Monday, October 15, 2012

Chinese Caused Solar Capacity Glut, Price War and Bankruptcies ... What Happens When Government Rules, Protectionist Measures and Subsidies Replace the "invisible Hand" of Free Markets

When government rules replace free markets, nothing good happens. Chaos and overcapacity are what the governments introduce when a relatively few elitist bureaucrats substitute their judgment for the judgment of all free market participants.

In sum, we all know more than some of us can ever know. That's the magic of the "invisible hand" of the market place at work. Individuals acting in their best interests with MOM create better results  than OPM government elitists, no matter how well intentioned government officials may be. And as we know, these big spending OPMers are not always well intentioned.

And it works the same everywhere, whether we're in government run China or the free market based U.S., for example. Let's look at solar specifically.

China subsidizes its solar panels heavily. That's no surprise.

What may be a bit of a surprise, however, is that solar products can't compete with fossil fuel based products, even when the solar products are heavily subsidized by governments.

In fact, the financial viability of solar is a disaster happening around the world right now and it's occurring in all affected economies, including ours. That's because the market isn't being allowed to work freely, and governments are running the solar show. Very poorly, too.

Two articles make this point. Glut of Solar Panels Poses a New Threat to China describes the situation this way:

"BEIJING — China in recent years established global dominance in renewable energy, its solar panel and wind turbine factories forcing many foreign rivals out of business and its policy makers hailed by environmentalists around the world as visionaries.
But now China’s strategy is in disarray. Though worldwide demand for solar panels and wind turbines has grown rapidly over the last five years, China’s manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war.

The result is a looming financial disaster, not only for manufacturers but for state-owned banks that financed factories with approximately $18 billion in low-rate loans and for municipal and provincial governments that provided loan guarantees and sold manufacturers valuable land at deeply discounted prices.

China’s biggest solar panel makers are suffering losses of up to $1 for every $3 of sales this year, as panel prices have fallen by three-fourths since 2008. Even though the cost of solar power has fallen, it still remains triple the price of coal-generated power in China, requiring substantial subsidies through a tax imposed on industrial users of electricity to cover the higher cost of renewable energy.

The outcome has left even the architects of China’s renewable energy strategy feeling frustrated and eager to see many businesses shut down, so the most efficient companies may be salvageable financially.

In the solar panel sector, “If one-third of them survive, that’s good, and two-thirds of them die, but we don’t know how that happens,” said Li Junfeng, a longtime director general for energy and climate policy at the National Development and Reform Commission, the country’s top economic planning agency. . . .

Many local and provincial governments also are determined to keep their hometown favorites afloat to avoid job losses and to avoid making payments on loan guarantees, he said.

Mr. Li’s worries appear to be broadly shared in Beijing. “For the leading companies in the sector, if they’re not careful, the whole sector will disappear,” said Chen Huiqing, the deputy director for solar products at the China Chamber of Commerce for Import and Export of Machinery and Electronic Products. . . .

The problem lies in the eagerness of Chinese businesses to rush into any new industry that looks attractive and swamp it with investments, he said. . . .

The modest cutbacks in production barely put a dent in China’s overcapacity problem. GTM Research, a renewable energy consulting firm in Boston, estimates that Chinese companies have the ability to manufacture 50 gigawatts of solar panels this year, while the Chinese domestic market is on track to absorb only 4 to 5 gigawatts. Exports will take another 18 or 19 gigawatts.

The enormously expensive equipment in solar panel factories needs to be run around the clock, seven days a week, to cover costs.

“You want to be up at 80 percent, so they’re half of what they need,” said Shayle Kann, the head of GTM Research, which is a unit of Greentech Media.

Chinese companies have struggled even though a dozen solar companies in the United States and another dozen in Europe have gone bankrupt or closed factories since the start of last year. The bankruptcies and closures have done little to ease the global glut and price war because China by itself represents more than two-thirds of the world’s capacity."

Global Glut and Shakeout Underway

And what about the effect on all this Chinese solar overcapacity on the rest of the world's markets and competitors, including those in the U.S.? World Markets Darken for China Solar says this:

"The shutters are coming down on China's solar industry.

The U.S. Commerce Department has imposed tariffs on imports of Chinese solar panels after ruling Chinese firms . . . have dumped their products in the U.S. market. The European Union is mulling a similar case, which could lead to duties on Chinese shipments to the world's largest market.

Why are manufacturers in the U.S. and Europe upset? China's solar exports have soared from $3.0 billion in 2007 to an estimated $20.3 billion in 2012, GTM Research says, accounting for the lion's share of the global market. Over the same period, China's unit prices have come down 80%.

That's caused a lot of pain for western rivals. . . .

For Chinese firms, the risk is that the U.S. tariffs are a sign of things to come. Europe accounts for 50% of the global market according to GTM, far more than 10% in the U.S. If the E.U. case goes against Chinese manufacturers, the result could be a significant hit to demand for their products.

Meanwhile, competition from conventional fossil fuels—not other solar panel producers—is a major challenge for the sector. . . . solar is around 20% more expensive per watt than natural gas.

Western subsidies for alternative energy drove the massive expansion of China's solar power industry. Now it is cheap gas and Western protectionism that threatens to turn out the lights on China's solar exports."

Summing Up

 Substituting the faulty judgment of government elitists in place of the judgment of  individuals freely choosing what to do with their MOM is invariably a loser's game. 

Government "investments" of taxpayer money to pick industrial winners is simply wrong. The market works, and government interference will only create problems which will cost taxpayers and later consumers billions of dollars in the end.

If any monopolistic government program, wherever located, is perceived to be willing to buy at profitable prices (after government subsidies and protectionist measures, of course) everything that any industry is capable of producing, industry participants will build capacity and produce flat out whether there's sufficient market demand for the production output or not. {Think of agricultural price supports, for example.}

As a result, easy credit, lack of market discipline and government subsidies necessarily lead to a glut of overcapacity. That's what happens when government rules are substituted for the pricing discipline of the market.

As government steps in, then one of two things occur: (1) either pricing falls dramatically and industry profits disappear or (2) protectionist measures and price protection are initiated by those same governments and pricing goes higher.

Either way big losses are the result, either to industrial "competitors" due to the capacity glut, or to "buying" consumers who are forced to pay more than the market would charge for those "protected" and monopoly priced products.

And all along the way there's always a better alternative to government game playing. It's the invisible hand of the free market where individuals make choices and prices and volumes are determined accordingly.

We have enough oil, gas and coal to last at least another century. Then in that distant future solar and wind may finally become viable and necessary. At that point MOM will be invested to develop that solar capability, just like the private sector now wants to develop more oil, gas and coal.

The only problem we have now is how to get the government out of the way of the market place. That said, it's a big problem. In fact, government knows best thinking is perhaps the biggest problem of all.

Thanks. Bob.

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