Solar Standoff: Will Sanctions on China Hurt US? - Analyst Blog

Climate change has figured prominently on President Obama's agenda. Time and again he has emphasized the importance of renewable energy as a means to achieve this objective. However, measures to reduce the inflow of Chinese solar panels may hamper his battle against climate change.

Anti-Dumping Measures

Speaking at the Los Angeles Trade-Technical College last month, Obama said: "We've reduced our carbon pollution over the past eight years more than any country on Earth." However, the very next day the Department of Commerce (DOC) implemented measures which could thwart such gains.

The DOC has upheld a complaint made by the U.S. arm of SolarWorld AG. In the complaint, SolarWorld had alleged that China's sale of solar panels to the U.S. was illegal because these panels are priced well below their cost of production.

Holding the allegation to be true, the DOC has imposed larger tariffs on imported panels. As a result of such tariffs, prices of foreign panels will increase nearly 15%. This will benefit domestic producers like First Solar, Inc. ( FSLR ) and SunPower Corp. ( SPWR ). A final ruling will be made in December, which means that whatever transpires till then will have a significant impact on the U.S. solar sector.

Origins of the Dispute

In 2011, SolarWorld filed a complaint with the DOC that China was subsidizing solar panel production in an illegal manner. This was enabling Chinese companies to price them below cost. The following year, DOC upheld the complaint and levied tariffs ranging from 31-250% on Chinese panels.

In response, Chinese companies avoided tariffs by moving production facilities to Taiwan. This in turn, led to SolarWorld filing a new complaint in Dec 2013. In June this year, the DOC levied duties of up to 35.2% to negate the effect of China's production subsidies.

Chinese Domination

The near complete domination of Chinese solar panels is in sharp contrast to the fate of domestic solar panel producers. According to data from the Census Bureau, imports of panels from Taiwan and China increased to $2.6 billion from $1.8 billion in 2010.

On the other hand, several domestic solar panel companies shut down. According to Boston-based GTM Research, panels made in China were used in more than 50% of U.S. rooftop installations. This also reflects the global dominance of China in the solar panel manufacturing space.

U.S. Initiatives

Analysts and market watchers alike believe the impasse illustrates the difficult choice the Obama administration faces. It will have to decide what is a greater priority -- ending Chinese dominance and protecting domestic companies, or combatting climate change to his fullest.

During the speech mentioned earlier, the President had also said: "We now generate 10 times the solar electricity, creating tens of thousands of jobs across the country." The Obama administration has always encouraged domestic producers to compete with companies from China and Germany. The economic stimulus package of 2009 featured tax credits and loans to boost green companies and encouraged the purchase of their products.

By the end of 2013, $4.4 billion had been handed out as part of the cost of installing residential solar systems. This resulted in a significant decline in the cost of solar energy. During the last four years, the cost of solar electricity systems has declined by nearly 50% while panel prices have declined 60% according to official figures.

Impact on Chinese Producers

China's commerce ministry has criticized the levy of duties on solar panels and cells produced in that country. The effect on two key producers illustrates the effects of levies which are as high as 165%. The DOC has levied a preliminary anti-dumping rate of 26.3% on Trina Solar Ltd. ( TSL ) following its investigations. Taken together with anti-subsidy duties announced in June, Trina Solar will face an effective rate of 29.3%.

Though the company opposed the preliminary findings, it said it is committed to serving customers in the U.S. as well as its business partners. In a statement the company said: "Trina Solar believes that because of its competitive cost structure, in-house manufacturing capacities, global strategies, strong brand image and quality products and global strategies, it will continue to grow its business in the United States and to play an important role in the U.S. market."

Yingli Green Energy Holding Co. Ltd. ( YGE ) also voiced its discontent regarding said duties, but also promised that it would continue to serve customers in the U.S. Yingli faces an anti-dumping duty of 42.3% and a combined tariff of 47.3%. Companies which refuse to cooperate with the DOC will have to pay the highest possible rate of 165%, which amounts to 191%, taking into account the anti-subsidy duty.

Evasion Strategies

ReneSola Ltd. ( SOL ) has said that it will utilize contract producers across the world so that it can continue to sell its panels in the U.S. Last week, the company said it will leverage partnerships with OEMs to sell solar panels worth 500MW in the U.S. next year. Analysts believe that this will create a complicated supply chain spread across several countries.

This in turn will raise manufacturing costs. But the benefits of global sourcing could possibly outweigh the cost of duties levied on such products. Analysts believe that other Chinese companies will follow suit. Such a phenomenon is likely despite the fact that the sector has returned to the black only a year earlier. This positive period has been preceded by years of low panel prices leading to lower margins.

Resolution in the Offing?

According to Bloomberg, a law firm representing the Chinese government has sent a proposal for a suspension agreement to Commerce Secretary Penny Pritzker. This is an attempt to settle the anti-dumping duty dispute. Trade experts believe that this is a crucial step in a resolution to the dispute since such an offer would not have been made unless China was confident that it would not be rejected outright.

A successful resolution to the dispute would come as happy tidings to the likes of Yingli and JinkoSolar Holding Co., Ltd. ( JKS ). On the other hand, domestic producers such as Enphase Energy, Inc. ( ENPH ) would lose the advantage gained by the imposition of anti-dumping duties. However, the adoption of solar power would continue at a rapid rate as consumers would not be deterred by higher prices.

Even when one considers employment generated from the sector, jobs growth has not come from solar panel making. Companies that produce polysilicon materials for solar kits, inverters and jacks and those involved in installation have contributed the bulk of jobs. According to the Solar Foundation, such positions contribute nearly 70% of all jobs in the solar industry. This why a satisfactory resolution to the conflict may be more desirable than a duty related impasse.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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