China's brutal dumping method is a blessing for the energy transition

It's one of the hot topics of the spring: Should Germany support its own solar industry to remain competitive against China's landfill modules? This issue was also a topic of debate during Olaf Scholz's three-day trip to China. Solar manufacturers like Meyer Burger are very concerned about Chinese competition. Installers, on the other hand, warn against protective measures that could make cheap Chinese modules more expensive and slow down the energy transition.

“I'm worried”

China's overcapacity in green industries is also causing headaches for American policymakers. “I am particularly concerned about the global impact of the overcapacity we are seeing in China,” US Treasury Secretary Janet Yellen said recently at the inauguration of a solar panel factory in the United States. In the past, Chinese government support has led to significant overinvestment in industries such as steel and aluminum. “Excess capacity is now building up in 'new' industries such as solar, electric cars and lithium-ion batteries.” This warning is justified because there is already excess capacity, particularly in batteries and solar systems.

Last year, Chinese battery production capacity was more than double demand. And the difference continues to grow: next year, capacity will be three times greater than demand, according to figures from the British industrial service CRU Group. The situation is similar with solar panels: last year China would have had enough manufacturing capacity for panels with a nominal power of 861 gigawatts. However, only 390 gigawatts were installed worldwide. This was a new record and surpassed the previous year's global installs by almost 40 percent. But even that wasn't enough to come close to utilizing China's existing manufacturing capabilities. And they will continue to grow: this year alone, between 500 and 600 gigawatts of production capacity will be added.

China's investment strategy

This is reflected in prices: solar cells have become two-thirds cheaper in the last twelve months. The situation is similar with batteries: their price was halved last year. The price of lithium helped: it rose enormously from mid-2021, hit an all-time high in late 2022, and has since fallen more than 80 percent.

Although lithium is unlikely to continue getting cheaper, the decline in battery prices continues. CATL, the leader of China's global battery market, expects prices to halve again this year. This means a price war is on the horizon as the second-largest battery producer, Chinese automaker BYD, is also aggressively cutting costs to survive.

There is a method to overcapacity and price wars: China's government is curbing consumption in favor of investment. These represent 42 percent of the local gross domestic product (GDP). In Germany it is only half. For a long time, these investments were mainly directed at the real estate sector and caused a gigantic boom there, but this is now over. Investments are now being channeled into industry, so excess capacity is building up there.

“Unlike other economies that have seen a drastic adjustment in their property market, the investment rate in China is not declining,” says Frederic Neumann of British bank HSBC. “Instead, investments are shifting towards infrastructure and, above all, the manufacturing industry. “

Division of the world market?

History repeats itself, at least when it comes to solar systems. After Germany introduced a feed-in tariff for solar and wind energy in 2000 and countries such as Spain and Italy followed suit, a market for solar systems developed in Europe. This allowed them to break out of their niche and enter the mass market. But the European solar boom was then strangled by governments. For several years now, China has taken the next step in the development of the solar market: with subsidies such as tax breaks or cheap loans, manufacturers are encouraged to build larger and larger factories to further reduce costs.

This is a problem for Western industrialized countries like Germany, because they also want to increase manufacturing capacity for batteries and solar panels. For other countries, however, Chinese overcapacity and rapidly falling prices are positive, says Gary Hufbauer of the US think tank Peterson Institute: “If China seeks a massive 'export solution', this will be the case for “Manufacturing companies in Japan, the EU, Korea and others hurt industrialized countries. But low prices will be welcomed in many developing countries in Latin America, Africa and Asia.”

Unlike industrialized countries, it is illusory for these countries to invest billions in their own production. And so, China's excess capacity could ultimately lead to a division of the global market for products like batteries and solar panels: industrialized countries are closing their markets, for example with anti-dumping tariffs, and building their own industries. And all other countries gratefully buy Chinese products, which are very cheap. If this accelerates the global energy transition to renewables, there would also be a clear winner from China's economic policy: the climate.

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The original of this article “China's brutal dumping method is a blessing for the energy transition” comes from Table.Media.