China Ramps Up Solar Capacity Despite a Slow 2018

By Eric Fry
Contributor

Alternative Energy

So far, 2018 has been a year to forget for most solar stocks. But their fortunes may improve soon… thanks mostly to resurgent Chinese demand for solar energy.

But before looking forward to the solar sector’s sunny prospects, let’s take a quick look back at its stormy past.

Throughout 2016 and 2017, the solar industry enjoyed boom-time conditions. Countries around the globe were installing solar panels at a breakneck pace – both in the residential market, and in the commercial and utility-scale markets.

Most stocks in the sector reflected these buoyant conditions… and they carried that momentum into 2018.

But then January happened.

That’s when the Trump administration imposed a 30% tariff on imported solar panels. Most solar stocks have struggled ever since.

The Solactive China Solar Index tumbled more than 40% from its January peak to its recent low on August 16.

Perhaps solar stocks would have recovered by now, if not for May 31. That was when the second major blow to the sector hit.

In a surprise announcement, the Chinese government said it would suspend “the allocation of quotas for new [solar] projects” and lower the subsidies on solar-generated electricity.

On the surface, these edicts seem harmful to the Chinese solar industry. But the government defended its actions as a way of “promoting the solar energy sector’s sustainable development, enhancing its development quality and speeding up reduction of subsidies.”

In other words, the Chinese government didn’t reduce subsidies for the solar industry to cripple it but to strengthen it. Be that as it may, removing government assistance from an industry creates short-term pain.

Not surprisingly, China’s announcement – combined with the U.S. tariffs – provided plenty of reason to sell solar stocks… and not much reason to buy them.

But these stocks may be very close to bottoming out and moving higher once again. Since August 16, the Solactive China Solar Index has bounced about 5%. Perhaps this mini rally is nothing more than the proverbial “dead cat bounce” that precedes a move to even lower lows.

On the other hand, this recent mini rally could be the start of a much bigger move. Conditions in the solar sector are on the mend… at least that’s what most Chinese solar companies seem to believe.

The top solar manufacturers in China are boosting their production capacity.

  • JinkoSolar Holding (NYSE: JKS), the world’s largest panel maker, will raise cell capacity by 40% and panel capacity by 20% by the end of this year.
  • GCL-Poly (Hong Kong: 3800) plans to increase polysilicon capacity at its new Xinjiang plant by 20%.
  • Tongwei Solar will more than triple its polysilicon capacity by year-end and double cell capacity.
  • LONGi Green Energy Technology Co. (Shanghai: 601012) plans to triple its annual wafer capacity by 2020.
  • Nanjing Sunport Power Corp. will double its solar module capacity by year-end.

These capacity expansions seem like an odd response to the prospect of falling demand. So why are these companies adding capacity?

Because overall demand isn’t falling… at least not much.

Even though Chinese demand has dipped, the European Union has picked up much of the slack. And the solar industry is likely to gain a big boost from the EU’s recent decision to remove punitive tariffs on imported Chinese solar panels.

JinkoSolar Vice President Qian Jing insists his company’s manufacturing operations have continued to run at full capacity thanks to demand from Europe and elsewhere. “Continuous strong demand from overseas,” he explains, “more than offset headwinds from the unfavorable domestic policy shift.”

But investors don’t seem to care that JinkoSolar is still running at full capacity. The stock has lost almost half its value since January. Investors seem to fear that the intrusions into the solar industry by the Trump administration and the Chinese government will cause a lasting slowdown.

And the very visible slowdown in Chinese solar installations adds to the angst. But keep in mind that China’s version of a slowdown would be spectacular growth anywhere else in the world.

China installed a titanic 53 gigawatts of new solar capacity in 2017, which was more than any country’s total installed capacity at the start of 2017.

This year, China will install “only” about 35 gigawatts, according to Daiwa Capital Markets Hong Kong Ltd. That volume of new capacity is greater than the total installed capacity of every country in the world except the U.S., Japan and Germany.

In other words, the “slowdown” in the Chinese solar industry isn’t particularly slow. No wonder companies like JinkoSolar are operating at full capacity… and growing.

Assuming the Chinese solar market resumes growing at a 2017-style pace – while markets in the EU, U.S., India and elsewhere continue to grow as well – the global solar industry could enjoy boom-time conditions once again. Which means solar stocks could catch fire again too.

Good investing,

Eric