In a recent article for PV-Magazine, we described the strategies of three companies to be unaffected by European tariffs. Those specific companies can make their cases on high ASP and strong demand from emerging markets, including Japan.
Since the article, the announcement of tariffs took a different turn. The first change was that provisional tariffs run from June to August with an 11.8% rate. This rate will increase in August if there is no amicable solution between China and the EU. If the increase happens, the rate will go up, on average, to 47% and be in place till December. During December, the matter will be voted on, this time by the EU member states. If the final vote resembles the non-binding vote just prior to June 4th, there will be no tariffs and all of it will become merely an unpleasant memory.
But, there is more needed to ensure there are no tariffs, including specific obligations to be met by the Chinese. Two aims have been named: minimum price, and limitation on quantity of modules to be exported to the EU. China Chamber of Commerce for Import and Export of Machinery and Electronics (CCCME) is engaged in the negotiation of those details. CCCME is representing 66 companies, presumably members of its solar chapter, with most of the US-listed companies being on the roster; speculatively speaking, being on the list is more than a ticket to participation in the EU market and to maintain Chinese solar interests there. It could be a list of businesses to deliver consolidation, quality, and development leading to technical leadership, all the points emphasized by the Chinese government.
In breaking news on Friday June 21st, the media has just reported that the basic framework of the agreement has been established, as a result of Karel De Gucht, EU commissioner, meeting with Chinese Commerce Minister Gao Hucheng.
So, what is the real impact of tariffs on Chinese companies in the next six months? At least, till August, minimal. Certainly, a brief squeeze until December is possible, but doubtful based on how talks have proceeded. It is unlikely that with the amount of discussion already in place, dumping tariffs will be permanent beyond December. Some suspect that no increase will take place, as a solution will be found before August, but there is more possible hardship ahead.
Eventually, on August 6, another curveball will be thrown at the Chinese – countervailing investigation results. Since economy treatment or MET status during the “dumping” investigation was not granted to the Chinese, the outcome is expected to be negative, as well. This is because when speaking in general terms, anything in condition of not being MET is considered to be either managed by centralized planning, receiving governmental input or being heavily subsidised or privileged in one way or another.
On a positive note, tariffs in the EU created a clear direction for the ASP increase upon any type of agreement. While the EU commission sought a 47% increase added on to current prices on import modules, this was certainly impractical with pricing from other parts of the world being below that, making the Chinese uncompetitive. So, somewhere between 11.8% and 47%, a price will be found. If there is a demand, this means that type of ASP can reach out profits sooner than expected.
If no tariffs, any agreements for outsourcing can be an added cost, eating up gross margin. Those who built plants like China Sunergy Co Ltd (NASDAQ:CSUN) or the just recently announced 200MW JinkoSolar Holding Co., Ltd. (NYSE:JKS) factory in Portugal could be spending money for nothing, as costs in Europe tend to be higher than in China.
It is inevitable that Jinko’s Portuguese plant seems to be on standby while the company is apparently awaiting results of political debacle. The company, until recently, has been struggling with liquidity. The situation has improved by the company issuing bonds and having new borrowing. Jinko has an operational processing advantage, which makes her a strong contender for some period of profitability this year. It is almost certain that a European location would make money for Jinko with a 47% tariff. Without tariffs, this could be quite difficult.
ReneSola Ltd. (ADR)(NYSE:SOL) also made a quick agreement for outsourcing. Despite variable statements on cost, it is clear that cost would be higher than domestic processing. There is also the subject of a polysilicon plant with its cash costs estimated at $15 per kg. When all operating cost is used, it effectively holds the company processing above spot pricing. Polysilicon tariffs in China could drive prices up, but it is unlikely that China will proceed to provide amicable settlement in the European dispute.
For now, two months of low rates are seen as another opportunity for stocking up. Companies are expected to export heavily until early July, to go through European customs prior to August 6th. Trina Solar Limited (ADR)(NYSE:TSL) and Yingli Green Energy Hold. Co. Ltd. (ADR)(NYSE:YGE) have the highest amount of deliveries to the region. Companies are also delivering to Croatia; Canadian Solar Inc. (NASDAQ:CSIQ) and Yingli had done so in April. Since the country becomes a part of the EU on July 1, 2013, modules shipped there can avoid 11.8% duty until this date.
While Yingli has a tremendous desire for the domestic market and was recently reassured to have a safe harbor in China, with 3GW worth of projects in Yunnan, Trina’s stance is baffling by lack of commitment to any specific action. Rich in cash, the company seems to be in a passive mode, a surprise for what was once a leader. This is also in stark contrast in the display of irony of Suntech Power Holdings Co., Ltd. (ADR)(NYSE:STP) offering duty-free modules to European customers. While they are not made by its bankrupt subsidiary, Wuxi Suntech, one could be wondering how Suntech pays for the modules, when it is struggling with liquidity issues.
