Solar Purge Drives Weakest Into Buyouts, to Spur More Deals
Comment of the Day

August 31 2011

Commentary by Eoin Treacy

Solar Purge Drives Weakest Into Buyouts, to Spur More Deals

This article by Ehren Goossens and Andrew Herndon for Bloomberg may be of interest to subscribers. Here is a section:
Tumbling solar-cell prices are provoking deals. Their 42 percent drop in 2011, stemming from tougher Chinese competition and declining solar-energy incentives in Europe, contributed to California's Sunpower Corp. and Roth & Rau AG of Germany agreeing to takeovers. Ascent Solar Inc. took a Chinese partner.

"Weaker companies who did not get their product costs down to competitive levels are going to disappear," said Christopher Blansett, an analyst for JP Morgan Securities LLC. "They'll be bought up. They'll go away. There is significantly more supply of solar modules than demand."

A sell-off in solar stocks has made acquisitions cheaper.
The Bloomberg Industries Global Large Solar Index dropped 36 percent this year through yesterday, compared with a 3.8 percent decline in the Standard & Poor's 500 Index in that period.

The pace of acquisitions is the fastest since 2009, when $6 billion were recorded. The biggest deals that year involved GCL- Poly Energy Holdings Ltd., the Chinese maker of polysilicon.

That's the raw material used in solar cells, which are combined into modules, or panels, that convert sunlight into power.

Eoin Treacy's view Solar cells and wind turbines represent two sectors where China has emerged as a world leader in terms of manufacturing. It has leveraged its industrial base, cheap labour relative to other countries and business friendly regulatory and credit framework to dominate both these sectors in less than a decade. It has been clear for some time that companies seeking to compete in the solar cell business on cost were unlikely to survive. (Also see Comment of the Day on February 4th).

Despite their competitive edge, Chinese manufacturers have not been spared the malaise which has affected the sector. Most of better performers broke below their respective 200-day MAs in early March and most remain in relatively consistent medium-term downtrends. Chinese manufacturers LDK Solar, JA Solar, Solar Fun Power Holdings and ReneSolar have returned to test the lower side of their respective bases. Clear upward dynamics sustained for more than a day or two will be required to indicate demand is beginning to return to dominance.

Trina Solar has deteriorated sharply since April and is now testing the $15 area which also offered support in 2010. It posted a large upside key reversal on August 23rd and has since posted seven consecutive days to the upside. It recorded its first higher high since late February today and provided it finds support above $12.50 on the next pullback we can assume that at least a near-term low has been reached.

Thin film solar manufacturer First Solar has fallen back to test the lower side of the more than 2-year range where it has at least paused. A sustained move above $107 would confirm more than temporary support in this area.

Previous sector leader Solarworld AG has lost almost 90% of its value since late 2007. It has at least paused above €5 but a break of the progression of lower highs, currently near €7 would be required to confirm a return to demand dominance.

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