Is solar a duplication of China’s rare earth element strategy?

Dr. Robert Castellano, The Information Network, USA.

NEW TRIPOLI, USA: Through a series of clever, systematic manipulations China now owns the rare earth element (REE) market. During the past twenty years there has been an explosion in demand for many items that require rare earth metals. China being China capitalized on its rich REE deposits and cheap labor to drive down prices to a point that nearly every mine outside China was forced to shut down because they couldn’t compete on price. The ROW being the ROW allowed China to take away business because of cheap labor.

In 2010, China cut export quotas for the minerals needed to make hybrid cars and televisions by 72 percent. The result – since the end of 2010, the composite price of the REE oxides has tripled. If that isn’t enough, China dominates the critical supply chain. Rare earth materials require a number of processing stages before they can be used in an application:

* Mining rare earth ore from the mineral deposit;
* Separating the rare earth ore into individual rare earth oxides;
* Refining the rare earth oxides into metals with different purity levels;
* Forming the metals into rare earth alloys; and;
* Manufacturing the alloys into components, such as permanent magnets, used in defense and commercial applications.

Based on industry estimates, rebuilding a US rare earth supply chain may take up to 15 years and is dependent on several factors, including securing capital investments in processing infrastructure, developing new technologies, and acquiring patents, which are currently held by international companies.

Is solar next?
High inventory of solar products has been pushing prices down since second quarter 2011. According to an article in DigiTimes, Dr. Yuan-Huai Simon Tsuo, chairman of Motech, “The aggressive capacity expansion in China should be carefully observed.” He added, “It is hard for solar cell firms to have utilization rates over 60 percent in May with high build-ups in inventory.”

Yet, according to Dr. Zhengrong Shi, chairman and CEO in his latest conference call remarked: “Suntech’s utilization rate in Q1 was around 85 percent and that it was expected that to increase in Q2 to about 90 percent. In its Q1 2011 earnings report, China’s Jinko Solar not only announced strong sequential module shipment growth but also strong second quarter shipment guidance.

China’s Suntech expects cell and module production capacity to reach 2.4GW by the end of the second-quarter 2011, of which 600MW of PV cell capacity will be owned and operated by a joint venture. Capacity at the end of 2010 was 1.8GW.

According to DigiTimes, China-based first-tier solar firms plan to follow capacity expansion targets set earlier. Total annual capacity is likely to expand 40GW in 2011 according to the orders for solar cells made by China-based firms. However, global demand for solar cells in 2011 might only be around 15GW, hence an oversupply is very likely.Source: The Information Network, USA.

According to the chart above, if the DigiTimes forecast is correct and 15GW demand is a reality, just the INCREASE in capacity of the top 5 companies (excluding First Solar) will make up more than half of the expected demand. By way of comparison, demand in 2010 was 17 GW, so there may actually be a drop in sales in 2011.

Also according to DigiTimes, China-based solar firms have stronger distribution channels causing the firms to run at full capacity even in May while other firms have been suffering from lower sales.

How can that be? In my opinion, it’s a game of smoke and mirrors that is being used for China’s control of the global solar industry by investing in top tier Chinese companies, and only top tier Chinese companies. Here’s how it works:

According to Suntech’s analyst day presentation,

1. Only 9.5GW of an estimated world’s 27GW capacity is bankable. Suntech includes itself in the bankable category along with JA Solar, Trina Solar, and Yingli Green Energy.
2. Another 10.2GW are classified as “low-cost bankable” which may include many low cost second tier producers in Asia.
3. The remaining 7.3GW are pegged as simply “unbankable.”

According to this thesis, there really isn’t an overcapacity of solar cells in the solar industry, just an overcapacity of “unbankable” and “low-cost bankable” vendors.

Suntech thesis is branding and thus bankability will be the key differential among industry players. These top-tier solar manufacturers are able to secure financing in the multi-million dollar range because bankability should insulate higher tier capacity from pricing declines more than lower tier suppliers.

Larger more conservative banks and institutions may only finance brands where not only the durability of its products is assured, but also the durability of the company supplying them. In an oversupplied market, lower tier brands would thus have to lower pricing to a level where increased returns attract higher risk investors. Ultimately, the profitability of many solar companies in 2011 will be linked to its competitive positioning within the industry. Many companies are forced to lower prices in order to get its products placed.

But the real issue is that these large banks just happen to be the Chinese government or government-owned banks, which are extending billions of dollars in loans to domestic firms.

In an April 2010 article in Forbes, “Suntech will reportedly get a loan of $7.3 billion from the state-run China Development Bank while Trina Solar, not so long ago a marginal player, will get a hefty $4.4 billion in funding. "It marks a dramatic bump in funding for the China solar PV [photovoltaic] industry," writes Deutsche Bank analyst Steve O'Rourke. "China considers solar PV and broader renewable energy as strategic."

According to the Mercom Capital Group, LLC, there was $41.8 billion in capital moving into the solar industry in 2010. The largest individual transactions were debt financing arrangements by the China Development Bank (Beijing, China), with recipients including LDK Solar Company, Ltd. (Xinyu, China) for $8.9 billion, Suntech Power Holding Co. Ltd (Wuxi, China) for $7.33 billion and Yingli Green Energy Holding Co. Ltd (Baoding, China) for $5.3 billion. In March 2011, Linuo Group Co., another solar firm, said it had secured a 12 billion yuan ($1.8 billion) loan from CDB. The packages these enterprises receive include cash grants, tax benefits, and low interest loans with the longest expiry date up to six years.

China Development Bank, the state-owned policy bank, created in 1994 to support the government’s economic and infrastructure goals, had $687.8 billion in loans on its books at the end of 2010, more than twice as much as the World Bank.

Bottom line
China possesses around 50 percent of the world's REE reserves, and has over the past two decades supplanted the US as the premier world REE supplier, due to a few significant factors.

The development of REE resources has over the years received Chinese government support (some sources even quote Deng Xiaoping saying that one day China will become ‘the Saudi Arabia of rare earths').

Greater China manufactured nearly 60 percent of the worldwide solar cells in 2010 and exported more than 90 percent.

In early May 2010, Dr. Shi of Suntech was quoted as saying: "The Chinese government has provided really clear and consistent policy to support the manufacturing – not just for solar but to try to attract all sorts of people to do all sorts of things in China.”

And now for the icing on the cake. Some 200 people are now employed by Suntech in the U.S., where the company opened a new factory last October in Goodyear, Arizona. Arizona was attractive to the company because of the state's tax incentives to encourage renewables manufacturing in the state. Arizona has a Renewable Portfolio Standard of 15 percent by 2525, but 30 percent of that must come from distributed generation such as rooftop solar. Suntech is in line to get $2m from state tax breaks, in addition to federal tax incentives, Shi said.

So let me get this straight. The Chinese government is gearing up to have Chinese solar manufacturers take over the industry by cash grants, tax benefits and low interest loans, and the US government is doing the same?

As I’ve been saying for the past two years, what’s worse, buying oil from OPEC or solar from China?