Best stock to invest in – The New US Solar Trade Dispute

Best stock to invest in

by Paula Mints

In 2012 SolarWorld, facing significant price and margin
pressure from cells/modules imported from China, filed trade
petitions in Europe and the US under section 337 of the 1930 Trade
Act. As a refresher on the Trade Act of 1930; this was the infamous
Smoot-Hawley Act which began as a protection for farmers but after
much debate fed by many special interests it was eventually attached
to a wide variety of imports (~900). Other countries retaliated with
their own tariffs. The US trade deficit ballooned. Smoot-Hawley did
not push the world into the Great Depression but it certainly was a
card in the Depression playing deck.

In 1934, as part of the New Deal, President Franklin Roosevelt
pushed the Reciprocal Trade Agreements Act through and the short
reign of protectionism in the US ended.

Back to 2012, following an investigation, tariffs
on cells and modules imported from China
were put in place.
Despite high anxiety in the US and Europe over potential price
increases, and a highly divided solar industry prices did not
increase significantly. In many cases, for larger buyers, the
tariffs were absorbed.

Goal of action: Attempt to correct the import/export solar
panel imbalance.
Result of action: Aside from industry participants and
observers lining up on one side or the other it was Business as
Usual. Prices increased slightly for smaller buyers and did not
decrease as rapidly for smaller buyers.

In 2014 SolarWorld amended its original petition to include cells
imported from Taiwan. Significant
tariffs were put in place
. Despite renewed high anxiety in the
US over potential price increases, prices did not increase
significantly. In many cases, for larger buyers, the tariffs were

Goal of action: Attempt to correct the import/export solar
panel imbalance.
Result of action: Despite angry shouts from both sides of
the dispute (for and against) it was business as usual again. In old
fashioned measurement terms, the needle on prices barely budged for
larger buyers, and though prices increased for smaller buyers this
was sometimesoffset by manufacturer or distributor sales on
inventory. In late 2016 China slowed it exploding market sending
global PV capacity immediately into an oversupply situation.
Overnight prices crashed and margins collapsed. To support current
production manufacturers began selling future production to large
buyers at extremely low prices. Price decreases were in some cases
available to buyers of smaller quantities.

Prices, in some cases, dipped below $0.30/Wp, lower than the price
of a cell and below the cost of wafer-to-cell-to module production.
Manufacturers, trapped in a spiral of buyer expectations and low
margins, doubled down by selling future production to large quantity
buyers in the $0.30/Wp to $0.40/Wp range.

Goal of action: Concerning the significant price drops,
this was an attempt to sell off manufacturer inventory and it went
awry. The goal of future pricing was to support current production.
Result of action: Lower prices for cells and modules for all
buyers and extended unprofitability for manufacturers leading to a
new round of manufacturer consolidation and creating a perfect
situation for new tariffs and other government actions on imports.
Meanwhile, sales of future production at low prices trapped
manufacturers in a downward pricing spiral.

Figure 1 offers average prices, average costs and
shipments from 2006 through 2016. Average prices and costs
are the weighted average price (or cost) represent a
global weighted average of the price paid for modules or
the cost of manufacturing modules during a specific

In April 2017 US-based (and 63% Chinese Owned) monocrystalline
cell manufacturer Suniva filed for bankruptcy and shut down its cell
and module facilities in the US. Simultaneously it filed a new
petition under Section 201 of the Trade act of 1974 asking for a
0.78/Wp minimum price on all crystalline module imports and an
additional $0.40/Wp tariff on imported crystalline cells.
The Trade Act of 1974, in theory, was designed to expand US
manufacturing participation in global markets and reduce trade
barriers. It also – and this is important – gave the President broad
fast-track authority.  Under it the US president can give
temporary relief to an industry.  Gerald Ford, who became the
38th president after the resignation of Richard Nixon, was president
at the time.  The Trade Act of 1974 was deemed necessary
because it gave the president a stronger negotiating position during
the Tokyo multilateral trade negotiations. It was set to expire in
1980 and has been extended several times. President Bush used
Section 201 in 2002 to increase tariffs on some steel imports to the

Section 201 of the 1974 Trade Act sets a higher bar for petitioners
than the previous trade dispute.  The injury must be serious.
The ITC (US International Trade Commission) has 120 to 150 days to
report its findings to the president.

