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Is Jim Chanos Right About Solar Energy: FSLR, CSIQ, HSOL, JASO?

November 23, 2011 | About:
Several solar energy companies appear in GuruFocus’ 52-Week Lows screener. Some of the ones that have dropped the most include Hanwha SolarOne Co. (HSOL) which is 87.5% off its highs, Canadian Solar (CSIQ) which is 86.6% off its highs, JA Solar Holdings (JASO) 82.5% off its highs, and First Solar (FSLR) 74.4% off its highs.

While a list of stocks selling at low prices is a great place to start looking for long candidates, solar companies might not be the best choice. They currently look cheap, but are cheap for a good reason. The solar business is simply not a good business to be in.

The bear case against solar energy was made by Jim Chanos at the Ira Sohn investment conference where he disclosed he was short First Solar. Chanos stated he was short solar companies for several reasons: (1) solar energy is not cost efficient, (2) withdrawal of government subsidies from the industry and, (3) increased competition from Chinese companies are hurting margins.

As we can see in the table of costs for new generation plants compiled by the EIA/DOE solar plants are some of the most expensive.

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Chanos is correct. Absent government subsidies it makes little sense to build a solar plant. Thermal solar plants are the most expensive types of power plants and PV solar plants are the third most expensive type of plant. In between the two is offshore wind (Chanos is unsurprisingly also short wind power companies as well).

Of the four companies mentioned at the beginning of the article, FSLR is showing shrinking gross and net margins. But we agree with Chanos that margin compression for many companies will be coming soon. Solar panel manufacturing capacity is expanding rapidly (particularly in China) and prices are falling.

In their latest conference call Applied Materials (AMAT) (a large semiconductor equipment manufacturer) CEO Michael Splinter said:

”In solar, we now see panel installations for the year ending up in the 22 to 24 gigawatt range, up approximately 25% year-on-year. Our outlook for the end market is healthy and we expect panel demand to grow 10% to 30% in 2012. We see continued strength in Germany and Italy with significant growth in the Chinese, U.S., and Japanese markets.

With module spot prices approaching $1 per watt, competition between the panel makers is intensifying. As prices fall, module efficiency becomes incrementally more important, accelerating the adoption of advanced technology.” [emphasis mine]

As the graphic below shows, prices have steadily been falling since the 1980s.

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Despite falling prices, solar still remains uncompetitive versus cheaper energy option such as natural gas. Solar prices would have to fall by perhaps another 60% to 70% to be competitive. If that does happen, what might the margins look like at solar manufacturers?

In his third point Chanos makes note of the fact that the solar industry has survived on subsidies. Since the costs of plants are uncompetitive, government subsidies are needed to encourage installation. Chanos notes that with governments around the world engaging in austerity that these subsidies are likely to be cut or phased out. Again, we agree with Chanos. Besides China, there does not seem to be a government in the developed world engaging in any expansionary fiscal policy. The United Kingdom, Australia, and the entire euro zone have embraced slashing government spending. The U.S. hasn’t caught the austerity bug yet but it certainly isn’t for lack of trying.

Combine the effects of fiscal austerity from governments with the private sector recessions that they create and you have a recipe for not only falling subsidies but falling energy usage in general.

Finally, when investing in Chinese companies one must be very careful of fraud. A large number of Chinese firms have been discovered to have significant accounting irregularities and have been unable to retain auditors or file financial statements on time and have subsequently been delisted from major exchanges. Several high profile blow-ups include Sino-Forest, China Media Express, and China Biotics.

In summary we think Chanos hit the nail on the head with his thesis about the solar industry and investors would be wise to heed his advice and stay away.

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About the author:

Ben Strubel
President and Portfolio Manager of Strubel Investment Management, LLC a value oriented, independent, fee-only Registered Investment Advisor (RIA) based in Lancaster, PA.

Visit Ben Strubel's Website


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