Corning Worth $16.50 Despite U.S.-China Trade Spats, Euro Mess

by Trefis Team
+16.24%
Upside
30.28
Market
35.20
Trefis
GLW
Corning
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Dow Corning manufactures silicon products worldwide and is the majority owner of Hemlock Semiconductor, a market leader in the production of polysilicon and other key solar materials for solar industry, that includes companies such as First Solar (NASDAQ:FSLR), LDK Solar (NYSE:LDK) and SunPower (NASDAQ:SPWRA). The joint-venture contributes around 22% to Corning’s (NYSE:GLW) stock as per our estimates. Dow Corning had been betting heavily on the expansion of solar industry but the recent worsening macro-economic environment has already taken some of the sheen from the industry. Now the company fears that the expanding trade war between the U.S. and China over solar module production could hurt its revenues further. [1]

We currently have a $16.50 Trefis price estimate for Corning, which is around 30% ahead of the market price.

See our complete analysis of Corning

Misplaced bet on solar industry expansion?

In the last few years, Dow Corning and Hemlock Semiconductor have announced investments of $5 billion to provide critical materials to the fast-growing solar technology industry. [2] [3] Both companies expected that U.S. solar industry would take off by end-2011, but the market bludgeoned solar stocks this year indicating that companies hadn’t factored in the present macro-economic challenges in their analyses.

The European Union has been the most ardent investor in solar power so threats to the Euro zone’s economies are indirect threats to solar. Severe austerity measures in Europe will threaten government support to the solar industry through subsidies which will hurt demand for the energy source if the cost is passed on to the consumers instead. Moreover as cuts in government spending will cut government and commercial demand for solar power, the sector will increasingly rely on consumer demand, which will only recover if unemployment falls, wages recover, and confidence returns to the market both on the investor and consumer sides.

U.S. China trade war to hurt Dow Corning’s exports

The Chinese government has focused upon increasing the competitiveness of its solar manufacturers through free or subsidized land from local governments, extensive tax breaks and other state assistance, which has reduced solar panel prices by 30 to 42 percent per kilowatt-hour in the last year. [4] This has helped Chinese manufacturers make deep inroads into the U.S. and European markets as cheap prices supported increased exports. This prompted a United Steelworkers union complaint last year, asking the Obama administration to investigate China’s clean energy subsidies and other policies and to bring cases against them at the World Trade Organization.

More recently, SolarWorld has filed case against Chinese solar manufacturers, alleging that Chinese trade practices have harmed American solar manufacturing. This has been endorsed by U.S. trade commission paving the way for potential tariffs on Chinese solar panels sold in the United States. [5]

Other solar manufacturers, including Dow Corning, fear that this will lead to Chinese backlash which will threaten America’s polysilicon exports to China (which was worth $873 million last year) and local demand for solar products, and have requested SolarWorld to withdraw its case. [6] [7] But SolarWorld has rejected the request and persists in its demand for punitive duties on Chinese solar products. [8]

Recently China slapped punitive duties on cars imported from the U.S. after the country failed to block U.S. tariffs on Chinese tires. ((China to Impose Duties on U.S.-Imported Cars)) ((China loses WTO appeal against U.S. tire tariffs)) This growing propensity towards politicization of trade spats between U.S. and China can hurt Dow Corning’s exports to China, which in turn will hurt Corning’s equity earnings from the joint-venture.

You can drag the trend lines in the  modifiable chart above to see the impact of these trends on Corning’s stock value.

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Notes:
  1. Dow Corning and Hemlock Semiconductor Group: Striking Balance – How the Solar Industry Benefits From the U.S. & China []
  2. Dow Corning Announces Multi-Billion Dollar Investments to Serve Emerging Global Solar Power Industry []
  3. Dow Corning and Hemlock Semiconductor Group receive Federal Tax Credits for Job-Creating Investments []
  4. China Benefits as U.S. Solar Industry Withers []
  5. U.S. International Trade Commission endorses SolarWorld’s case against China []
  6. U.S. solar companies urge SolarWorld drop China case []
  7. US Solar Stat of the Week: $2.5B in Polysilicon Exports []
  8. SolarWorld persists with trade case against China []
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