Solar’s deathly spiral and the $650 million Suntech fraud

The share prices of solar manufacturers plummeted overnight on more weak sales news and a potential fraud of the sector’s largest company. And with bankruptcies in the sector coming thick and fast, we look at who’s left to pick up the pieces.

‘Solar company enters liquidation’ is already a familiar headline and one we should get used to seeing quite regularly over the next few years. A shakeout of epic proportions is underway in the sector and it has led to rapid stock price declines and a minor trade war that could escalate quickly in coming months.

The shakeout is far from over despite annual industry growth rates of 42 per cent, with selling prices remaining below cost for many manufacturers and prices only likely to fall further.

To pinpoint the cause is not difficult. Subsidies for solar, particularly in Europe, led to rapid production growth through the lure of decent profits. It encouraged plenty of new competitors to try their hand in the sector and as the new entrants gathered, particularly in China, prices began to fall rapidly – 75 per cent since 2008 and 45 per cent last year alone.

With prices falling so swiftly on the back of innovation and an oversupply, solar manufacturers in developed economies have been caught short. Most simply can’t reduce prices as quickly as the likes of manufacturers in China due to considerably higher labour costs. That being said, even the Chinese firms are struggling.

Right now the top ten list of solar manufacturers is dominated by Chinese firms (figures from end 2011 – Suntech is now reportedly in top spot):

1. First Solar (US)
2. Suntech (China)
3. Yingli Green Energy (China)
4. Trina Solar (China)
5. Canadian Solar (Canada)
6. Sharp (Japan)
7. Hanwha Solar One (Korea)
8. Jinko Solar (China)
9. LDK Solar (China)
10. SolarWorld (Germany)

In 2007, the list was:

1. Q-Cells (Germany)
2. Sharp (Japan)
3. Suntech (China)
4. Kyocera (US)
5. First Solar (US)
6. Motech (Taiwan)
7. SolarWorld (Germany)
8. Sanyo Electric (Japan)
9. Yingli (China)
10. JA Solar (China)

While First Solar and Canadian Solar are officially based in the US and Canada, respectively, it should be noted that the bulk of First Solar’s production is now carried out in Malaysia (over 80 per cent in the first quarter) and most of Canadian Solar’s production is done in China.

In the red

The news overnight was a familiar tale, with the share prices of several leading lights slumping.

After a flood of red, Suntech hit a record low of $1.34 on the New York Stock Exchange. At the end of 2007, its shares were seen topping $80. First Solar, the other industry frontrunner, is at $14.21, well off its remarkable high of over $300 in 2008. It was still over $100 just one year ago.

Among other players in the top ten, Trina Solar hit a three-year low last night, Canadian Solar is nearing an historic low after plunging 15 per cent, Yingli and LDK Solar are at all-time lows, Hanwha is close to a 52-week low, SolarWorld is at its weakest price in eight-years and Sharp, which is more diversified and has problems beyond solar, has touched its lowest point in 10 years.

According to news reports, the share slump was caused by concerns of falling panel prices amid a glut of supply – though one would be concerned if investors had just realised this. Indeed, weak results from Trina and news Suntech may have been the victim of a €560 million fraud provided the catalysts for the plunge.

In May 2010, Suntech offered a financing guarantee of approximately €554.2 million ($A649 million) to GSF Capital. As security for the company's obligations under the guarantee, Suntech received a pledge of German government bonds worth €560 million from GSF Capital, a third-party investor of GSF. An internal analysis from the company has now discovered that the bonds may never have existed. It will now look to sue Javier Romero, a former Suntech sales executive who ran GSF.

"We are very disappointed that this has occurred and it has the highest level of attention from the company and the board, including the Audit Committee,” Dr Zhengrong Shi, Suntech's chairman and CEO, told investors. “There is no indication that management had any involvement, and we are vigorously pursuing all avenues to resolve this matter and ensure that we protect the interests of our shareholders."

Suntech said the reports of fraud were not yet conclusive and while it doesn’t impact the sector as a whole, it does provide a further shake to the confidence of solar investors who have watched a recent spurt in bankruptcies.

In the past 12 months, the list of solar manufacturers to have filed for bankruptcy includes:

-- Solyndra (US)
-- Q-Cells (Germany)
-- Amonix (US)
-- Solon (Germany)
-- Solar Millenium (Germany)
-- Scheuten Solar (Germany)
-- Solar Trust of America (partly owned by Solar Millenium)
-- Solarhybrid (Germany)
-- Evergreen Solar (US)
-- SpectraWatt (US)
-- Photowatt (France)
-- Energy Conversion Devices (US)
-- Odersun (Germany)
-- Abound Solar (US)

If rumours prove correct, China’s LDK Solar may not be far off joining the list (although it is being rescued by its local government in China for the time being), while BP disbanded its solar division late last year.

It might not seem like it right now, but this is the painful transformation the industry had to have and it will provide a strong base for profitable growth in the years ahead, albeit for a more select group of competitors. Which companies remain when a pricing floor is reached, potentially sometime around 2015/16, is another story.

Follow @Danielbpalmer on Twitter.

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