Solar demand outstrips supply and raises valuation concerns

China’s solar technology industry has experienced explosive growth in just a few short years as it becomes the principal supply of solar product.  But in early October the challenge of getting enough raw material to satisfy demand has caused valuation concerns over listed Chinese solar businesses.  At issue plaguing the global industry is an acute shortage of high quality polysilicon, the key feedstock material for manufacturing solar panels.  Exacerbating investor anxiety is the industry’s practice of not fully disclosing amounts of polysilicon supplies to which companies have guaranteed access or the prices that companies are forced to pay for tight supplies.

The solar technology industry in China has thrived thanks to a favourable regulatory environment spurred by a government eager to expand the use of alternative energy and clean up air pollution. The Chinese solar push has coincided with booming demand in Europe, particularly in Germany and Spain, for PV arrays buoyed by generous subsidies and national efforts to expand the mix of solar to their power grids.

The emergence of Chinese solar companies’ presence on Wall Street began in December 2005 with the listing of Suntech Power Holdings Co. Ltd., a solar-module maker based in Wuxi, Jiangsu.  Suntech is the world’s largest module manufacturer, with a global workforce of more than 4,000.  Other listed Chinese firms include Canadian Solar Inc. Trina Solar Limited,  Solarfun Power Holdings Co Ltd, JA Solar Holdings Co. Ltd, China Sunergy Co. Ltd, LDK Solar Co. Ltd and Yingli Green Energy Holding Co Ltd.

The ongoing polysilicon shortage, along with recent controversies over two Chinese companies accused of inaccurately reporting supplies to investors, will contribute a waning of investor confidence.

This phenomenon, while alerting investors to the general risks of investing in China, also illustrates how green tech is not immune to the economic imbalances felt in other sectors.  While green is the way industry is going, it remains a challenge to find businesses that manage themselves in a more holonic way.  Investors should expect a less transparent investment environment in the “Wild East”.


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