The new year is already two days old, folks, but Mr. Market is still drunk. Which is not surprising -- by all indications, he's been imbibing for several days straight already.
Just before the New Year festivities commenced, we watched in shock as shares of Chinese solar wafer maker ReneSola (NYSE: SOL) rocketed more than 33% in a day, then gave back part of that gain, then broke for the holiday. This morning, the shares are rising once again.
Of course, erratic stock movements have been par for the course these past few months. But no one's been acting stranger than the solar stocks lately. Consider that fellow wafer makers LDK Solar (NYSE: LDK) and MEMC Electronic (NYSE: WFR) are both bobbing up and down in tandem with their peer. Meanwhile, these companies' prime customers -- solar panel makers like Suntech (NYSE: STP), JA Solar (Nasdaq: JASO), Solarfun Power (Nasdaq: SOLF), and Canadian Solar (Nasdaq: CSIQ) -- are moving up and down in lockstep.
Why is this strange? Because on New Year's Eve, tech journalist Digitimes came out with a short but telling report that bodes very ill indeed for the wafer makers, and not much better for their customers. According to Digitimes, certain Chinese wafer-makers have been "dumping" their production on the market at prices of $6 per wafer or less.
Half your profits just went "poof." Happy New Year!
Now, that number doesn't mean much in isolation, so let me provide some context: These same wafers were selling for as much as $12 a piece as recently as September. So basically, wafer prices got cut in half. In any logical world, that means profits at wafer makers have been hurt badly, and the stocks should go down. It also means that customers who've been locking themselves into long-term supply contracts at higher rates compared to the new spot prices will fail to reap the profit margin-benefits of the new, lower prices.
Suntech, for example, which in May secured a long-term supply agreement for the delivery of seven gigawatts' worth of wafers from Shunda Holdings through 2020. With spot prices falling through the floor, into the basement, and en route to the Earth's core, chances are that any price Suntech agreed to pay for Shunda's wafers will prove too much. Hence, its profit margins should suffer, and its stock price as well. In fact, Suntech gained 11% on New Year's Eve Eve and is up 11% more today.
It makes no sense to me, but it does seem to promise us one thing: 2008 was a weird, nonsensical year. Just because the calendar flipped a digit doesn't mean 2009 is going to be any saner.
For further Foolishness on happenings in the house of the rising sun, read:
“The Next Great Investment”… That’s how a top global investor describes India’s potential. On Nov. 28, The Motley Fool’s Tim Hanson returns to India to prove it. Follow along in real time and get his TOP pick first (Hanson returned from China in July with a stock that’s up 169%!). Enter email below.
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