More solar firms set to burn up as prices sink
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Dec 23,2011
uk.finance.yahoo.com
(Reuters) - Only four years ago, hundreds of start-ups optimistically built factories and churned out solar panels to meet rising demand. Now, closures and failure loom for many.
The brutal shakeout is a dramatic reversal for an industry that has seen overall global growth of more than 30 percent annually over the past decade and this year will reach new records for solar panel sales.
Only a handful of manufacturers are now profitable in the face of too much capacity, which has contributed to a plunge in prices, and as government subsidies have been curbed. European banks that lent billions for solar installation have also pulled back as they struggle in the euro zone credit crisis, and debt-laden Chinese solar companies are in danger of burning up.
Solar profit margins that often approached 50 percent in 2007 have in many cases disappeared altogether. The pain - namely bankruptcy for some key players in the sector - may get much worse before it begins to ease.
"When you look at some of those balance sheets and how levered those companies are, and you look at how thin their profit margins are, it can really make your hair stand on end," said Kevin Landis, portfolio manager of the Firsthand Alternative Energy Fund, whose top holdings include Swiss solar equipment maker Meyer Burger Technology AG and U.S. equipment maker GT Advanced Technologies Inc.
And while sliding prices are making solar more competitive, the prospect of new cheap supplies of natural gas around the world is undermining those gains.
The continuing shakeout is seeing many of the early entrants to the solar industry either fail or sell out. A whole new breed of big investors, such as Warren Buffett and Google Inc (NasdaqGS: GOOG - news) , or oil industry companies such as TransCanada Corp , are moving into solar power production. Some, including oil giant Total (Other OTC: TTFNF.PK - news) , have even entered the tumultuous panel manufacturing market. Its (Euronext: ALITS.NX - news) rival BP Plc, however, said this week it was exiting the solar business entirely.
Asian conglomerates that already have solar panel manufacturing operations, such as Japan (EUREX: FMJP.EX - news) 's Sharp Corp or South Korea's LG Corp (KSE: 003550.KS - news) , could scoop up their smaller, struggling rivals, or simply allow them to fold and benefit from reduced capacity.
The rapid march down in prices and the Darwinian survival of only the fittest - without the aid of large government subsidies - is making solar power more competitive against conventional energy sources, such as oil, coal and nuclear power. That means that for homeowners, businesses and utilities, the choice to go solar is more attractive and attainable than ever.
GLOBAL GLUT
Still, even the most efficient manufacturers are troubled. First Solar (NasdaqGS: FSLR - news) , the U.S.-based low-cost leader, last week announced job cuts, saying 2012 profits would be up to 50 percent below Wall Street forecasts. A week earlier, another big U.S. solar company, MEMC Electronic Materials Inc, said it would cut a fifth of its staff and idle some facilities.
At the heart of the downturn is a massive global glut of panels and huge excess production capacity that has driven prices down more than 40 percent in 2011.
"The prices that we're seeing today are likely not covering manufacturing costs in many cases," said Ralph Romero, director in management consulting for Black & Veatch, which provides engineering and due diligence consulting services to solar manufacturers.
The pain for the solar manufacturers has been acute, with most shares in the sector dropping more than 60 percent. First (Berlin: FC0.BE - news) Solar, a one-time Wall Street darling, is the worst-performing stock in the Standard & Poor's 500 index this year, down more than 73 percent.
A number of companies have already lost their fight for survival, such as Germany's Solon SE and Solar Millennium (Sao Paolo: TIBR3.SA - news) , which both sank into insolvency this month. That follows U.S. companies Evergreen Solar (NasdaqGM: ESLR - news) , SpectraWatt and Solyndra, the last of which shut down operations in September despite its controversial gobbling up of more than $500 million of U.S. government support.
Even China's notoriously aggressive small, private manufacturers are closing factories. In fact, experts predict much of an estimated 49.8 gigawatts of global solar cell production will have to be shuttered so that companies can profitably meet expectations of far lower global demand.
A GLOOMY OUTLOOK
Prices for solar panels started 2011 near $1.60 per watt, but a buildup of inventory forced manufacturers into a fire sale toward the end of the second quarter that has pushed prices to near $1 per watt now. Romero said prices for polysilicon panels, the dominant technology, may stabilize around that level, though others see declines continuing well into next year.
SolarCity, one of the largest U.S. solar installers, is anticipating a further slide early in 2012. "I do think 85 cents is probably close to the floor," said Lyndon Rive, its CEO.
That price could spell difficulties for some major names, including U.S.-listed Chinese companies Suntech Power Holdings , which has the biggest capacity for making panels in the world, and LDK Solar Co, one of the largest makers of polysilicon wafers used to make panels, industry analysts and investors say.
LDK did not respond to questions about its financial health. A spokesman for Suntech emphasized the company had cemented its position as the largest supplier of panels globally, and that it is increasing its market share.
Like other China-based companies, Suntech and LDK won massive credit lines from state-backed banks. Two years ago, that was seen by many in the industry as an unfair handout that allowed them to outflank rivals in Germany or the U.S.
But now that debt, about $2.2 billion for Suntech and $3.6 billion for LDK, is proving a huge burden.
"Maybe because (LDK) are so big they get some kind of sweetheart debt deal that prevents the company from going under, but I would find it really hard to believe that the current equity holders are going to be spared," said Morningstar (NasdaqGS: MORN - news) solar industry analyst Stephen Simko, who added that Suntech also looks particularly vulnerable.
LDK's debt has swelled $800 million in the past 12 months to almost three times its net asset value, and analysts see it showing negative free cash flow of about $1.1 billion this year and $375 million in 2012, Thomson Reuters I/B/E/S data show.
On the same basis, Suntech negative free cash flow is likely to approach $800 million this year, and $200 million in 2012.
Concerns are also swirling in the debt markets, where LDK's 4.75-percent bonds due in April of 2013 are priced at around 68 cents on the dollar, according to Thomson Reuters (Toronto: TRI.TO - news) data. Markit data, however, shows that issue priced at 47 cents to 51 cents on the dollar. Suntech's debt that matures in March of 2013 is priced at 41 to 42 cents on the dollar, according to Thomson Reuters and Markit.
"We exceeded both our shipment and gross margin guidance for the third quarter and ended the quarter with over $560 million of cash and restricted cash," Rory Macpherson, Suntech's director of investor relations, said in an email.
"We are also implementing a range of initiatives that will strengthen our financial position over the next 12 months. These include accelerating cost-down programs, improving working capital by $200 million by the end of the year, reducing operating expenses by 20 percent in 2012, limiting capital expenditures to maintenance only, and monetizing non-core assets."
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