What Does This Policy Change Mean for Solar Panel Manufacturers?

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Solar PanelsEarlier in the year, GTM Research analysts Shyam Mehta predicted that the solar-panel market would remain oversupplied into 2014 if Beijing did not allow Chinese companies to go bankrupt and if their production capacities were not reduced. But several changes in the past 12 months, including hints of Chinese consolidation, have presented the possibility of a far different future.

What does Chinese consolidation mean for the solar panel industry?

When the International Trade Commission voted unanimously in November that the United States solar-panel manufacturers had been unfairly hampered by predatory pricing, the agency paved the way for the Commerce Department to impose tariffs of 24 percent to 36 percent on Chinese solar panel imports. At the time, worries of over-capacity and price collapses dominated the news of the industry.

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But despite dumping from Chinese competitors, the third quarter proved that the imbalance between manufacturing capacity and demand may soon reach an equilibrium. According to a report compiled by the Solar Energy Industries Association, solar costs have decreased by 30 percent over the past two years and global demand is growing at a rate of 14 percent.

In addition to new legislation by the United States and increasing global demand for solar panels, a change in Chinese policy may end the problem of over-capacity for good. The State Council, China’s cabinet, announced last week that it would reduce government support for failing domestic solar companies. A statement seen by The Wall Street Journal indicated that the government would utilize “market pressure mechanisms” to eliminate over-production. As the publication reported, this decision could make it easier for companies to consolidate through mergers and acquisitions and allow troubled companies to fail. However, the statement gave no further details, and it was not clear whether Chinese officials would supplement this change in policy with additional legislative changes.

CHEAT SHEET Analysis: How will these changes influence the industry trend?

A core component of our CHEAT SHEET investing framework explains that companies riding macro trends tend to outperform those that don’t. Think of the investing proverb, “A rising tide raises all boats.” Even as global demand continues to rise, Chinese manufacturers, which which have been blamed by many U.S. companies for the glut of capacity, have suffered from their situation.

Trina Solar Limited (NYSE:TSL), a Chinese solar company, is down approximately 50 percent this year because of the capacity problems and mounting trade regulation in the United States. LDK Solar Co., Ltd. (NYSE:LDK) and Suntech Power Holdings Co. Ltd. (NYSE:STP), also Chinese solar companies, are both struggling to keep their share price above $1. However, because Beijing’s decision could address the problems of overproduction and foreign anti-dumping complaints, shares of LDK, Suntech, Trina Solar, and numerous other Chinese solar companies have soared by as much as 11 percent.

U.S. manufactures are set to benefit as well; along with the announcement from China’s State Council aimed at regulating overproduction, the third quarter’s strong installation numbers are a sign of a strong 2013.

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