Falling demand tied to the global economic slump is pressuring China’s leading solar power supplier and its charmed chief.
Gong Jing, Ji Minhua and Chen Zhu, Caijing 6 March 2009
In just a few years, Shi Zhengrong built one of the world’s largest solar energy companies and rallied global investors around his Suntech Power Holdings.
Shi was rated the wealthiest person on the mainland in 2006 by the U.S. business magazine Forbes, and crowned China’s “Solar King” by Fortune magazine in February.
But Shi is also a white-knuckled company chairman trying to steer Suntech through the most turbulent period of his seemingly charmed career.
Suntech, which Shi built almost single-handedly, recently reported a fourth quarter 2008 loss of US$ 65.9 million, or 42 cents per share, on revenues of US$ 414 million. Its gross earnings margin was a paltry 0.6 percent.
The company’s gloomy financial report along with a pessimistic business forecast sparked a sell-off for Suntech’s New York-listed stock. The company’s share price started tumbling in mid-January and, as of February 23, had fallen to US$ 6.64 per share.
Oversupply and slackening demand since last year have up-ended the solar energy market, technically known as the photovoltaic (PV) industry. In China – home to the world’s largest PV production capacity – about one-fifth of all solar cell and components manufacturers have closed.
In an interview with Caijing, Shi admitted his company faces unprecedented challenges that have required suspending expansion plans, curtailing production and laying off employees. Yet he promises to weather the storm.
Separately, however, a source close to Suntech said the financial crisis does not bode well for the world’s PV markets. New energy investment plans have been mentioned in economic stimulus packages unveiled by the United States and European countries, but dark clouds may hang over the PV industry – including Suntech – for the next year or two.
Silicon Hoarding
Ironically, Suntech’s conundrum may be connected to what’s widely rumoured to have been a company decision last year to hoard large amounts of polysilicon, a key ingredient for solar energy equipment. Shi and Suntech apparently bought into a PV industry adage that “he who owns silicon is king.” But the global price of polysilicon slumped last year, which in turn stung Suntech’s bottom line.
Shi told Caijing that his company “indeed bought some higher priced silicon.” The first purchase was last September, during a polysilicon shortage for the industry, and the second in November.
Suntech was preparing for fourth quarter production when it bought supplies of polysilicon for US$ 350 to US$ 400 per kilogram. The purchase was enough for one-third of the manufacturer’s quarterly capacity, Shi said. But in October, polysilicon prices began to fall, skidding to less than US$ 200 per kilogram.
Shi argued that buying up polysilicon is a routine production step, and that the company did not hoard. Yet he admitted paying “inappropriate prices.”
But a PV executive in Jiangsu Province, where Suntech is headquartered, said according to his knowledge Suntech did indeed hoard polysilicon. He said the purchases provided polysilicon for up to half of the company’s fourth quarter capacity, not one-third as Shi claimed.
The executive, who works for a Suntech competitor and declined to be named, further disclosed that the purchases had followed sharp increases in polysilicon prices for several years before 2008, when the PV business was growing and lucrative.
In addition to high costs for raw materials, Shi said, the company’s fourth quarter results suffered from the negative impact of the depreciation of the euro against the dollar, and declining prices for solar cells. The euro’s value is of importance because about 85 percent of Suntech’s solar cells are sold on European markets, primarily for euros.
Euro-denominated prices for solar cells fell as much as 15 percent in the fourth quarter, Shi said. But when considering the 8 to 10 percent devaluation of the euro against the dollar, the price actually declined by up to 25 percent on a dollar basis.
Market analysts are viewing Suntech’s slump from another angle. They connect the share price decline to pessimistic prospects for future earnings, not the quarterly loss.
Among other statistics, analysts point to Suntech’s expectations, based on current operating conditions, for its gross profit margin in the first quarter 2009 to fall about 5 percent from the same period last year to between 12 and 15 percent.
Support and Capacity
Investors started pummeling Suntech last November, after the company predicted a fourth-quarter loss. Some speculated Suntech might be trapped in a downward spiral, while others said the company was running out of cash and faced bankruptcy.
