CHINA - Solar Industry Clouds

"Dark clouds gather over China's once-booming solar industry" by Malcolm Moore, The Telegraph (UK) 8/29/2012

China's push into solar energy was supposed to be a proud example of how the country was advancing into hi-tech manufacturing. But now the whole sector is on the brink of bankruptcy.

Two years ago, LDK Solar, one of China's largest solar panel makers, built a new, state-of-the-art factory in the central city of Hefei.

It sits in one of the city's industrial parks, a big LDK Solar logo on its wall, with the New York-listed company's slogan underneath: "Lighting the Future".

"It cost 2.5 billion yuan (£250m) to build, the majority of the equipment was imported from Germany, and it hired 5,000 staff," said Jie Xiaoming, a 30-year-old who works at the plant's quality control and packaging department.

Last month, however, 4,500 of the staff were put on gardening leave. They receive 700 yuan a month to stay at home. The factory has shut down 24 of its 32 production lines.

"There do not seem to be any orders. People are still turning up for work, but mostly just sleeping. The management has not said much, just that the United States has a new policy that is stopping our exports," said Mr Jie.

Since it was set up in 2005, LDK Solar, along with several other Chinese solar panel makers, has enjoyed heady growth. Solar power, along with biotechnology and aerospace, was declared a "strategic emerging industry" and was given grants and low-cost loans.

It funneled the cheap credit into an aggressive expansion, hoping to provide an entire industry chain of products and services.

Meanwhile, in Europe and the US, governments provided subsidies to buy Chinese-made panels as part of commitments to boost renewable energy.

But the incentives created a glut of suppliers, and since 2010, the price of polysilicon wafers has fallen by nearly three-quarters. The price is now below the production cost - in the latest quarter, LDK Solar's gross margin was -65.5pc.

Meanwhile, the debt crisis in Europe has cut government subsidies to the sector and the US imposed a 31pc tariff in May on Chinese wafers, complaining that manufacturers were being underwritten by the government.

In July a group of 25 European solar companies followed suit, filing an anti-dumping complaint with the European Union.

At the same time, the quality of the solar equipment being made by Chinese companies, even by the biggest companies, is often not export-grade.

While the Chinese government has promised to hugely increase its purchases of solar panels, there is a significant excess capacity in the domestic market that has kept prices low.

China's big five firms are all reporting disastrous trading and heavily indebted balance sheets. At the end of the first quarter, JA Solar listed debt and liabilities of $1.5 billion, Trina Solar had debts of $1.08 billion, and Yingli had debts of $3.44 billion.

Suntech, once held up as a model company, could have to pay $690m in collateral related to a possible fraud, and it also has a $541m convertible bond payment in early 2013. Its total debts are $3.58 billion.

In the first quarter, LDK lost $185.2m as sales dropped by nearly 75pc. "When they came to remove staff, they simply chose a percentage who would remain," said another worker outside the Hefei plant, who declined to be named. "The whole industry is doing badly, and LDK also had a strategy problem. There is no point in worrying now. It is simply a matter of time before the factory closes. I give it a maximum of six months," he said.

For the time being, the Chinese government is determined to keep LDK alive. The authorities in Xinyu, where it is headquartered, have announced they will roll 500 million yuan of the company's debts into their annual budget.

A bank official told Caixin, a Chinese magazine, that Xinyu government had set aside a total of 2 billion yuan to bail out the firm. Government officials, who boasted that they wanted to turn Xinyu into a "silicon town", are desperate not to lose face. But so far LDK is rumored to have laid off 10,000 workers and defaulted on payments of around 600 million yuan to 20 suppliers, according to Caixin.

"I don’t think we will close though. I think the worst situation we will be sold," said Mr Jie. "Apparently Sharp is interested."

Sharp's interest is unclear, and so far there has been no queue of buyers. Jiangxi Copper Corporation was rumored to be a possible bidder, on the orders of the local government, but Pan Qifang, secretary of its board of directors, summed up the general wariness of the market: "Our company is not familiar with the solar industry, so we cannot rush into it," he said.

LDK Solar declined to comment.

COMMENT: The question for me is, does China really know how to run a world free-market business or is this just the consequence of economic times?