A Rough Road Ahead For Chinese Solar Firms As US Upholds Tariffs

STP: Suntech Power Suntech Power  each representing One Ordinary Share) logo
Suntech Power Suntech Power each representing One Ordinary Share)

On Wednesday, the United States Department of Commerce upheld its decision to impose tariffs on Chinese solar firms, concluding that they sold solar panels in the US market at prices below fair value and benefited from subsidies provided by the Chinese government. The ruling comes at a time when Chinese solar firms such as Suntech Power (NYSE:STP) and Trina Solar (NYSE:STP) are grappling with excessive overcapacity, ballooning debt and rapidly falling margins.

The duties imposed on Chinese firms are two-fold: anti-dumping duties and countervailing duties. Anti-dumping duties are placed on imported goods that are sold at prices below what they are sold at in their domestic markets while countervailing duties are placed on imported goods that are subsidized by foreign governments.

The final tariffs rates were revised from those given in the preliminary ruling issued earlier this year. Anti-dumping duties will now range from 18% to 250% depending on the manufacturer. Countervailing penalties were increased considerably, from 3%-5% to about 15%. [1] Most of the duties will be retroactive, beginning from 90 days before the date of the preliminary findings.

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The tariffs will be finalized in November after the International Trade Commission completes a parallel investigation to ascertain that the US manufacturers were hurt by the dumping.

US An Important Market For Chinese Firms

Although the decision to uphold the tariffs was not surprising, it is a setback to the Chinese firms who were looking at the US markets to offset the troubles faced in key European markets. Many EU countries, including Germany and Spain, have been slashing solar subsidies, denting demand for photovoltaic products. The EU also recently initiated an anti-dumping investigation against Chinese solar firms.

Although US solar capacity accounts for only around 7% of global PV installations, the market has been expanding rapidly. [2] Installed capacity grew by 73% last year to about 4.5 GW and is expected to continue as the federal and state governments continue to offer attractive tax credits and cash rebates. As of last year, the US imported about $3 billion of Chinese solar products, which was about 20% of Chinese solar production.

Suntech Power Faces High Tariffs

We believe that Suntech Power, China’s largest photovoltaic manufacturer, will face the brunt of these tariffs. The US market is playing an increasing role in the company’s revenue mix – accounting  for about 23% of its revenues in 2011, up from 10% in 2009. The company faces an anti-dumping duty of 31.73% and a countervailing duty of 14.78%, bringing the total tariff to a whopping 46%. Another large Chinese solar firm, Trina Solar, faces an 18.32% anti-dumping duty and a 15.97% countervailing duty. ((US Sets Final Duties On Chinese Solar Panels, Reuters))

These tariffs will render the Chinese solar firms less competitive compared to their American peers such as First Solar (NASDAQ:FSLR) and SunPower (NASDAQ: SPWR) who have been actively cutting costs by sourcing from overseas plants.

Moving Manufacturing Abroad

According to US Senator Ron Wyden, there is a potential loophole that could benefit Chinese firms since the tariffs do not hold when a portion of the panels are manufactured outside China. [3]

A few Chinese companies have already begun sourcing cells from Taiwan and other parts of Asia. Manufacturing costs in Taiwan are about 15% higher compared to China.  ((Threatened Duties Push Chinese Solar Firms Offshore, Reuters)) Chinese firms have also been looking to reinforce their manufacturing operations in the US. Following the preliminary ruling in March, Trina Solar expressed its desire to begin production in the US.  Suntech Power opened a 30 MW manufacturing plant in Goodyear, Arizona, in 2010 and has since ramped up capacity to 50 MW.

We expect this trend of moving operations overseas to continue, however, we are concerned about the impact it may have on  profitability since most Chinese solar firms have traditionally benefited from lower manufacturing costs and the economies of scale offered by their Chinese operations.

We have a price estimate of $1.17 for Suntech Power, which is about 37% above its current market price.

Understand What Drives a Stock at Trefis

  1. US Sets Final Duties On Chinese Solar Panels, Reuters []
  2. Congressional Research Service: US Photovoltaic  Manufacturing []
  3. U.S. Sets Anti-Dumping Duties on China Solar Imports, Bloomberg []