More on the "Predictable" Solar Panels Decision and Trade Diversion

When I first wrote about last week's preliminary decision by the US Department of Commerce to impose big anti-dumping duties on imports of Chinese solar panels, I noted (among other things) that any final duties probably wouldn't lead to a long-term increase in US solar manufacturing but instead would simply cause Chinese production to move to other low-cost destinations (and, of course, raise US prices).  I reported on one Chinese manufacturer - JinkoSolar - publicly announcing its intentions to increase production at one of its Canadian affiliates in order to avoid the solar tariffs, and a new report from Platts makes clear that JinkoSolar is definitely not alone:

[D]espite prophecies of doom and gloom on both sides of the case leading up to that decision, the ultimate outcome of the ruling may have a smaller impact on the US photovoltaic market than advocates predicted.

US manufacturers, led by Oregon-based SolarWorld (a unit of the German solar giant), accused Chinese firms of illegally dumping panels in the US at prices far below what is possible in the US. Without US government action, they argued Chinese PV producers would solidify their domination of the global solar panel market and quickly eliminate the US solar panel manufacturing industry.

And US solar developers said tariffs would make it more expensive to build new solar power projects here, potentially smothering US PV development.

But after the DOC decision, [two] of the largest Chinese PV manufacturers--Suntech and Yingli Green Energy--said they are already prepared to shift their production and use their global supply chains to sell the US panels that will not be subject to tariffs, and with only a small increase in prices.

"We're fully prepared to handle this situation and we believe that we can continue to supply the US market" without paying tariffs, said Helena Kimball, head of marketing for Yingli, in an interview. "The requirement to source third party cells will have a slight impact on costs since we will need to outsource what we currently produce efficiently in-house. However, we believe that this will minimally impact market prices."

Andrew Beebe, Suntech's Chief Commercial Officer said Suntech has similar plans.

"As a global company with global supply chains and manufacturing facilities in three countries, including the United States, we are providing our U.S. customers with hundreds of megawatts of quality solar products that are not subject to these tariffs," Beebe said in a statement... 

GTM Research Solar Analyst Shyam Mehta said Chinese companies will likely use one of two strategies to avoid US tariffs: either shift production outside of China, as Suntech's Beebe described, or use Taiwanese suppliers to make cells, which would be assembled into modules in China through a process called "tolling." 

"We estimate that tolling cells to Taiwanese firms would increase Chinese costs by 6-12%, which is meaningful but manageable," Mehta said.

As I mentioned last week (and in the Platts piece), neither of these strategies is illegal, and the only thing domestic producers can do to stop it is to file a new AD/CVD petition targeting the countries to which Chinese production was diverted.  Given these facts, the Platts article concludes that any final AD/CVD order should have few, if any, long-term benefits for US solar manufacturers:

Some Chinese suppliers will likely shift a portion of their operations to the US as a result of the tariff decision, Mehta said, but in the long term, other countries with lower production costs will likely benefit.

"We see the impact of this decision on US manufacturing as positive, but spurring limited investment in the future and likely only temporary relief for existing U.S.-based suppliers," Mehta said.

So, think of these tariffs as a sort of "sugar high" for petitioner SolarWorld and other US manufacturers - they'll get a little bump in terms of (consumer-hurting) prices and production, but it won't last.  However, the pain felt by US consumers will continue, as they're forced to pay above-market prices for their solar panels.

According to the Wall Street Journal, it seems that the markets have caught on quickly to these realities:

U.S. solar stocks such as First SolarFSLR +0.91% enjoyed a brief burst of jingoism last Thursday, when the Commerce Department announced antidumping tariffs on Chinese photovoltaic-equipment makers. As of Monday, though, trade-war fever had subsided: First Solar hit a fresh 52-week low of $13.37, down from almost $128 a year ago.

The initial bounce reflected hope that tariffs would shield U.S. solar profit margins against the price deflation brought on by rampant Chinese investment in manufacturing capacity.

But protectionism is just another form of subsidy, which has defined solar power's boom and bust. Generous subsidies generated artificial demand in such tropical paradises as, er, Germany. Their sudden curtailment, as governments tightened belts, then battered growth forecasts—although not before they had helped encourage all that Chinese investment. Last year, global capacity to manufacture solar cells was more than twice the level of demand.

If the U.S. were the world's biggest solar market, a tariff might offer its domestic manufacturers more than a fleeting hope. But Pavel Molchanov of Raymond James expects the U.S. to account for just 11% of demand this year, against Europe's 53%. Updating analysts earlier this month, First Solar mentioned Brazil, India, Australia and, yes, China as growth opportunities.

If the Commerce Department's action is merely the opening salvo of a trade war, it could ultimately damage the overseas ambitions of the remaining U.S. manufacturers as other countries enact similar measures. Above all, the ultimate objective in the solar-power industry is to reduce its costs so that it can eventually compete with other forms of power without the aid of subsidies. This latest one works in precisely the opposite direction.

SolarWorld's stock witnessed a similar collapse today, losing much of the gains that it made on Friday following Commerce's big announcement.  Apparently it took Wall Street all of one day to figure out that last week's preliminary determination has done nothing to dramatically alter the future of the American and global solar markets.  Of course, had these companies' shareholders just read this blog, they could've avoided the financial pain of today's big crash.  Now, they're forced to stick with these stocks until the next sugar high comes along.

But, hey, at least these folks had the opportunity to get out early and avoid the inevitable result of yesterday's preliminary duties.  US solar panels consumers have no such luxury.