WEBVTT - Axiom's Johnson on Solar Market: Weakening U.S. Demand (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>This is a Bloomberg Business Flight from Bloomberg World Handquarters.

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<v Speaker 1>I'm Charlie Pellett. The SMP five hundred index did move

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<v Speaker 1>lower today after briefly approaching a record, as falling crewde

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<v Speaker 1>prices sparked a sharp sell off in energy shares, denting

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<v Speaker 1>confidence of the US growth and corporate profits will rebound.

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<v Speaker 1>The SMP five hundred index down two points to one seventy,

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<v Speaker 1>a drop of one tenth of one percent, and as

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<v Speaker 1>Stack up twenty two points, a gain of four tenths

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<v Speaker 1>of one percent. The down Jones Industrial Average down twenty

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<v Speaker 1>seven points, a drop of two tenths of one percent,

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<v Speaker 1>The Tenure down fifteen thirty seconds, with the yield of

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<v Speaker 1>one point five percent, Gold of four dollars an ounce

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<v Speaker 1>to thirteen fifty seven Again, there are three tents of

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<v Speaker 1>one percent. West Texas Intermediate Crew down three point seven percent,

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<v Speaker 1>declining a dollar fifty four barrel right now at forty

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<v Speaker 1>dollars and seven cents. I'm Charlie Pellett, and that's a

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<v Speaker 1>Bloomberg Business flash. This is taking Stock with Kathleen Hayes

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<v Speaker 1>and Pim Fox on Bloomberg Radio. If Elon Musk's idea

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<v Speaker 1>to merge Tesla Motors and Solar City Corps is such

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<v Speaker 1>a good one, why did both share prices slump today?

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<v Speaker 1>Tesla down more than two percent, Solar City down more

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<v Speaker 1>than seven percent after an announcement was made an agreement

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<v Speaker 1>for Tesla to acquire Solar City for about three hundred

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<v Speaker 1>million dollars less than initially proposed six weeks ago. Could

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<v Speaker 1>it have something to do with weaker solar demand in

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<v Speaker 1>the United States. Let's put this question now to our

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<v Speaker 1>next guest. We're very happy to welcome back to the show,

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<v Speaker 1>Gordon Johnson. He's the head of Alternative Energy, Metals and

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<v Speaker 1>Mining and Equipment and managing director at Axiom Capital Management. Gordon,

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<v Speaker 1>thanks for joining us, Hey, thanks for having me. So.

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<v Speaker 1>I guess the market doesn't like this deal. Uh No,

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<v Speaker 1>the market doesn't like this deal. I mean, if you

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<v Speaker 1>think about the deal's price, what like two point three billion,

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<v Speaker 1>two point four billion, But if you add in the

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<v Speaker 1>massive amount of debt that Solar City has um, Tesla

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<v Speaker 1>shareholders are paying a much more than that, around five

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<v Speaker 1>billion for this UH this acquisition. If if you also

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<v Speaker 1>include the fact that Solar City has lost UM operating

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<v Speaker 1>UM profit has been uh castle rather has been severely

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<v Speaker 1>negative UM, it's even more costly for Tesla shareholders. So

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<v Speaker 1>it looks like what Elon Musk is doing is he

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<v Speaker 1>is using what what I think many would argue as

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<v Speaker 1>a richly priced asset to go out and buy an

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<v Speaker 1>asset that's struggling. And while that's beneficial to Solar City shareholders,

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<v Speaker 1>it's certainly not basic beneficial to Tesla shareholders. Gordon, is

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<v Speaker 1>the solar industry struggling in the United States? Hate them guests?

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<v Speaker 1>Based on the numbers? The answer to that question is

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<v Speaker 1>absolutely so. Last week we published a note that showed

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<v Speaker 1>that UM if you look at total US installations UM

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<v Speaker 1>that's e I A data UM both rooftop and commercial

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<v Speaker 1>UM in the month of May and relations were down

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<v Speaker 1>roughly fifty month over months, and the run rate is

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<v Speaker 1>eight point six giga wats. The run rate in April

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<v Speaker 1>is much higher than that, at ten uh ten point

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<v Speaker 1>six gigawats. And then if you look at UM the

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<v Speaker 1>rooftop applications data in California. Keep in mind this is

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<v Speaker 1>just for California, but California cumulative solar installations. That number

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<v Speaker 1>was also down roughly eight percent month over month in

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<v Speaker 1>May and has been down and eleven of the past

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<v Speaker 1>fifteen months. So that's a leading indicator. So both the

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<v Speaker 1>leading and elading indicator for solar installations in the US

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<v Speaker 1>is pointing down and actual installations are disappointing. So the

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<v Speaker 1>data suggests that things are getting weaker, and we believe

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<v Speaker 1>it's because of global weakness some places like China, India, Japan.

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<v Speaker 1>You believe the weakness in US solar demand is related

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<v Speaker 1>to the demand over the weakening demand overseas. I would

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<v Speaker 1>have thought maybe maybe the the early adapters are not

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<v Speaker 1>so early adapters. We've kind of run out of them,

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<v Speaker 1>and people are seeing the lower oil prices, maybe heating

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<v Speaker 1>your home with some of the traditional sources isn't going

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<v Speaker 1>to rise as much as they thought. Yeah, so that

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<v Speaker 1>is a good question. It's it's not I didn't I

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<v Speaker 1>didn't tie that all together. So that the key is

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<v Speaker 1>what's happened is when demand in China disappoints um and demand.

