Trina Warning Foreshadows Solar Gloom

Doug Young

After watching their shares and prospects soar over the past year, solar stocks are suddenly hitting a cloudy patch as investors anxiously wait for most companies to return to the profit column following a 2 year sector downturn. That wait may have just gotten a lot longer, following a warning from Trina (NYSE: TSL) that it will fall far short of its previous sales forecasts for the just-ended first quarter.

Trina blames the problem on short-term factors, as it and other Chinese panel makers work to finalize an agreement to avoid the European Union’s previous threat of anti-dumping tariffs. But hidden in the optimism from Trina and its Chinese peers is the fact that the new agreement is likely to have many of the same effects as the original punitive tariffs. That means most of these Chinese companies will suddenly face resurgent new competition from western rivals in Europe once a deal is reached.

According to its newly issued warning, Trina said it now expects to report it shipped 540-570 megawatts worth of panels in the first quarter that just ended on March 31. (company announcement) That figure is down sharply about 20 percent to be precise from the 670-700 megawatts worth of panels that it previously forecast just 6 weeks ago. Trina blames the shortfall on failure to finalize an agreement with the EU, after the 2 sides last year reached a landmark deal that would see the Chinese panel makers voluntarily raise their prices to offset the effect of unfair subsidies from their home government. (previous post)

Most solar shares have rallied strongly over the last year over hopes that a 2 year sector downturn was in the past. But the stocks have given back a big chunk of those gains in the past month, in a needed correction as investors realize a turnaround may be slower in coming than many had hoped.

Trina shares dropped 3.8 percent after its warning, and are down nearly 40 percent since early March. Other panel makers are down by similar amounts, with Yingli (NYSE: YGE) down 42 percent over the same period, including a 6.5 percent drop after Trina’s warning. Even superstar Canadian Solar (NASD:CSIQ), one of the only major panel makers to return to profitability, has lost 34 percent since early March, including a 6.3 percent drop after Trina’s warning.

Some might argue that the current sell-off may be nearing an end, since a 40 percent correction is certainly quite large. But many optimists in the crowd are failing to realize that the new EU agreement will have virtually the same effect as punitive tariffs, since it will force Trina and its peers to raise their prices to levels similar to those from their US and European rivals. That means all the Chinese manufacturers will face stiff new competition under the new agreement in Europe, which has traditionally been their biggest market.

Meantime, the companies could also soon face similar competition in the US, which last year imposed its own anti-dumping tariffs to protest China’s unfair state support for the industry through policies like cheap loans and preferential taxes. The US is currently working to plug a loophole in its earlier decision that allowed the Chinese panel makers to avoid many of the extra tariffs. When that happens, the Chinese companies will also face renewed competition in that market. (previous post)

Two bright spots for the Chinese manufacturers will be their own home market and also Japan, where the governments and private companies have launched ambitious programs to rapidly build up solar power capacity. But those developments won’t be enough to offset the big obstacles in the US and Europe, meaning that Chinese solar panel makers are likely to see both their sales and stocks come under pressure for the rest of the year.

Bottom line: Trina’s sales warning hints at new obstacles for Chinese solar panel makers in the key EU market, putting pressure on their sales and shares for the rest of this year.

aDoug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.