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China: Market exodus and price cuts amid ferocious competition

CHINA: China's wind turbine manufacturers are beginning to feel the pinch of plummeting prices. With annual growth rates starting to dip and manufacturing capacity exceeding demand, the number of companies is expected to drop dramatically.

Cut-throat price competition will make life harder for turbine makers, says Yue Zhihong, supply-chain director at Goldwind.Liu Qi, deputy general manager of Shanghai Electric Wind Power Equipment Manufacturing, agrees.

Turbine prices have been dropping at an average annual rate of 12% since 2007, he says. Today units are selling at CNY 3,600-3,700 per kilowatt ($554-570/kW), which is about half the peak price in 2006.

"Because of pressures of surplus production capacity, China's wind turbine prices will be lowered another 10% (over the next year)," adds Li Shengmao, a senior analyst at China Investment Consulting Corporation.

China's manufacturers currently have a combined annual wind turbine production capacity exceeding 20GW. Last year, 12.48GW of new capacity was installed at wind farms across the country. While this is 37.1% up on additions made in 2009, it represents a fall in the growth rate of China's overall market. China's wind market doubled every year between 2005 and 2009 in terms of total installed capacity. In 2010, cumulative capacity increased 73.3% to 44.7GW.

This year, new additions are set to increase at around 37% again, with around 26GW installed. This would mean a cumulative market growth of around 58%. Plans by central government are likely to ensure it does not go beyond this.

The National Energy Bureau (NEB) plans to resume authority for approving all wind projects, taking back control for those under 50MW from local authorities. The industry notes the NEB is much stricter than local governments when it comes to granting building consent, making a slowdown in construction inevitable.

Quota system

"The point is to keep the feet on the ground," says an NEB spokesman. "This year, all the provinces, autonomous regions and municipalities will have a segmented quota for wind-farm construction. For example, China will have a total of 26GW wind turbines installed this year, and a certain province will be granted a quota of 500MW."

Around 90 turbine manufacturers, 50 blade makers, and 100 tower suppliers operate in China. "Competition is ferocious," says Sun Lixiang, deputy general manager of turbine supplier Guodian United Power.

"We are experiencing heavy pressures to reduce turbine production costs. Under the existing market price system, wind turbine makers can no longer make extravagant profits." Goldwind's Yue notes that existing manufacturing expansion plans mean this trend will increase and "overcapacity will be inevitable".

A widespread exodus from the market is expected over the next three years. "The industry reshuffle will surely start with suppliers of components and parts, because they shoulder the largest part of the pressure from reduced turbine market prices," suggests Goldwind's Yue. But turbine suppliers will also be hit.

"At present, many wind turbine makers offer the price of CNY 3,500/kW to wind farm operators," says Hao Yiguo, CEO of Guangdong Mingyang, the largest private Chinese wind turbine maker. But many small suppliers of wind turbines have paid more than CNY 5,000/kW for components and parts in their machines. With falling market prices, these costs are unsustainable.

China Energy Conservation Investment Corporation agrees and expects a number of private companies to retreat by the end of the year. By the end of 2012, some state-owned wind turbine manufacturers will not have survived either, it says.

In the end, China will have no more than ten domestic wind turbine manufacturers, the company forecasts.

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