Suntech reported US$ 395 million in cash and cash equivalents in the third quarter 2008, down US$ 200 million from the previous quarter.
A local government official close to Suntech told Caijing that its crisis will not trigger bankruptcy. As a leading force in the global PV industry, with a sound record of performance, Suntech is the kind of enterprise that can win support from the Wuxi municipal government if necessary.
Moreover, the company has solid backing from Jiangsu banks. Despite the current tight credit market, banks extended Suntech’s credit line in the fourth quarter by US$ 600 million, to a comfortable US$ 2.4 billion.
However, banks are concerned about Suntech’s scheduled expansion. One banker in Jiangsu told Caijing that banks would be forced to accept greater risks if Suntech insists on an expansion on credit during a market downturn.
The company had set a production growth target of 5,000 megawatts worth of solar cells and panels by 2012. It also planned other projects including an expansion of its headquarters in Wuxi. But the faltering market and banker concerns forced Suntech to slow its expansion pace. Shi said growth plans haven’t been abandoned, but the target may be adjusted.
Suntech said in the fourth quarter report that total production capacity in 2009 would remain at around 1,000 megawatts. That would make 2009 the first year in which the company did not expand production since 2005, the year it listed on the New York Stock Exchange.
Company production capacity reached a world-leading 1,000 megawatts at the end of 2008 – more than enough to satisfy Suntech’s current 2009 orders for 600 megawatts, an amount that’s expected to rise to about 800 megawatts before year’s end.
Suntech’s woes also extend to its attempt to move up the supply chain. The latest financial report shows that, due to falling polysilicon prices, the company expects to lose between US$ 49 million and US$ 52 million tied to its investments in Russia’s polysilicon producer Nitol Solar and U.S.-based Hoku Materials.
Due to suspended orders from European clients, Shi confirmed that Suntech’s current output was only at half capacity. That’s forced Suntech to cut about 10 percent of its workers. Some 800 jobs were shed in the fourth quarter, and a plan to hire another 2,000 workers is on hold.
At Suntech’s headquarters plant in Wuxi, Caijing found some staffers were reporting for work only two days a week at facilities operating at about 50 percent capacity.
Uncertain Future
When it was a promising start-up in a promising industry, Suntech won favor from investors around the world. It was one of several Chinese solar companies in an environmentally friendly sector whose rise has had much to do with energy policies in the United States and Europe.
Renewable energy laws in Germany, Spain and Italy included generous financial incentives for solar power producers, encouraging the PV industry to open factories at a phenomenal rate.
The industry and Suntech could get another boost over the next few years because the United States and China are expected to follow Europe’s lead in solar subsidies. Optimists say the industry may face a capacity shortfall over the next decade.
A direct result of the rapid growth of capacity is the price increase of the raw materials. No wonder prices of polysilicon have soared to US$ 400 per kilogram in the third quarter 2008.
But industry experts generally agree that PV factories will have more than enough capacity through 2009.
Meanwhile, government support issues cloud the industry’s future. Some experts think generous subsidies for solar power actually drive up costs. It can be tricky to set incentives at levels that don’t stick governments with unreasonable bills when market prices fall. To avoid this dilemma, some have called for substantial cuts in government support for solar power. Incentive cuts could deliver a serious blow to solar power companies, especially those selling in Europe.
The PV industry is counting on the U.S. market for solar to take off in 2010. It’s hoped that under President Barack Obama, government subsidies for solar energy will increase as part of a stimulus plan to revive the economy.
Meanwhile, China’s domestic PV industry has barely gotten off the ground, offering enterprises such as Suntech few opportunities on the domestic scene. As of the end of 2008, only 150 megawatts worth of solar panels had been installed in China, and total market shipment last year was just 40 megawatts. What’s more, nothing substantial about solar power was mentioned by the Chinese government in its recently announced 4 trillion yuan economic stimulus plan.
Caijing learned that the PV market is small in China because the costs are high and upstream polysilicon production harms the environment.
Eventually, though, the sun may rise again for Shi’s Suntech and other solar power companies. Shi expects the cost of solar power generation in China to reach 1 yuan per kilowatt in 2012, in part thanks to falling prices for polysilicon.
