China PV Enterprise Tough Choice

On 15 October 2008, LDK Director, President and Chief Operating Officer Tong XingXue said that 80% of the China PV industry are facing a shortage of funds. Some are cutting production to preserve cash and some have stopped work.

On 30 October 2008, on the the Forbes list of China richest, at the top and bottom of the industrial chain LDK Chairman and Chief Executive Officer Peng XiaoFeng and Suntech Chairman of the Board and Chief Executive Officer Shi ZhengRong position on the list are in close fight but their value halved at about 9.59 billion yuan and 10.2 billion yuan.

At the effect of the financial crisis, once considered the 'sunrise' industry, the PV industry is now not spared from the financial crisis. China's PV industry now faces 2 great risks. 1) Forex losses. 2) Market demand slowing down. Another thing is the tightening of the banks loans. All the various factors have caused the 'money burning' PV industry to feel the early arrival of winter. Some analysts even think that the next movements of the PV industry will be known by the end of the year.

Forex Risks
As the largest solar module producer on the globe, Shi ZhengRong may be the first to know of the marktet movements in the PV industry.

About 98% of China's PV industry's market are overseas with most their products selling to Europe, US, Spain, Japan, etc. In the second half of this year, the Euro depreciation against the RenMinBi (RMB) has overtaken the USD. In the recent 3 months, the exchange rate between Euro and USD has dropped more than 21%.

Sources says that Suntech which is listed on the New York Stock Exchange with its products mostly selling to Germany, because its production scale is the largest and most of the contracts are conducted in Euro, its losses will be the greatest in this round of Euro decline in the forex market. Also, its producte being in the lower end of the industrial chain, it will face directly the end market demand challenges.

Sources said that for example, after exchanging, for every 1 million Euro earned there will be up to 210,000 Euro loss. Sources said that from beginnging of 2006, in order to reduce the risk of the exchange rate between RMB and USD, a lot of export industries have changed to use Euro as the trading currency rather than the USD and now the rapid depreciation of the Euro is becoming the hot potato in those industry's hands.

As such, Suntech's investor relationship department mentioned that the depreciation of the Euro has at a certain level affected the company's performance and says that in the current financial crsis, not one can escape unhurt.

Other than the forex risk, currently the price for solar panels have fallen about 6%-8%. US market research company FBR mentions that the gross margin for the PV industry is going to decline and expects that product prices will decline even more in the November period and will decline about 10% in the fourth quarter of this year till next year's first quarter.

Suntech has shown rather good performance in this year's 2nd quarter with revenue at about 480.2 million USD, a 51.3% increase in income growth and a gross margin of about 24.1%. Following that, the company have risen the target and mentioned that revenue for 2008 to increase from 1.9 billion to 2.1 billion, the production output to incrase from the previous 530MW to 550MW.

Analysts are taking a wait-and-see attitude towards such claims of Suntech because 2nd quarter's growth for Suntech is under the fact that other factories are in shortage of raw materials which causes Suntech to receive large orders giving it a certain level of advantage. However, under the current financial situations, end-market demand has its limitations.

Goldman Sachs in its report says the prices for parts to be used at lower end of the PV industry will face price falling pressure and with the current international credit crunch environment makes the global outlook for solar energy policies subsidies to be more prudent. The report says that during such times, a strong financial position for companies is the most important.

Suntech says that they will use financial tools to hedge a certain amount of the Euro contracts in order to reduce the risks of forex to the minimum. Suntech hoped to use financial means to reduce the effect of the depreciating Euro. But regarding the results, Suntech says that it will provide information on the 20 November 2008 3rd quarter report.

LDK, also on the the Forbes list of China richest, with silicon materials as its products, Peng XiaoFeng says that LDK have no worries in forex. In order to avoid possible forex risks, LDK focused on the adjustments for different currencies deployment. He said that most of LDK's contracts are based on the RMB and USD. For the Europe market products, mostly are also based on the USD. About 30% are RMB based orders, 60% USD and only 10% for Euro.

