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Stay Away From Chinese Solar Sector

Recent bankruptcy of Suntech Power and default on a loan by LDK, highlight a problem that goes beyond these two companies. The struggle of these companies to stay afloat indicate wide spread over supply in the Solar industry and steep decline in prices of solar products to the levels, where it is impossible for these firms to even recover their operating costs. LDK has not reported operating profit since second quarter of 2011. Suntech Power has not reported its financial statements since first quarter of 2012.

Prices for poly silicon, which is used to manufacture wafers, have fallen from USD354 per kg in 2008 to around USD17 per kg driven by both improvements in manufacturing process as well as significant price competition in the sector. The margin in the sector for all the products has gone down significantly. Global capacity for poly silicon is around 300 thousand metric ton. But almost half of this capacity has a cost of production higher than the current average selling prices. Only a few large players with large production capacity and latest and efficient production processes are able to make some profit. LDK had to shut down its poly silicon manufacturing plant due to its inability to produce poly silicon at an economical rate. Cost of a mono 5 inch wafer has reduced from USD 2.2 per piece in 2010 to USD0.8 per piece in April 2013.

Other countries have blamed Chinese firms of dumping solar products, supported by subsidies from the Chinese government. In May 2012, the Commerce department in the United States ruled that the Chinese firm are dumping their products in the United States in order to drive the competition out. The commerce department ordered to levy a 31% import tariff on silicon photovoltaic cells manufactured by the Chinese solar companies. The European Union is investing charges of dumping against the Chinese solar firms and it is being expected that an import tariff will be levied against the Chinese solar panel manufacturers.

Suntech, world's largest solar panel maker, defaulted on its USD51 million offshore bond payment on 15 March 2013 and later its onshore subsidiaries were taken into bankruptcy by the local bank lenders. The company has around USD2.4 bn of debt outstanding. As of 26 April 2013, Sutech's defaulted bonds were trading at around 28 cent on the dollar. On 15 April 201, LDK defaulted on its USD23.8 million dollar denominated convertible bonds as it was unable to reach a settlement with holders of USD7.0 million worth of bonds. LDK's CNY denominated Dimsum bond are currently trading at around 36 cents on the dollar. Given the huge oversupply and weak pricing environment encompassing the Chinese solar sector portfolio mangers would do well to stay away from the sector.