27 june 2013

Wind turbines: the weathervane swings

The Lex Column, The Financial Times, June 27, 2013

Reaction to Obama’s speech highlights changes in sector dynamics

Thanks, Mr President. Ripples from the latest Obama plan on climate change – which would place controls on carbon dioxide-emitting power plants while boosting renewable energy production on federal lands – spread quickly. While the US coal industry wailed and related shares fell, there was an offsetting fillip for investors in Europe’s wind turbine makers. Shares in Denmark’s Vestas, now number two globally behind General Electric, jumped over 5 per cent on Wednesday. Smaller peers, like Spain’s Gamesa and Germany’s Nordex, also notched up gains.

All of which throws a timely spotlight on the extent to which this sector is turning round. Vestas, Gamesa and Nordex outperformed handsomely over the past year compared with general market indices – with Vestas’ stock tripling from July lows. Of course, such gains need to be seen in context. The sector, and investment in it, shrank dramatically in 2011 and 2012, due to collapsing subsidies in big markets, overcapacity, Chinese competition and ill-timed corporate expansion. Operating losses at Vestas and Gamesa combined, after special items, topped €1.2bn in 2012.

But that has spurred drastic restructuring, the costs of which contributed to 2012’s red ink. Now all three groups are guiding towards positive free cash flow and operating margins (before special items) in 2013. True, global industry order flow was down by a third year-on-year in 2013’s first quarter, according to HSBC. And while this has improved in recent months, 2013’s decline overall could be about 15 per cent. But industry forecasts anticipate a strong rebound in 2014, helped by the 2013 extension to the production tax credit in the US. Investors may understandably fight shy of a sector driven by political whims (and budgets). But money can be made – and some of the winds, at least, are looking more favourable.

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