NEW YORK (
) -- Shares of Chinese solar stocks, including shares of
Yingli Green Energy
, were rising on Tuesday morning after the latest chatter about potential feed-in tariff cuts in Germany made a hard cap on solar installations seem less likely, and suggested that another classic boom-and-bust cycle in Germany could play out in 2011.
Yingli Green Energy and Trina Solar were both up as much as 6% to 7% in early trading.
It wasn't just the noted low-cost vertically integrated module leaders rising in Tuesday morning trading.
was up the most among Chinese solar stocks, with an 8% gain, and JA Solar was up by 5%.
It was an across-the-board bet on low multiple Chinese solar stocks on Tuesday, and it's not a big surprise in solar, where a rising tide has a history of lifting all boats.
Jinko Solar, which was downgraded by Goldman Sachs in late 2010 based on the theory that in a slowing demand environment, "tier two" brands falter, was among the biggest gainers in Tuesday trading, up more than 7%.
LDK, in particular, is a bet on the bottleneck in polysilicon demand, as well as the vertical integration roadmap of many Chinese solar companies not already positioned among the module leaders.
LDK has been increasing its in-house polysilicon production, plans a spin-off of the polysilicon business this year, and it also aggressively modeling solar module sales in 2011. Any demand pull-in in Germany lends credence to LDK's outlook, in terms of being able to move modules, as well as supporting pricing fundamentals in the polysilicon market and making the 2011 environment a potentially better one for a planned polysilicon business IPO.
JA Solar, which was hit with a sell by Stifel last week, was up by more than 5% on Tuesday. JA Solar has been trying to vertically integrate as well, and slate more of its market leading cell supply to captive module sales. However, it still rises or falls based on the solar demand outlook and the supply level of solar cells. With overcapacity in the solar cell market, JA Solar's outlook is subject to the declining price environment and the "squeezed middle man" theory. Yet with some traders betting that one more German demand pull-in is set to occur, the rising tide lifts all boats in solar also applies to the solar cell players, especially the market's largest cell producer.
The latest German FIT reduction chatter started last Thursday with a Barclays report about a draft of FIT legislation making its way towards the German parliament, and was followed by a
report on Monday saying the news service had reviewed a draft document. Chatter about feed-in tariff declines based on a sliding scale have been rumored for weeks already, but a trade based on the rumors seemed to pick up steam after a draft document surfaced.
>>More Solar Subsidy Cuts on Deck in Germany
Feed-in tariff cuts reduce pricing in solar, but they also have caused demand spikes historically. The bullish trading in Chinese solar stocks on Tuesday morning could be an indication that the most bearish demand forecasts for Germany in 2011 could be overdone and that Chinese solar stocks multiples are too low, with another 2011 demand spike poised to be the result of another round of FIT declines.
Some solar analysts were expecting German demand to fall below the 5 gigawatt mark in 2011. However, in the draft of the FIT reduction plan referenced by
, the German government includes a scenario in which German solar demand surpassed 7.5GW. It could just be a worst-case scenario formality in the draft document, or it could indicate that once again, the German government's plan to slow solar growth by adding FIT reductions will only serve to increase demand in Germany, as it did in 2010.
SMA Solar, the German solar inverter giant, said in its 2010 full year view on Monday that changes in feed-in tariffs in mid-2010 had caused a considerable reduction of the newly installed photovoltaic power in Germany in the second half of the year. However, not all are convinced that this second-half 2010 slowdown will continue with planned mid-year cuts for 2011.
Adam Krop, analyst at Ardour Capital noted that there had been the typical uncertainty surrounding 2011 demand evident in solar trading, but now with a German draft approach to FIT cuts out in the open and progressing forward, it takes some uncertainty away. "I expect a pretty significant pull in ahead of the cuts. Cutting FITs in 2010 created a massive pull in and I expect a similar situation to happen in 2011," the analyst said.
Keep in mind that last June, ahead of mid-year FIT cuts, Germany had its biggest month for solar installations ever, with 2.2GW installed.
Of late, the slowdown in German installations toward the end of 2010 has led to the argument being made that the feed-in tariff cuts are working to moderate growth in Germany, and that another round of additional FIT cuts won't lead to the classic boom.
Referring to the recent weakness in the German market as a sign that the classic boom won't play out again in Germany, Ardour Capital's Krop said that one has to consider the season during which it is occurring. German demand towards the end of the year slows down because of typical seasonality in solar. A mid-year cut, on the other hand, creates exaggerated seasonality to the positive side -- as evidenced by last June's 2.2GW month.
German solar inverter giant SMA Solar reiterated its view of a weaker pricing and margin environment in 2011 in its Monday outlook. While SMA Solar didn't revise its guidance higher, it reiterated what it had told the market late in 2010. The SMA Solar outlook was one more data point indicating that if there are going to be pricing and margin declines in 2011, it will start with the high cost European companies, as opposed to the low-cost Chinese vendors.
There is a fine line between feed-in tariff cuts stimulating demand and feed-in tariff cuts forcing pricing down to such an extreme that solar companies can't book profits, even the low-cost producers from China. The trading action on Tuesday, at least early on, suggested that the latest German political plan for solar was yet another sign favoring the low-cost, Chinese solar supply leaders. Even if pricing falls, these companies will be in the best position to withstand the pressure, and the demand they are soaking up in Germany may not be as weak as previously imagined.
In fact, if it does lead to a bigger demand year in 2011 than current forecasts, the draft of the German FIT plan might simply push the hard cap off to 2012.
If there has been a never-ending boom-and-bust cycle in solar predicated on feed-in tariff decline schedules, there has also been a classic scenario in Germany regarding a hard cap on solar: every year the German government avoids the issue by layering in additional feed-in tariff cuts, which leads to a larger market than anticipated, which circles back around to debate about whether a cap is needed when the next year starts.
On Tuesday, the trade in solar may be about a bigger market in Germany in 2011 than current forecasts are targeting, but by the second half of the year, ironically, the trade may return to fears about a cap in Germany.
-- Written by Eric Rosenbaum from New York.
>>More Solar Subsidy Cuts on Deck in Germany
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