Euro Currency Troubles Just Beginning for Canadian Solar and Module Rivals

(MoneyWatch)  Canadian Solar (CSIQ) shocked Wall Street last month after announcing it booked a significant foreign exchange loss for first-quarter 2010 due to the falling value of the Euro against the U.S. dollar. The big question now is how vulnerable other photovoltaic (PV) players across the supply chain, from wafer manufacturers to vertically integrated PV system rivals, like Trina Solar (TSL) or First Solar (FSLR), are to volatile currency fluctuations.

The Ontario-based solar panel maker took a $20 million charge for its inadequate exposure to the depreciating euro against the U.S. dollar during the quarter ending March 31. "The Euro depreciated dramatically during the quarter and we did not have adequate currency hedging to cover our Euro exposure," admitted chief financial officer Arthur Chien.

We have since taken actions to significantly increase our currency hedging, with approximately 85% of our expected Euro exposure for the second quarter of 2010 now protected.

As if solar manufacturers weren't already grappling with enough external threats to their pricing power and profit margins, now suppliers need to redouble efforts to accurately model currency fluctuations -- especially fluctuations of the euro against the U.S. dollar and the Chinese yuan: exchange rates as of June 1 were ?1 = $1.2142 U.S. and $1 U.S. = 6.83 Chinese yuan.

Wells Fargo (WFC) analyst Sam Dubinsky warns that currency is a real concern for solar, opining that solar module makers take the most direct hit from the euro decline: whereas a solar-wafer maker or solar-cell maker in China is manufacturing in the same region that it is selling, the solar-module makers might manufacture in China -- cost of goods denominated in yuan -- and then sell in euros in a country like Germany. In other words, an incorrectly hedged company could take a double whammy to its gross margin, cost of goods (yuan) and revenue (euros).

China-based Trina Solar (TSL) is a module maker whose currency mismatches are overshadowing planned shipments of 750 MW to 800 MW for the whole of 2010, representing year-on-year growth of 88 percent to 100 percent. The company has significant exposure to Europe, where it derives more than 80 percent of sales -- even active hedging efforts won't shield its financials: approximately 60 percent of second-quarter euro exposure is covered at contract rates of $1.30-$1.40, according to chief financial officer Terry Wang.

With a current exchange rate of US $1.21 per euro, it's doubtful that the company will meet forecasted calls for gross margin in second-quarter 2010 in the high 20 percentages. Total earnings for 2010 could fall more than 84 percent, too, if the Euro averages less than $1.25, according to Barclays Capital analysts.

Fluctuations in exchange rates -- in particular, between the U.S. dollar and the yuan -- affects more than just operating margins: volatility in currency exchanges can adversely impact the health of Trina Solar's balance sheet, too: the $305.4 million in accounts receivable is denominated in U.S. dollars; as payment terms are usually in euros or yuan (depending on where customer is located), positive or negative adjustments must be made to the ledger upon collection of receivables. That the falling euro has been difficult to manage -- even with hedging programs -- and is hurting other low-cost solar-cell producers based in China is underscored in a recent Bloomberg Businessweek interview with Barclays analysts: with the euro at $1.25, profits for Baoding-based solar-cell Yingli Green Energy Holding (YGE) would fall 42 percent, while Chinese rival Suntech Power Holdings (STP) would see a 79 percent drop.

With the European Union still unable to get its fiscal act together, its shared euro currency will continue to be weighted down by irresponsible deficit spending of member states (like Greece and Portugal). Expressing little confidence in Eurozone policymaking, currency analysts at UBS AG slashed its year-end euro/USD estimate to $1.15 from $1.30 on May 13. Ergo, expect another quarter of tempered earnings growth announcements from your favorite eco-friendly -- but unprofitable -- solar companies.