Sept 2018

After summer sunburn — mind solar insolvencies

While oil and gas sector posted strong earnings on the back of higher commodity prices, performance for clean energy, espe-cially solar, reflects regulatory concerns, especially in China

The number of large bankruptcies for solar companies should increase, especially in China because of rampant overcapacity and pricing issues, the end of subsidies, and the ongoing trade feud with the US

Ph

oto

by F

ab

ian

Bla

nk o

n U

nsp

lash

INDUSTRY

SPOTLIGHT

Economic Research

2

AFTER SUMMER SUNBURN MIND SOLAR INSOLVENCIES

Industry Spotlight by Euler Hermes Economic Research

Great divide – the break-down of

the oil/solar connection

The latest earnings season has shown some great divide between and within the various sectors within energy. The impact of rising com-modity prices is far from uniform. A large majority of companies in the oil & gas sector reporting rising reve-nues and earnings underscores the turnaround in the sector and positive commodity impact. It implies margin stability.

Conversely, clean energy is not benefiting from the traditional posi-tive oil price effect, ie improving vol-umes and earnings in silage with rising oil prices. While still more com-panies have reported rising earnings last quarter, the share of those com-panies is rapidly decreasing. In Q2, only 58% of companies in clean en-ergy reported y/y rising Ebitda, down from 66% in Q4 17.

Solar: Cloud over China

We expect the driver of this deterio-ration, regulatory change, to cause further deterioration of earnings growth and be a prime source of new risk in the clean energy sector.

As often in the past, the solar sector is the epicentre of volatility. In May 2018, the Chinese government an-nounced the suspension of all subsi-dies for ground mounted solar parks in favour of competitive tenders, and a significant reduction in feed-in tariffs.

These measures reflect capacity build in line with the government’s 2020 200GW target, alongside a need for catch up on network infra-structure and a significant financing deficit.

It appears that Chinese policy may be shifting away from capacity build towards streamlining and optimising of investment, as witnessed by a strong focus on UHVDC (ultra high volume DC) network development. The coming about of these measures was already visible in Q1 and Q2 18 numbers.

Figure 1 Energy quarterly earnings: number of companies reporting positive revenue and Ebitda growth

Source: Bloomberg and Euler Hermes, sectors based on BICS classification comprising a

sample of 931 oil & gas companies and 210 clean energy companies (Q1 18)

Catharina Hillenbrand-Saponar, Sector advisor

+ 33 184 11 41 29

Catharina.Hillenbrand-Saponar@eulerhermes.com

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Q3 17 Q4 17 Q1 18 Q2 18

Oil Ebitda growth

Clean energy Ebitdagrowth

Oil revenue growth

Clean energy revenuegrowth

3

September 2018

But highly likely, the true significant im-pact of a market slowing from a volume of over 50GW to c30MW pa will be seen in Q3 and even more Q4 18, one of the peak quarters in the year for the sector. Solar module prices have declined in an accelerated fashion.

Risk of rising insolvencies

In a sector characterised by very thin margins – normalised through cycle Ebit margins for the leading manufacturers are in the region of 4% - and overcapaci-ty, volume decline of the magnitude as above will not only lead to earnings de-cline but missed payments, payment delays lengthening beyond an already very high 127 days, and ultimately sig-nificant risk of insolvencies.

As a whole, we see chances of a rise in our major insolvencies in energy from 15 new cases ytd 2018, all of which outside the solar sector, as casualties may hit the radar screen later in the year and/or 2019.

The current change in Chinese regula-tion is big enough to count as one of the major step changes for the solar sector. In our view it could trigger yet another wave of restructuring and consolidation.

Overcapacity is a global matter, even though the bulk of production is situated in China. Solar products are very mo-bile, easily shipped and major upset in one market – in this case the single most important in the world – tends to spill around the globe.

As the solar sector is very interlinked and global, the issue concerns not only the entire value chain, from polysilicon man-ufactures, through wafers, installers and the like, but also companies outside of China.

We therefore caution on solar compa-nies on a global scale as well as certain areas within technology (factory auto-mation/robotics) and speciality chemi-cals, equipment and services. It is worth noting that the EU ended import con-trols for Chinese solar panels as of end September 2018, thus Europe may be the next recipient of a wave of cut price Chinese product.

We have also already seen a pick-up in Chinese exports to the US, despite US tariffs. The 30% levy on panels is being offset by a 19% ytd decline in the global wholesale crystalline silicon module price. We estimate that US module prices are currently around 25% below the levels immediately after the intro-duction of the 30% import tariff.

The intent of the tariffs was to save US solar module manufacturers from earn-ings pressure and bankruptcy risk. Chi-nese energy policy and market reality has completely counteracted that.

Consequently, we do see rising risk for US manufacturers. The same phenome-non also puts other manufacturers out-side of China risk, chiefly Europe but also elsewhere. Nonetheless, we expect se-vere margin pressure and consolidation amongst Chinese operators. Capacity utilisation sub 70% cannot support a long term sustainable business model. Even with exports, the sector is heading that way. US exports may sooth, but an-nual demand of c 10GW for the whole of the US does not even cover half of the shortfall in China, even if flows are di-verted as they will be.

The industry is characterised by very vio-lent cycles and this might be a major downturn.

Figure 4 Ebit margins average solar sector leaders

Source: Bloomberg, and a company data

Figure 5 Major insolvencies energy

Source: Euler Hermes

Figures 2 and 3 Solar product prices and market growth

Source: Bloomberg, EPIA and Euler Hermes

0

20000

40000

60000

80000

100000

120000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

MW

Global capacity installations

China

-25

-20

-15

-10

-5

0

5

10

15

20

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Q1 0 2 4 6 8 10 12 14 16

H1 15

H2 15

H1 16

H2 16

H1 17

H2 17

H1 18

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0

2

4

6

8

10

12

14

16

18

20

Oct-17 Jan-18 Apr-18 Jul-18

PVinsights PV GradePolysilicon $/kg (left-handside)

PVinsights Multi 156mmWafer $/piece (right-handside)

PVinsights Multi 156mm Cell$/piece (right-hand side)

PVinsights Multi ModuleSpot $/watt (right-handside)

4

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained herein may include prospects, statements of future expectations and other forward -looking state-

ments that are based on management's current views and assumptions and involve known and unknown risks and uncer-

tainties. Actual results, performance or events may differ materially from those expressed or implied in such forward -looking

statements.

Such deviations may arise due to, without limitation, (i) changes of the general economic conditions and competitive situa-

tion, particularly in the Allianz Group's core business and core markets, (ii) performance of financial markets (particularly

market volatility, liquidity and credit events), (iii) frequency and severity of insured loss events, including from natural catas-

trophes, and the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) p ar-

ticularly in the banking business, the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rates includ-

ing the euro/US-dollar exchange rate, (ix) changes in laws and regulations, including tax regulations, (x) the impact of ac-

quisitions, including related integration issues, and reorganization measures, and (xi) general competitive factors, in each

case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pro-

nounced, as a result of terrorist activities and their consequences.

NO DUTY TO UPDATE

The company assumes no obligation to update any information or forward -looking statement contained herein, save for any

information required to be disclosed by law.

Director of Publications: Ludovic Subran, Chief Economist

Euler Hermes Allianz Economic Research

1, place des Saisons | 92048 Paris-La-Défense Cedex | France Phone +33 1 84 11 35 64 |

A company of Allianz

http://www.eulerhermes.com/economic-research

research@eulerhermes.com

euler-hermes

eulerhermes