, as how the EU rules on this matter could set the tone for the entire solar power industry for years to come. Makes sense.
The trouble is, the intense focus on this one nuance is obscuring a much more important detail …
Missing the Point
While the posturing between the EU and China is an intriguing prewar ritual, what’s more fascinating is that nobody seems to be interested in the fact that companies like Suntech Power (NYSE:STP), Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL) are not only willing to take big — and sustained — losses on solar power panels, but also have been able to do so as long as they have.
Remember, the U.S. Department of Commerce put the kibosh on 60 Chinese solar panel makers earlier this year by raising the import tariff to 31% after determining these companies had “dumped” panels into the U.S. market as well. A few hundred smaller Chinese suppliers saw their U.S. import tariff jump as much as 250%. Yet, they’re not only still importing to the United States, but are now dumping into the EU as well.
It raises one key question: Doesn’t the fact that Chinese manufactures are practically giving solar panels away — yet still have plenty to spare — tell you something?
The dumping issue is just a microcosm of the bigger, underlying issue, and clamping down on China’s exports isn’t going to fix the problem.
How’d We Get Here?
The past eight years have been nothing less than revolutionary for the solar power industry.
In 2004, solar power panels were not much more than a novelty: fun to think about, but hardly ready for mainstream use. That’s why China had no solar panel manufacturing capacity to speak of then, and why the rest of the world had little. But, the idea had support — and subsidies. So, by last year the world’s solar power production capacity reached a whopping 70 gigawatts, up from 2010’s 40 gigawatts, which was better than 2009’s 23 gigawatts.
Dollar-wise, as of last year, spending on solar power infrastructure was around $40 billion, which was only a tad better than 2008’s total. Bear in mind, however, that solar panel prices fell by an average of more than 60% in 2011.
Two key ideas become top-of-mind themes when processing all those numbers:
- $40 billion is a lot of money.
- Four years isn’t a lot of time.
Think of it as the California Gold Rush of 1849. In the beginning of that year, few people even knew where California was (there were only 29 states then, and California wasn’t one of them — it still was part of the Mexican Cession), and even fewer people knew there was gold there. By the end of the year, that part of North America was swimming with prospectors, making it nearly impossible to actually make any money by looking for gold there.
Oh, there was gold … just not enough to merit the number of people looking for it.
In 2004, there were only a few dozen solar panel makers. The United States owned 43% of the market share then. China had none. With billions worth of revenue on the table, though, by 2008 China had become the biggest solar panel maker in the world.
The number of companies making solar panels soared to several hundred during that four-year stretch. The ballooning industry grew so fast, nobody knows the actual number of companies that were operating at the peak of demand in 2008. But, just for perspective, Canadian Solar (NASDAQ:CSIQ) (its manufacturing plants are in China) didn’t exist until 2007. Neither did Suntech Power.
Even after Spain and Germany — two huge solar panel customers — squelched their subsidies, more Chinese manufacturers came online in 2010 and 2011, hoping to break into a market that was poised for a rebound that never really materialized.
It wasn’t a purely-Chinese pile-on though. SunPower Corporation (NASDAQ:SPWR) didn’t become the solar panel manufacturer America knows and loves today until 2007.
Well, guess what — while nobody questioned it at the time, the world built too much solar power manufacturing capacity between 2007 and 2010 … way too much.
And There’s Still Too Much
The numbers are staggering. The global demand for solar panels is not only still growing, but still accelerating. Last year, we added about 30 gigawatts of new electricity production capacity. Problem: We have enough manufacturing capacity to add 58 gigawatts of new capacity per year. And yes, that potential output factors in the exit of Solyandra and Evergreen Solar. Indeed, it factors in the exit of about 30 North American and European solar panel manufacturers in the past 12 months.
For comparison, China exported about 12 gigawatts worth of production capacity, with the European Union buying about 60% (7.2 gigawatts) of it. That still leaves about 17 gigawatts worth of excess potential out there to contend with, one way or another.
Yes, pushing China out of the European market — in part or in whole — could make a helpful dent for EU manufacturers like Germany’s SolarWorld AG or Q-Cells, or even U.S.-based SunPower. It just won’t be enough to truly make solar fiscally viable given the potential supply and moderating demand … despite what the European manufacturers are saying.
In other words, it’s a capacity problem much more so than a pricing problem or a parity problem. Until the industry’s production potential gets cut in half, panel makers somewhere are going to have to take losses.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.