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Cloudy Forecast for China’s Solar Pacesetter
Falling demand tied to the global economic slump is pressuring China’s leading solar power supplier and its charmed chief.
Gong Jing, Ji Minhua and Chen Zhu, Caijing
6 March 2009
In just a few years, Shi Zhengrong built one of the world’s largest solar energy companies and rallied global investors around his Suntech Power Holdings.
Shi was rated the wealthiest person on the mainland in 2006 by the U.S. business magazine Forbes, and crowned China’s “Solar King” by Fortune magazine in February.
But Shi is also a white-knuckled company chairman trying to steer Suntech through the most turbulent period of his seemingly charmed career.
Suntech, which Shi built almost single-handedly, recently reported a fourth quarter 2008 loss of US$ 65.9 million, or 42 cents per share, on revenues of US$ 414 million. Its gross earnings margin was a paltry 0.6 percent.
The company’s gloomy financial report along with a pessimistic business forecast sparked a sell-off for Suntech’s New York-listed stock. The company’s share price started tumbling in mid-January and, as of February 23, had fallen to US$ 6.64 per share.
Oversupply and slackening demand since last year have up-ended the solar energy market, technically known as the photovoltaic (PV) industry. In China – home to the world’s largest PV production capacity – about one-fifth of all solar cell and components manufacturers have closed.
In an interview with Caijing, Shi admitted his company faces unprecedented challenges that have required suspending expansion plans, curtailing production and laying off employees. Yet he promises to weather the storm.
Separately, however, a source close to Suntech said the financial crisis does not bode well for the world’s PV markets. New energy investment plans have been mentioned in economic stimulus packages unveiled by the United States and European countries, but dark clouds may hang over the PV industry – including Suntech – for the next year or two.
Silicon Hoarding
Ironically, Suntech’s conundrum may be connected to what’s widely rumoured to have been a company decision last year to hoard large amounts of polysilicon, a key ingredient for solar energy equipment. Shi and Suntech apparently bought into a PV industry adage that “he who owns silicon is king.” But the global price of polysilicon slumped last year, which in turn stung Suntech’s bottom line.
Shi told Caijing that his company “indeed bought some higher priced silicon.” The first purchase was last September, during a polysilicon shortage for the industry, and the second in November.
Suntech was preparing for fourth quarter production when it bought supplies of polysilicon for US$ 350 to US$ 400 per kilogram. The purchase was enough for one-third of the manufacturer’s quarterly capacity, Shi said. But in October, polysilicon prices began to fall, skidding to less than US$ 200 per kilogram.
Shi argued that buying up polysilicon is a routine production step, and that the company did not hoard. Yet he admitted paying “inappropriate prices.”
But a PV executive in Jiangsu Province, where Suntech is headquartered, said according to his knowledge Suntech did indeed hoard polysilicon. He said the purchases provided polysilicon for up to half of the company’s fourth quarter capacity, not one-third as Shi claimed.
The executive, who works for a Suntech competitor and declined to be named, further disclosed that the purchases had followed sharp increases in polysilicon prices for several years before 2008, when the PV business was growing and lucrative.
In addition to high costs for raw materials, Shi said, the company’s fourth quarter results suffered from the negative impact of the depreciation of the euro against the dollar, and declining prices for solar cells. The euro’s value is of importance because about 85 percent of Suntech’s solar cells are sold on European markets, primarily for euros.
Euro-denominated prices for solar cells fell as much as 15 percent in the fourth quarter, Shi said. But when considering the 8 to 10 percent devaluation of the euro against the dollar, the price actually declined by up to 25 percent on a dollar basis.
Market analysts are viewing Suntech’s slump from another angle. They connect the share price decline to pessimistic prospects for future earnings, not the quarterly loss.
Among other statistics, analysts point to Suntech’s expectations, based on current operating conditions, for its gross profit margin in the first quarter 2009 to fall about 5 percent from the same period last year to between 12 and 15 percent.
Support and Capacity
Investors started pummeling Suntech last November, after the company predicted a fourth-quarter loss. Some speculated Suntech might be trapped in a downward spiral, while others said the company was running out of cash and faced bankruptcy.
