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Solar Stocks Face Grayer Skies

Jim Cramer recently said he's not a believer in solar plays because they require government subsidies, and governments around the world are out of "moola."

Back on Sept. 3 I wrote that the solar industry was headed for crisis in 2010 and that as many as half of the more than 200 solar manufacturers, who at the time were mired in red ink with selling prices above $2.00 per watt, might not survive. Prices have dropped since then, erasing already razor-thin margins.

Late last year, a few announcements supported my prediction:

  • General Electric (GE - Get Report) said it planed to close its only U.S. solar panel factory because production costs had exceeded sale prices. The factory can produce 34 megawatts
  • Evergreen Solar (ESLR) said it would move panel production from its factory in Devens, Mass., to China in 2010 in order to cut costs.
  • BP (BP) solar unit announced it would close its solar panel factory in Maryland and outsource that work to a contract manufacturer. In October, BP said it had hired Jabil Circuit (JBL) to assemble panels at a Jabil factory in Poland.

Then this month, China-based Jinko Solar withdrew its IPO plans due to "poor market conditions." Just weeks before, another China-based polysilicon manufacturer, Daqo New Energy, pulled its $80 million IPO.

Meanwhile, a lot of companies are losing money:

  • Evergreen Solar reported a fourth-quarter net loss of $98.1 million after an $82.4 million loss in the third quarter.
  • Renewable Energy reported a fourth-quarter net loss of 1.05 billion Norwegian kroner ($177.5 million), compared with a net profit of 1.11 billion kroner a year earlier.
  • China's JA Solar (JASO - Get Report) reported a fourth-quarter net loss per diluted American depositary share of 0.80 yuan (or 12 cents), compared with a net loss per diluted ADS of 2.31 yuan (or 34 cents) a year earlier.
  • Akeena Solar (AKNS) reported a fourth-quarter net loss of $3.7 million, or 11 cents a share, compared with a net loss of $9.2 million, or 31 cents a share, a year earlier.
  • Energy Conversion Devices (ENER) reported a fourth-quarter loss of $39 million, or 92 cents a share, compared with earnings of $13 million, or 31 cents a share, a year before.
  • MEMC Electronic Materials (WFR) (NYSE:WFR) swung to the red in the fourth quarter on a plunge in gross margin and weaker sales.

These are just a few examples. In some cases business was better last quarter, but that's before changes in German incentive programs (feed-in tariffs) expire in 2010. Also, these are large publicly traded companies, and many are Chinese with government stimulus packages assuring their survival. What about the plethora of small, privately held companies?

In fact, I suspect the Chinese will attempt to dominate the solar industry by increasing supply on the market at low prices to drive out competition. Already, JA Solar, despite a loss in the past quarter, announced it will increase capacity from 875 MW in 2009 to 1100 MW in 2010. In 2010 the solar industry will exhibit capacity utilization of 25.7%, and inventory will be stretched to 133 days.

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