Peng XiaoFeng says that it can be adjusted. For the 10% orders in Euro, they will be used on equipment purchases. Before this, Peng XiaoFeng has 15 years experience in export trading.

Peng XiaoFeng says that from LDK's order list, most of the contracts are in the 5-10 years period. The orders have now been arranged until 2018 and can guarentee about 10% of deposits which amounts to about 700 million USD. Peng XiaoFeng says that on the eve of the financial crisis on 19 August 2008, LDK successfully sold 4.8 million ADS, raising about 200 million USD worth of funds.

As for whether he will select some financial tools to hedge against forex risks, Peng XiaoFeng says that LDK will not go into something that it is not familiar with.

Market Demand Slowing
The credit crunch will cause a contraction in the end market investments and competition for funds is already white hot. Normally big solar projects can go immediately with the need for a few billions USD support. Some are not even profitable and what they can do is sell their government's tax credit eligibility in exchange for funds.

One manager from GE Energy Financial Services says that there are a lot of solar projects government's tax credit eligibility on the market. A 1,000MW solar project can create about up to 1.5 billion USD worth of government's tax credit eligibility. But at this time, there are few who have the potential to buy up those government's tax credit eligibility. Everybody is looking for money everywhere.

The industry is worrying about the end market as the economic slowdown will weaken the demand for China's PV products which will cause an increase in over-capacity.

As the largest solar module producer on the globe, LDK's coming order list situation becomes the largest indicator for the whole PV industry.

Suntech expressed that the credit crisis is only a short term challenge. It will not change the overall situation and it will not change the inevitable trend on the rapid development of new energy. Suntech hopes to restore confidence in investors.

What can be seen currently is that, Germany which takes about half the world's PV market, has plans to reduce 7% of the subsidies from beginning of next year. Spain's subsidy plan ended in September. The new US president choice will also affect the support for the PV industry. From the PV industry's stock price movements we can see that there is a weakening in investors confidence.

Crystalline silicon cells cost of generating electricity is about 3.8 USD per Watt. Thin film solar cells cost of generating electricity is about 2.8 USD per Watt, much higher then traditional electricity generation methods. Thus, PV industry's market will still be based on government policies directions. Shanghai Solar Energy Society Chairman 崔容强 says that the rapid development in the PV industry mainly depends on Germany, Spain, US and other government's various subsidy policies for power generation into the power grid to encourage development. Although the prospects are good in the long term, but with the current global financial pressures, various country's government needs funds to resolve thier own domestic financial problems, will there be weakening of the efforts to support the PV industry cannot be judged at the moment.

With the spot price of solar cells down, it has also brought about the loosening of prices of materials in the upper industrial chain. LDK, being at the upper end of the industrial chain, its current list of orders is estimated to last about one winter period with signed supply of up to 15GW with next year's estimated sales to reach 1.6GW. Most of the customers are Q-Cells, SolarTech and other big global companies, these are almost guaranteed demands.

Peng XiaoFeng says that every year they give customers about 10% price reduction in order to safeguard the rights and interests of customers. Next year when their silicon plant goes into operation, they can increase the gross margin from the current 25% to about 40%-50%. With the support of the 16,000 tonnes silicon factory, together with LDK's enclosed recycle system, the price per kilogram of silican wafer can be controlled at about 20-25 USD, down from 100 USD.

From the evolve from 'Silicon Material is King' to 'Technology is King', with the coming of the financial crisis storm to the PV industry, only those companies with core competitiveness can survive said a source from a PE. This may be an opportunity to structure the 'chaos' in PV industry. Because steel, oil and other purchasing material prices have went down, the cost to build and run a factory is much lower then before.

With the semiconductor industry downturn, Applied Materials, Qimonda and others have announced that they will expand into solar business. The big number of people retrenched from the semiconductor industry can also benefit from the growth in solar business.

At the current situation, which could be the worst or the best times, how many in the PV industry can last through this coming 'winter', overcoming the problems of shortage of funds and slowing of market demand and how many can benefit from the current situation, we will have to wait and see.