The EU slapped solar tariffs on Chinese imports today. However, the tariffs disappointed many and sent shares of US and European solar manufacturers lower. Some Chinese based companies are soaring, such as JinkoSolar Holding Co., Ltd. (NYSE:JKS) which is up 4.5 percent. The reason? The tariffs were lower than expected and the big impact will not take place right away. Credit Suisse explains what the expectations were and why investors were surprised.
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EU commission imposes initial tariffs lower than expected, 60-day negotiation window via CS
Summary – initial tariffs lower than expected. The EU commission today outlined details of the tariffs on China solar panel imports into Europe as a result of its anti-dumping investigation. The initial tariffs will start at 11.8% for the first 2 months starting June 6, and increase to 47.6% from Aug 6 to Dec 6 if China panel makers do not remove the injury for EU solar panel makers. Dec 6 will be the end of the full investigation at which time a decision will be taken whether to impose duties for another 5 years. The EU commission noted that the range of duties in EU applies not just to panels but also to cells and wafers, so will make it difficult to by-pass the tariffs by routing manufacturing through Taiwan as is the case for shipments to the US. Note that the anti-competitive investigation will have some results by Aug 6 as well, however the duties from anticompetitive investigation will not be additive to the preliminary duties from antidumping investigation unless the injuries are assessed to be even higher due to anti-competitive practices compared to anti-dumping.
Initial impact positive for China solar. The first 2-month tariff is at a quarter of the initial proposed level, and thus minimizes the immediate impact to Chinabased companies such as Trina Solar Limited (NYSE:TSL), Yingli Green Energy Hold. Co. Ltd. (NYSE:YGE) and JinkoSolar Holding Co., Ltd. (NYSE:JKS). The overall lower volumes in EU would be a negative for polysilicon producers. Within the context of a rapidly improving Japan market, and potential for higher demand in China through the year, the combination of higher prices albeit at lower volumes but lower poly cost could lead to a better margin evolution for China solar companies than in the worst case scenario of high EU tariffs. Today’s developments provide more clarity on policy evolution, but we would caution that there will still be uncertain outcomes possible as China and EU arrive at a negotiated solution.
Negotiated solution looks more likely – higher EU prices & import quotas likely. Note that the EU commission had previously a much more hardline stance on imposing duties on China solar panels. However, 2/3 of the EU member states have opposed imposition of duties by the EU commission. China itself has heavily lobbied the commission and member states to mitigate the impact of duties. The EU commission noted that it is open to arriving at a negotiated solution that results in a higher price for China solar panels combined with fixed volumes such that the domestic solar industry in EU has an opportunity to minimize injury. We think investors have been expecting an outcome that reflects a negotiated settlement due to member states’ opposition.
The prospect of lower volumes from China-based competitors as well as higher prices could be a positive for First Solar, Inc. (NASDAQ:FSLR)’s & SunPower Corporation (NASDAQ:SPWR)’s EU operations, as First Solar, Inc. (NASDAQ:FSLR)/SPWR have manufacturing capacities outside China. However, note that it is possible that China solar
companies will become more aggressive in non-US, non-EU markets, which could offset the benefit of higher prices in EU market.
Details on managing the quota will be critical. The commission noted that China solar companies are producing volumes that are 150% of market demand. If we do get a negotiated agreement that results in higher prices, you have to limit volumes for all of China. This would mean, there has to be a mechanism that in turn allocates the lower volumes to local China producers. Presumably, there will be competition among China solar companies to get a share of that allocation. If there ends up a bidding mechanism to get the allocated quota (bid proceeds going to say the China government), the competitive bidding could negate the impact of higher prices. If the quotas are allocated without additional cost, this would be a positive for China solar makers – even though they will have lower volumes, they will also have some level of profits, whereas now the China solar companies are barely earning positive gross margins on sales to EU.
Project Economics – higher prices will impact demand. A 5MW system at a price of $1.60/Watt including $0.65/Watt for the panel may have an IRR of 12% in Germany. An average 47.6% panel tariff would have made the IRR unviable using China panels. As a result, Europe would have had to buy modules from other sources at prices above $0.65 but likely well below the price implied with the tariff of 47.6%. If modules became 7c/Watt more expensive due to an 11.8% tariff, the IRR at $1.67/Watt system price would bring the IRR down to a viable 8.5% (from 12% at $1.65/Watt). However, the EU clearly noted that the initial 11.8% is not a signal to China that the price increase needs to be only that much – the commission noted that China is selling at an 88% lower price. It is possible that the price increase could be even higher than 11.8% – which could result in lower demand in EU as some markets may become less viable.
Outsourcing vs. China Manufacturing. Taiwan cells may cost 5-7c/W more than China cells; EU cell processing may cost 6-7c/W more than China cells; and EU module processing may cost 2-3c/W more than China modules. An 11.8% EU tariff would add about 6-7c/W to China modules at current prices, similar to the extra cost from using Taiwan cells. However, it is likely that Taiwan cell prices would have risen more with full EU tariffs in addition to US tariffs. China modules with an 11.8% tariff will still cost about 3-4c/W less than outsourcing in Europe. However, an eventual price increase that is higher than 11.8% would result in different conclusions.