China's Solar Stock Rally: Avoid Being Burned 23 comments
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A number of subscribers were electrified by the sudden boom in Chinese solar energy stocks late last week. Badly depressed companies like Suntech Power (STP), First Solar (FSLR) and Yingli Green Energy (YGE) jumped overnight by as much 50%.
What happened? Some stock analysts clearly overreacted to a report on the Chinese Finance Ministry’s Web site which indicated that the government will offer a sizeable subsidy for the cost of installing solar arrays. That’s almost all of the detail that was provided. Certainly it was not enough to justify double-digit gains in every Chinese stock remotely related to solar energy.
Buying into this overnight sensation almost guarantees investor losses unless substantially more satisfactory detail is revealed by Beijing. Some of the details that are missing in the subsidy plan include the conditions to qualify for payment and exactly what kind of installation will be included in the plan. Also missing is the timing of the government’s payment of the subsidy and exactly how many years this program will last. Investors simply can’t know which companies will benefit and by how much without this kind of detail from Beijing.
What we do know is that the Chinese government announced a 20 yuan per watt (approximately $2.93 per watt) subsidy for solar energy. But only 2.5 billion yuan have been allocated for the program. That amounts to a relatively underwhelming $366 million, an amount which may provide a one-time boost for the industry. The size of the subsidy implies the government will only support 180megawatts (MW) of installations and that’s not a huge increase relative to the size of the industry.
In order to gauge the importance of the subsidy from an investment perspective it’s important to compare the size of the program to the size of the industry. Many Chinese solar panel makers, and there are approximately a dozen of them, produce more solar products in a year than the entire subsidy plan will be responsible for. For instance Trina Solar (TSL) shipped 201MW of products in 2008 and Yingli Green Energy shipped 281MW last year. An industry-wide boost of 180 MW is relatively small by comparison.
We feel the market has overreacted to the Chinese stimulus plan. Even shares of First Solar jumped approximately 13% on news of the China stimulus plan. But First Solar is an Arizona-based company and is highly unlikely to gain directly from a plan that is almost certainly intended to assist Chinese firms. It’s also worth noting that First Solar produces a billion watts of solar energy products annually. Even if the Chinese subsidy did apply to First Solar it would only cover 15% of First Solar’s entire output.
In short, this sudden boom in solar stocks has the makings of a mini-bubble. From an industry-wide perspective, solar companies both in China and the western hemisphere are facing pricing pressure because of overcapacity and falling polysilicon prices. Chinese companies and their North American, European and Asian competitors are all facing big slides in prices for the solar cells and panels they produce.
Perhaps more generous U.S. solar incentives will eventually help stabilize prices and reduce the build-up of inventory throughout the silicon solar panel supply chain. The reality of the industry is that solar power is more expensive than conventionally generated electricity and the industry is entirely dependent on government subsidies to make solar power an economical alternative. The Chinese subsidy by itself is not enough to revive the industry.
For the time being we expected solar energy stock prices to drift back to their somewhat depressed pre-stimulus values. Analysts worldwide have now cast doubt on the Chinese stimulus plan, and without investor confidence share prices are likely headed one way: down.
Disclosure: no positions
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This article has 23 comments:
What we do know is that the Chinese government announced a 20 yuan per watt (approximately $2.93 per watt) subsidy for solar energy. But only 2.5 billion yuan have been allocated for the program. That amounts to a relatively underwhelming $366 million, an amount which may provide a one-time boost for the industry. The size of the subsidy implies the government will only support 180megawatts (MW) of installations and that’s not a huge increase relative to the size of the industry.
However, it is indeed possible that additional funds will be allocated. It's not as if China writes a law and it stays on the books, as it does in the US; they can decide from month to month how much money to dole out.
"The reality of the industry is that solar power is more expensive than conventionally generated electricity and the industry is entirely dependent on government subsidies to make solar power an economical alternative."
It's a little dishonest to argue against solar energy on the grounds of subsidies, when fossil fuels get much larger subsidies. The massive subsidies given to oil, coal and nuclear over the decades, are somehow always ignored in these assessments. 50 years of subsidies for nuclear and 90 years for oil. And then there is the fact that fossil fuels are the incumbant forms of energy that enjoy all the advantages of coziness with government, and of government policies that have helped them for decades in many ways other than subsidies. Oil has dictated govt. policy making for generations.
When was the last time the U.S. launched a war to protect solar panel shipments? When has solar gotten the equivalent of the give away oil leases in the Gulf of Mexico with no royalties owed to the government being collected, like oil has? This alone is worth $1 billion a year to the oil companies.
If fossil fuels don't enjoy a cozy relationship with government, how do we explain the coal fly ash sludge spill by Massey Energy in 2000, which the EPA called the worst environmental disaster in the history of the U.S. southeast, 30 times the size of the Exxon oil spill, which spread 75 miles to the Ohio River, contaminating the water of tens of thousands of people, and which Massey was fined a whopping $57,000 for? Lucky for them, this happened just before GW Bush took office, so the charges were mostly dropped, including possible criminal indictments, and the investigation quickly shut down, with the lead investigator fired.
This is part of what renewable energy is up against.
The $300 million dollar number for the Chinese subsidy is not likely to be the whole story.
From Eric Savitz' article yesterday...
“Recent announcements are just the tip of the iceberg.” He writes that contacts at the National Development and Reform Commission say the country is planning a $30 billion, four-year green stimulus program."
I wouldn't take this guy's advice if they waterboarded me.
Just look back at July and August last year, this is almost
the same story while YGE, SOLF, were praised sky-high, and
lately they almost became penny stocks. News from a foreign
country, especially from you know WHERE, shouldn't be taken
seriously. Look at C and GM, would you believe they are becoming
penny stocks now ? Or worse, like LEH and others, gone forever !!
Some, not "almost every family."
In the USA, the cheapest thing is natural gas.
It will take the next 10 years or longer for Americans to know
the benefit of solar due to its high cost now.
Meantime whatever these companies are doing in China doesn't mean they will do well here due to the "BUY AMERICAN" theme right now.
To follow unknown news is foolish sometimes.
If people got BURNT twice before, they should know the taste !!
I remember several year-perhaps a decade-ago reading about how it would take oil preposterously and miraculously hitting $60 a barrel before solar would be cheaper and this is when oil was at $15 a barrel.
Then oil went to $140 and still no one talked about how oil was no longer the cheaper option. We just acted like we had to use oil. Please understand that these cost estimates are not "hard science". It depends on financial analysis of fixed versus variable costs and capacity so to blindly listen to these "stuck up reactionaries" is very misleading. Obviously once certain fixed costs are incurred in terms of capacity and solar "grids" solar will be far far far less expensive than oil. Look at how many trillions upon trillions (With a T) of dollars went into all the pipelines, oil tankers, refineries, drilling equipment, etc etc.
This guy doesn't have a short position.
You guys have a Short memory. Period.
Google China is using the MYST.OB cloud computing and B2B platform as the centerpiece of its massive E-commerce and cloud computing push in China.
The Chinese government is also funneling huge cash into the effort.
The MYST.OB/Google China E- commerce Platform has been reported in the Chinese press but has not received any attention by the Western media...........yet.
Information is money. Now you know something most other investors do not.
MYST.OB about to report solid profit, big top and bottom line growth.
This is a major company in the making.
Go here for some DD:
investorvillage.co..