WHEB Commentary

Ty Lee

Is the end of Suntech the beginning of consolidation?


Are we finally seeing consolidation in the solar sector? The sector has been suffering from oversupply for a long time but the market forces of supply and demand so far have only led to sharp price declines throughout the supply chain. The overcapacity issue persists due to the availability of cheap loans and preferential government policies in China. Finally, here comes the news which looks like the beginning of industry consolidation. Suntech’s Wuxi subsidiary declared bankruptcy on Wednesday, following its default on a $541 million convertible bond.

Suntech was until recently the world’s largest solar panel manufacturer. The market has been concerned about Suntech’s liquidity over the past few months but the news still came as a surprise as it is the first company based in mainland China to default on a publicly traded debt. While the company’s failure was largely due to the challenging business environment, it has also made some poor decisions in the past. It signed long-term contracts with polysilicon suppliers at high prices and made huge investments in thin film cells which were subsequently proven to be a failure.

Superficially, it seems that the long-awaited industry consolidation is finally coming true. Is the Chinese government finally getting more realistic about the need for rationalization in the solar sector? We think not. The Chinese government recently increased its solar capacity installation target to 10GW for 2013, more than double its existing installed capacity of 7GW1. An official with the National Development and Reform Commission has in fact already stated that the government may intervene in the reorganisation of Suntech and it is widely expected that the company will be rescued to save the 10,000 jobs. According to CLSA, Suntech has about 5% of China’s total cell/module capacity2. Even if all of Suntech’s production lines were shutdown, there would still be 2 times oversupply in China2. Nevertheless, the bankruptcy of Suntech will make financing more difficult, which should help speed up the sector consolidation. It also sends a clear signal to the market that the Chinese government will not support manufacturers at all costs.

It has been almost a year since we wrote a blog on Q-Cells’ bankruptcy in April last year. We did not hold any solar companies back then and we still do not have any exposure to this sector. We are excited to see that solar installations have continued to grow significantly. For example, new installations reached a record amount of 7.6GW in Germany and grew 76% in the US in 2012. Nevertheless, with the lingering oversupply issue and the recent trade war over solar tariffs, we remain cautious on solar module manufacturers.
1 “Improved Visibility Around China’s On-Grid Solar Feed-In-Tariff Program”, Citi, 11 March 2013
2 “Swan song”, CLSA, 21 March 2013

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