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<v Speaker 1>The reason I'm saying China's China is the world's largest

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<v Speaker 1>solar market and the man in other markets is the point.

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<v Speaker 1>What happens is everybody rushes to the market of strongest

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<v Speaker 1>strengths UM and the in the in the the market

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<v Speaker 1>UM that is the strongest right now is the US market.

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<v Speaker 1>So you have a bunch of Chinese guys rushing for

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<v Speaker 1>this market, not just to sell their panels, but also

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<v Speaker 1>to develop projects. And what's happening is you're getting a

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<v Speaker 1>saturation UH solar projects and key markets i e. California

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<v Speaker 1>and Texas where now at sometimes during the day you're

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<v Speaker 1>having negatively negative electricity prices, which if that persists, will

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<v Speaker 1>sell the end of you know, utilities, and clearly we

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<v Speaker 1>need utility electricity. Solar is intimittent. Peakloads cannot replace UH.

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<v Speaker 1>You know, fossil fuel, which is distributed baseloads meeting you

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<v Speaker 1>get the same amount all day solar, you don't get

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<v Speaker 1>it any at night and even through the day it's intermittent.

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<v Speaker 1>So what happens is utilities start to push back and

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<v Speaker 1>they win those battles. We've seen this happen in Germany, Spain, Italy, Hawaii, UH, France,

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<v Speaker 1>you name it. Anywhere you've had massive solar installations. You

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<v Speaker 1>start to get dislocations in the grid, and when that happens,

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<v Speaker 1>um even though countries have you know, robust uh uh,

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<v Speaker 1>you know, renewable energy ambitions, you know, they have to

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<v Speaker 1>revert back to reality, i e. We need fossil fuel.

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<v Speaker 1>So that's effectively what's happening. You have a bunch of

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<v Speaker 1>guys rushing into the US market, which is causing saturation

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<v Speaker 1>and thus limiting future growth. What does the private transaction

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<v Speaker 1>of Trina Solar They are going to be bought for

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<v Speaker 1>one point one billion dollars in the world's biggest solar

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<v Speaker 1>panel maker. What does that tell you about the industry?

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<v Speaker 1>That's another good question. So every week prices come out

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<v Speaker 1>um poly silicon, solar wafers, solar cells, solar module prices,

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<v Speaker 1>and the way they think about that is you use

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<v Speaker 1>probably to make waifs waivers and make cell cell to

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<v Speaker 1>make modules. In a nutshell, prices are completely collapsing. They're

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<v Speaker 1>they're literally falling. The levels of I think a lot

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<v Speaker 1>of people thought were impossible in the clods are accelerating

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<v Speaker 1>on a weekly basis. Every week it's getting worse and

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<v Speaker 1>worse and worse. So the industry right now is defined

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<v Speaker 1>by over lot. I think the reason why Train and

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<v Speaker 1>Solar is going private, and a lot of others will

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<v Speaker 1>try to follow suit. Keep in mind j Solar hasn't

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<v Speaker 1>been out there to go private as well, is because

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<v Speaker 1>things are so bad that they need to do things

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<v Speaker 1>behind the scene they don't want investors to see. And

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<v Speaker 1>in addition to that, they want to relist on either

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<v Speaker 1>the Shanghai or Hong Kong stock exchange where you're not

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<v Speaker 1>limited to you know um or you're not um I guess,

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<v Speaker 1>limited from having to you know, abide by gap rules um. So.

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<v Speaker 1>I think the impetus for them going private is that reason.

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<v Speaker 1>Not necessarily that the the industries in the state of

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<v Speaker 1>you know, in a good state. It's actually quite a

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<v Speaker 1>bad state and worsening with every week that passes. So

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<v Speaker 1>Gordon seems to me that's a big red flag for

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<v Speaker 1>investors be aware of these companies as future investments if

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<v Speaker 1>they're going to go back on when the Chinese exchanges

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<v Speaker 1>to avoid international gap accounting, right, And I don't think

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<v Speaker 1>this is I don't think that that's another good point.

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<v Speaker 1>I don't think this is a mystery to people who

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<v Speaker 1>know Chinese companies. The problem is the bulk of you know,

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<v Speaker 1>the guys watching and listening to your show, UM probably

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<v Speaker 1>don't know about you know, companies that have you know,

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<v Speaker 1>UM been been you know U s A d R

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<v Speaker 1>S when when private and then relisted on Chinese stock exchanges.

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<v Speaker 1>So I think it's important to know that. I want

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<v Speaker 1>to thank you very much. Gordon Johnson. He is the

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<v Speaker 1>managing director and head of Alternative Energy as well as

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<v Speaker 1>Mining and Metals equipment research for Axiom Capital Management, giving

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<v Speaker 1>us his perspective on Trina Solar and it's one point

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<v Speaker 1>one billion dollar purchased by a private equity group and

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<v Speaker 1>of course the Solar City Tesla Motors combination. As as

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<v Speaker 1>you said, Kathleen, at a lower price. This is taking stock.

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<v Speaker 1>I'm pim Fox my co host, Kathleen Hayes. This is

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<v Speaker 1>Bloomberg coming up, Bloomberg Labe ranchie by land Over Manhattan,

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