China will impose preliminary anti-subsidy duties on some solar-grade polysilicon imports from the United States in a move that could further escalate the solar trade dispute between the two countries. However, the duties will be set at about 6.5%, which is less than previously expected. The duties are also significantly lower than the anti-dumping duties (up to 57%) that China imposed on U.S. polysilicon imports back in July. According to Reuters, the duties will be applicable to imports from two U.S. based manufacturers, Hemlock Semiconductor (one of the world’s largest producers) and AE Polysilicon Corp., and will take effect from September 20. We believe that the move is unlikely to have a tangible impact on the Chinese solar panel manufacturers that we cover and its effect on China’s polysilicon industry is also not expected to be significant.
China’s Polysilicon Industry Is Floundering But These Duties Are Unlikely To Help
While many view the duties as a retaliation to the anti-dumping and countervailing duties that the U.S. imposed on Chinese made solar cells last year, the Chinese government claims that the duties are a measure to protect its struggling domestic polysilicon industry from imports that are subsidized and sold at below cost.
China’s polysilicon industry has been reeling under chronic overcapacity. Polysilicon prices in the country have fallen from over $400 per kilogram in 2008 to current levels of close to $20, as regional governments pumped in money to build capacity to produce the commodity which is a key input used to manufacture photovoltaic wafers and cells. The Chinese polysilicon industry has more than 40 companies and has seen a total investment of close to 100 billion yuan ($17.6 billion) to date. Despite the scale and investment, Chinese polysilicon manufacturers seem to lack the technical expertise and their production trails American and South Korean manufacturers in terms of quality and purity of the feed-stock. Solar panel manufacturers tend to prefer high purity polysilicon since it allows them to make their panels more efficient, translating into better pricing and margins. This has meant that close to 60% of the polysilicon consumed by Chinese wafer and cell manufacturers is imported.  Additionally, with Chinese solar panel manufacturers increasingly targeting high value markets such as Japan and the U.S., the quality of polysilicon is likely to be more of concern and we believe that the duties are unlikely to deter companies from continuing their imports, since silicon costs now accounts for just about 25% of a solar panel’s direct manufacturing cost.
As of last year, Yingli Green Energy (NYSE:YGE) , China’s largest solar panel manufacturer, procured close to 90% of its raw materials from the U.S., Germany, and Korea.  According to Yingli’s SEC filings, the company has a long-term polysilicon supply agreement (from 2012 to 2020) with Hemlock’s Asian unit, Hemlock Semiconductor Pte.  While the terms of the agreement are not known, even if the purchases were to be subject to duties, we believe that it would not have a significant impact on the company’s margins.Notes: