Suntech Power‘s (NYSE:STP) CEO Zhengrong Shi warned that Europe could follow the U.S. in imposing tariffs on solar imports dealing a major blow to the Chinese solar industry.  Suntech and competitors such as Trina Solar (NYSE:TSL) are already reporting operational losses, in part because of countervailing duties imposed by the U.S. Department of Commerce on solar equipment imported from China. The duties were imposed in response to a complaint from the U.S. based solar companies that accused Chinese manufacturers from benefiting unfairly from government support. Companies are now moving to start a similar trade case in Europe, the biggest market for solar panels. If the anticipated case leads to an imposition of similar duties on solar, Chinese players would be dealt a lethal blow.
We have a $2.67 price estimate for Suntech Power, which is at a 35% premium to its current market price.
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The imposition of duties cost Suntech Power $19.2 million last quarter.  The U.S. market accounted for 34% of Suntech’s overall sales in Q1 2012.  The tariffs imposed on Chinese imports erode the cost advantage enjoyed by Suntech and Trina Solar in the American market, possibly denting sales. While the companies have reiterated their ability to weather the latest turn of events, they are already looking at ways to working around the tariffs by shifting production to sites outside China.
Europe accounted for about 44% of Suntech’s production and similar moves to protect the local industry there could result in big problems for Chinese players, who are struggling to adapt to the industry overcapacity situation.
According to reports, SolarWorld and a few other European companies are already taking steps to build a trade case against Chinese companies in Europe.  Overall, Europe accounts for 70% of the sales of Chinese solar companies. Players like Trina Solar are already expecting a round of consolidation in the industry. A tariff on sales in Europe could sound the death knell for many Chinese players, many of whom are already laden with debt.
Some analysts expect Trina and Suntech to scrape through the industry downturn because of their scale and technological superiority.  However, with the prevailing uncertainty in the solar market, it is difficult to build an accurate picture of the industry over the course of the next few of years.Notes: