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Today’s industry press on the renewable energy industry in China carries an instructive piece of analysis on dynamics in the photovoltaic solar market — i.e., the ‘chips’ on solar panels that do the photovoltaic conversion from sunlight to transmission-ready electricity.

Currently, this is a boom industry in China. One city in Shandong province, Dezhou, is alone home to more than 100 PV manufacturers. When the critical supply input for this industry — polysilicon — tightened in global markets, the full statecraft apparatus of the PRC central government got into gear to assure supply for this sector, a story well described by Jason Dean, Andrew Brown and Shai Oster in a frontpage Wall Street Journal article on November 16, 2010. Since supply is being ramped up by these ‘investor euphoria’ factors and because demand is constrained by State Grid’s ability to integrate new PV-generated power into the national grid, prices are dropping. As reported by RenewableEnergyWorld.com in September 2010, “the late-August round of bids for utility-scale solar power projects in China yielded a new milestone in the economics of solar power in China: a sub-Yuan/kWh price for solar power. To achieve this impressive number, the Chinese government has used the state-owned sector (and particularly enterprises under the direct control of the central government) to help subsidize the price of solar power, to the point where the economics appear to be unsustainable.”

So, if the factors above give the background to the current moment, the analysis below shows where this situation is likely to lead in 2011 in the Chinese domestic market.

One final observation — since the Chinese PV solar panel is strongly export-oriented, the oversupply situation in China will lead to falling prices in international markets. Falling prices of imported Chinese panels will undercut the ability of U.S.-manufacturers to compete at cost and this will in turn add to the pressures on the bilateral U..S.-China bilateral relationship. The U.S. Steelworkers presented an omnibus complaint against Chinese unfair trade practices in renewable energy in September but USTR and the Obama administration chose in December to take up officially only the wind power component of that complaint.

The pressures building up in the global market for PV solar mean that the Obama administration may be under pressure in 2011 to broaden their trade action in renewables to include PV solar products.

ANALYSIS – BOOM IN CHINA’S PV INDUSTRY HARD TO CONTINUE IN 2011 – Asia Pulse (December 30, 2010)

China’s domestic photovoltaics firms have achieved remarkable performances in 2010 boosted by surging demand in domestic and overseas markets. But the boom is hard to continue in 2011 upon oversupply in domestic market and no further growth in international demand. According to statistics from Wind Info, 58 solar companies listed on China’s A-share market achieved combined net profits of 12.1 billion yuan (US$1.82 billion) in the first three quarters of 2010, up 46 per cent year on year from 8.29 billion yuan. However, high expectations on the outlook for the PV industry have attracted a good number of companies to take up the production of PV products, which is very likely to result in oversupply in 2011. Besides, international PV demand is unlikely to see further growth in 2011, therefore the boom in China’s PV industry in 2010 is unlikely to carry on into 2011.

Surging demand boosts performance of PV firms in 2010.

Since the beginning of 2010, international demand for PV products has continued to surge, growing threefold in Germany. Emerging PV markets such as Italy, the Czech Republic, and the US also stepped up construction of PV power plants. This has directly driven the demand for PV products, and led to a relatively long duration of short supply of PV products, including silicon wafers and solar cell modules, which greatly benefit domestic PV giants. Leading PV producers like Suntech, LDK Solar, and Yingli Green Energy all registered better-than-expected performances in the first three quarters of 2010. Among the 58 domestically-listed PV companies, 20 reported their net profits doubled in the first three quarters, and their sales margins increased by 5 percentage points year on year. Besides this, 23 companies have forecast increasing net profits for the whole year of 2010, and 16 of them expected over 50 per cent growth in net profits. Not only have PV producers turned in sound performances, but also have domestic PV equipment manufacturers benefited from the surging demand. Zhejiang Jinggong Science and Technology (002006.SZ), a manufacturer of polycrystalline silicon ingot production furnaces, expect net profits of 60 to 65 million yuan for 2010, up 150 to 180 per cent year on year.

Oversupply of PV products expected in 2011

China is very likely to face overcapacity and oversupply of PV products on diminishing international demand and continuous enthusiasm of domestic PV producers for capacity expansion. Zhou Yanwu, chief analyst with Research In China, said that more than 90 per cent of China’s domestic PV companies are heavily reliant on exports, and the export destinations are mainly concentrated in Europe. However, European countries, the world’s largest PV solar market, recently announced they are to cut back subsidies to PV projects. Germany has trimmed total subsidies to PV projects by 3 per cent since October. Spain is planning to cut the on-grid price of solar power-generated electricity generated by 45 per cent. The Czech Republic is also mulling over reducing its investment in a 700MW solar power plant. Solarbuzz, the PV market research specialist, believes that the policy changes will reduce demand for China’s domestic PV products, and this will take effect from the beginning of 2011. There is a consensus that China’s PV industry is not likely to maintain its fast growth in 2011. An insider with Suntech predicted that in certain periods of 2011 international PV demand may be lower than in 2010. However, despite of unfavorable changes in the solar power policies of European countries, China’s domestic PV companies are actively expanding their production capacity.

— Risen Energy (300118.SZ) on Wednesday announced that it plans to invest 800 million yuan to build a 300MW crystalline silicon production line, which will double its current production capacity.

— Shanghai Aerospace Automobile Electromechanical (SSE:600151) and Hengdian Group DMEGE Magnetics (SSZ:002056) recently announced they are to jointly invest more than 1 billion yuan to expand solar-cell production capacity.

— Leading PV producers like Suntech, Yingli, JA Solar, and LDK in China have already released their expansion plans for 2011, which all involve a 10-odd per cent increase in production capacity.

According to China’s development plan for the PV industry, China is aiming to increase PV installed capacity to 20GW by 2020. But judging by the current rate of expansion, it is likely to top 50GW by then. Meanwhile, the entire PV industry, including PV cells and PV modules, may face periodical oversupply in 2011 due to concentrated operation of newly added production capacity. According to statistics, there will be 11 solar cell producers with production capacities exceeding 1GW in 2011. A PV producer noted that China’s solar cell production capacity is expected to reach 35GW in 2011, while total international demand would not surpass 20GW. If all domestic production capacity is fully operated, there will be 50 per cent oversupply of solar cell products in 2011. In the face of a gloomy outlook for international PV demand, domestic PV companies may encounter challenges in getting a return on investment in the short term. Oversupply will force the prices of PV products to drop further in 2011.