Solar bear Axiom Capital‘s Gordon Johnson has another negative report out on China’s solar industry today.

Polysilicon prices will see a “major correction” over the next 3-6 months. “We see polysilicon prices heading lower to the $15-$16/kg range,” noted Johnson.

His reasoning? Chinese solar companies are taking on excessive risks and their consumers may not end up paying the bill:

We see excessive balance-sheet risk taking by Chinese cell/module vendors at present, evidenced by both inventories and accounts receivables at the Chinese PV cell/module “bellwethers” approaching/exceeding record levels. Stated differently, due slacking demand for solar globally, Chinese PV cell/module vendors are being forced to take excessive risk in the world’s riskiest solar market (i.e., China). Yet, with curtailment at 40% on avg., and 80%-90% in some cases in China (curtailment is utilities refusal to buy a portion of the power produced by solar plants, thus limiting the transmission of “hard cash” to the project owners who are the counterparties to the ballooning accounts receivables/inventories on the balance sheets of the Chinese PV cell/module vendors), we see the ability of customers to pay back Chinese PV cell/module vendors when their receivables are due as extremely limited.

The last time Chinese module makers’ inventories reached record levels (i.e., C1Q12) as they have recently, the Guggenheim Solar ETF (TAN) proceeded to correct by -37% (Trina Solar (TSL) fell from $7/shr to $2.40/shr; WCH fell from $52/shr to $41/shr; REC Silicon (REC-OSL) fell from $2/shr to $0.65/shr) as write-offs were taken & inventory was liquidated/dumped across the value chain, pushing polysilicon/wafer/cell/module prices to new lows. It appears solar companies are taking similar risks now.

Curtailment risk is a problem in China. First Solar (FSLR), for instance, has mentioned it as a reason it is not aggressively pursuing the big market during its conference call:

One of the biggest issues we have with respect to the China market from a development model standpoint is there’s lots of curtailment of assets in that market, and I think how that develops and what risks that represents gives us significant pause for concern. We’ve recently hired a new country manager. We do have efforts underway. But I would say that our highest-grade efforts are elsewhere around the world as opposed to China.

Second, there is a ton of polysilicon imports into China, which will suppress the prices:

Nov. 2014 data updated overnight shows an acute spike in polysilicon imports into China to a new all-time record high (the second such record set since Sep. 1st, 2014); after being up +32.2%/+51.5% YoY in Sep./Oct., respectively, polysilicon imports into China are up +48.2% in Nov. 2014. Why? Well, up until Sep. 1st, 2014 when China decided to end the processing trade rules (which previously dictated that any material used in domestic manufacturing would be exempt from import duties provided the finished product is then exported), there was a lot of uncertainty in the Chinese market (i.e., what would be the tariffs imposed on foreign imports as a result of U.S./EU tariffs on Chinese panels). More specifically, vendors were afraid to ship polysilicon into China in fear of retroactive tariffs from the Chinese government. However, when it became clear that the processing trade rule would be suspended, yet permits before that date would have a 1yr useful life, vendors applied for polysilicon processing trade permits en masse. That is, based on our checks, over 100K MT of polysilicon processing trade permits were applied for and granted (i.e., 18.5GW). By way of background, and not well understood at present, we again highlight that these permits have a useful life of 1yr.