Suntech reported US$ 395 million in cash and cash equivalents in the third quarter 2008, down US$ 200 million from the previous quarter.
A local government official close to Suntech told Caijing that its crisis will not trigger bankruptcy. As a leading force in the global PV industry, with a sound record of performance, Suntech is the kind of enterprise that can win support from the Wuxi municipal government if necessary.
Moreover, the company has solid backing from Jiangsu banks. Despite the current tight credit market, banks extended Suntech’s credit line in the fourth quarter by US$ 600 million, to a comfortable US$ 2.4 billion.
However, banks are concerned about Suntech’s scheduled expansion. One banker in Jiangsu told Caijing that banks would be forced to accept greater risks if Suntech insists on an expansion on credit during a market downturn.
The company had set a production growth target of 5,000 megawatts worth of solar cells and panels by 2012. It also planned other projects including an expansion of its headquarters in Wuxi. But the faltering market and banker concerns forced Suntech to slow its expansion pace. Shi said growth plans haven’t been abandoned, but the target may be adjusted.
Suntech said in the fourth quarter report that total production capacity in 2009 would remain at around 1,000 megawatts. That would make 2009 the first year in which the company did not expand production since 2005, the year it listed on the New York Stock Exchange.
Company production capacity reached a world-leading 1,000 megawatts at the end of 2008 – more than enough to satisfy Suntech’s current 2009 orders for 600 megawatts, an amount that’s expected to rise to about 800 megawatts before year’s end.
Suntech’s woes also extend to its attempt to move up the supply chain. The latest financial report shows that, due to falling polysilicon prices, the company expects to lose between US$ 49 million and US$ 52 million tied to its investments in Russia’s polysilicon producer Nitol Solar and U.S.-based Hoku Materials.
Due to suspended orders from European clients, Shi confirmed that Suntech’s current output was only at half capacity. That’s forced Suntech to cut about 10 percent of its workers. Some 800 jobs were shed in the fourth quarter, and a plan to hire another 2,000 workers is on hold.
At Suntech’s headquarters plant in Wuxi, Caijing found some staffers were reporting for work only two days a week at facilities operating at about 50 percent capacity.
Uncertain Future
When it was a promising start-up in a promising industry, Suntech won favor from investors around the world. It was one of several Chinese solar companies in an environmentally friendly sector whose rise has had much to do with energy policies in the United States and Europe.
Renewable energy laws in Germany, Spain and Italy included generous financial incentives for solar power producers, encouraging the PV industry to open factories at a phenomenal rate.
The industry and Suntech could get another boost over the next few years because the United States and China are expected to follow Europe’s lead in solar subsidies. Optimists say the industry may face a capacity shortfall over the next decade.
A direct result of the rapid growth of capacity is the price increase of the raw materials. No wonder prices of polysilicon have soared to US$ 400 per kilogram in the third quarter 2008.
But industry experts generally agree that PV factories will have more than enough capacity through 2009.
Meanwhile, government support issues cloud the industry’s future. Some experts think generous subsidies for solar power actually drive up costs. It can be tricky to set incentives at levels that don’t stick governments with unreasonable bills when market prices fall. To avoid this dilemma, some have called for substantial cuts in government support for solar power. Incentive cuts could deliver a serious blow to solar power companies, especially those selling in Europe.
The PV industry is counting on the U.S. market for solar to take off in 2010. It’s hoped that under President Barack Obama, government subsidies for solar energy will increase as part of a stimulus plan to revive the economy.
Meanwhile, China’s domestic PV industry has barely gotten off the ground, offering enterprises such as Suntech few opportunities on the domestic scene. As of the end of 2008, only 150 megawatts worth of solar panels had been installed in China, and total market shipment last year was just 40 megawatts. What’s more, nothing substantial about solar power was mentioned by the Chinese government in its recently announced 4 trillion yuan economic stimulus plan.
Caijing learned that the PV market is small in China because the costs are high and upstream polysilicon production harms the environment.
Eventually, though, the sun may rise again for Shi’s Suntech and other solar power companies. Shi expects the cost of solar power generation in China to reach 1 yuan per kilowatt in 2012, in part thanks to falling prices for polysilicon.
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