NEW ENERGY: Beijing Eyes Solar Consolidation, Yingli in Sight?

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Bottom line: China is likely to see 1-2 of its weakest major solar panel makers close over the next year in a campaign led by Beijing, with Yingli as the most likely candidate to make the first exit.

Yingli’s star grows dimmer

A couple of new reports from the Chinese solar sector are shining a spotlight on consolidation that’s still needed before the industry can return to health. One report cites the Ministry of Industry and Information Technology (MIIT), the sector regulator, saying more such consolidation is necessary and the pace should accelerate. The second is a technical announcement from Yingli (NYSE: YGE), the weakest among China’s major panel makers, saying it has fallen out of compliance with US listing requirements due to its low stock price.

The appearance of these 2 news items on the same day is purely coincidence, even though both are related to the same phenomenon. That phenomenon saw global solar panel production explode over the last decade, as scores of new plants opened in China in response to policy directives and other incentives from Beijing.

As a result, China now supplies over half of the world’s solar panels, and global prices have remained wobbly for much of the last 4 years due to oversupply. A sharp drop in prices back in 2011 led to an initial round of consolidation that saw major players Suntech and LDK go bankrupt and their assets get acquired or shuttered. But clearly some more consolidation is still needed to further reduce supply.

The MIIT is keenly aware of that fact, which has prompted it to issue a statement saying it expects consolidation to accelerate, and for the nation’s strongest players to lead the way for the entire sector. (English article) It adds that despite the state of oversupply, Chinese output of polysilicon, the main ingredient used to make in solar panels, actually grew 16 percent to 74,000 metric tons in the first half of the year.

That would seem to imply that the MIIT is quietly criticizing Chinese panel makers for boosting output even during a weak market, and hints the regulator may step in to forcibly close some weaker producers or at least force them to cut back output. This kind of situation is quite common in China, where manufacturers of raw materials like steel and aluminum actually boost output during a weak market, even if it means selling at a loss.

Acting on Government Orders

They usually behave in such irrational manner under direct or implied orders from their local governments, which want the increased activity to help them meet their economic growth targets. Such orders also carry the implicit guarantee that the government will step in to help companies if they run into financial difficulties by offering measures like loans from local branches of big state-owned banks.

Yingli is one such company, and gets big support from its local government in the industrial city of Baoding where it’s a major employer, even though the company is losing money. Unlike its peers, most of whom managed to return to profitability after several years of losses at the height of the earlier downturn, Yingli has never emerged from the red over the last 5 years.

The company’s financial struggles prompted it to issue a statement earlier this year saying its existence as a business could be in danger, though it later said that investors had misinterpreted that statement. (previous post) Nonetheless, the statement prompted a sell-off of Yingli stock, and the shares have traded at $1 or less since mid-July.

That prompted Yingli to issue another statement saying it had fallen out of compliance with US trading rules that require a company’s share price to remain above the $1 level. (company announcement) Technically Yingli could be forcibly de-listed due to this violation, though companies in such situations can usually return to compliance using a reverse share split.

Still, the company’s troubled situation and shrinking market value — now worth just $174 million — make Yingli an ideal candidate for the kind of consolidation envisioned by the MIIT. Accordingly, I wouldn’t be surprised to see the MIIT quietly engineer a deal for one of the stronger panel makers to make a bid for Yingli, which could quietly disappear by this time next year.

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