In early May SolarWorld Germany (SRWRF)
declared itself insolvent and its US subsidiary while stating it
would continue operations filed its intent to lay off its
employees.  In late May SolarWorld joined Suniva’s
Goal of action: The goal of the latest petition seems to be to make
a statement.   Result of action: Suniva is unlikely to
survive. SolarWorld may pull itself out of danger.  US cell
manufacturing is already comatose.  The most likely result will
be higher prices for all participants. Should the petition be made
retroactive for any period it will cause margin distress for US
installers, developer and EPC. 
Nota bene, the 2012/14 petitions established a date for the
tariffs to be implemented that took into account the timeframe
required to investigate. That is, the tariff would go into effect at
an earlier date than the decision.  The current tariff minimum
import price petition does not include a date marker but this it is
by no means certain that an earlier date wouldn’t be established if
the proceedings go forward. The ultimate decider in the current case
is President Trump.

Who did the earlier tariffs benefit? 
Several years later the solar industry still takes sides concerning
the 2012 and 2014 trade dispute. Concerning the US, the 2012/2014
dispute did not lead to an increase in US cell manufacturing. One
reason for this is long timeline from installing equipment, through
pilot scale production to commercial activity.  It takes time.
It takes money.  The decision to invest time and money in a
vulnerable incentive-driven market is nontrivial. 
In 2016 the US had 1% of US cell manufacturing capability and 1% of
module assembly capability.  The cell is the electricity
generating component of the module without which the module is just
a frame. Module assemblers buy cells. As the US has significantly
more demand than it does crystalline capacity US module assemblers
must import cells. Table 1 presents US cell manufacturing capacity,
shipment and US market demand from 2011 through 2016. 

Observing Table 1, US manufacturing capacity remained flat during
the period from 2011 through 2016 viewed through the lens of
compound annual growth. On the face of it, the US supply and demand
story seems clear, however, looking closer bumps in the
supply/demand road are apparent.  To understand the market, the
macro view, represented by compound annual growth rates, is
informative, but the bumps in the road, that is the detail, are even
more important.

Table 2 offers a bumpier view of US supply and demand during the
period after the first tariffs in 2012.  In 2013 US capacity to
produce cells, again, the electricity generating component of the
module, decreased by 16% decreasing again in 2015 by 9%.  In
2013 shipments decreased by 9% before seeing a 6% recovery in
Demand, meaning modules acquired from all countries, increased by
70% in 2013, 40% in 2014, 25% in 2015 and 73% in 2016. Demand during
this period and for the foreseeable future (assuming no changes) was
and is primarily driven by the ITC.
In 2015 US capacity to produce cells increased by 60 percent as
manufacturers brought new capacity online. Shipments increased by
38% primarily to serve the growing US market. Despite new capacity
the US still could not serve its own market.  The new capacity
that was available in 2015 was additional, that is, brought on line
or added by manufacturers currently operating. It takes years,
decades in many cases, to add new manufacturing capacity.  The
only way new capacity can be brought on line in a country is to
truncate the pilot scale to commercial production timeline. When
manufacturers move too rapidly through pilot scale production the
result is almost always poorer quality.

Table 3 offers four scenarios for 2017, low, conservative and
accelerated. Table 3 provides two conservative scenarios based on
manufacturing capacity. The reason for this is that though
SolarWorld will likely shutter some capacity and lay off employees
it may survive the year as it has done before. Should installers
become anxious about SolarWorld’s survival and stop buying its
modules the ripple effect of this would ensure the company’s

The direct goal of the current tariff/minimum price action is
murky. Following its bankruptcy Suniva took investment with the
caveat that it file the petition. The goal of protecting US
manufacturing is difficult to support as the US has very little cell
manufacturing and cannot serve its own market. The US has more
module assembly capacity but must buy cells to assemble from other
countries. The petition affects crystalline cells and not thin
films, at least for now. There is not enough global thin film
capacity to serve the US market. 
Should the current tariff petition be enacted prices for cells and
modules all demand side participants will increase and US
manufacturing will not become more robust. The only to increase US
cell manufacturing is to invest overtime and reward buyers to
choosing US produced cells and even then, other components will need
to be imported.

What the trade petition means to you
End users: It is highly unlikely that system prices will
increase. Expectations for low system prices are cemented in (and
highly publicized). End users do not have to choose to install
solar. End users have buying power. 

Residential Installers: This group will feel the squeeze
stuck between buyers who do not have to choose solar and
distributors/manufacturers who will likely pass on higher
prices.  Warning, however, though the current petition does not
set a date for tariffs it still could.   Distributors:
This group will face higher prices but can usually pass on at least
part of the cost to installers.  As with installers, though the
current petition does not set a date for tariffs it still

Developers and EPC: Price increases will be smaller for
this group but there will be price increases and slower decreases.
Thin film manufacturers will be free to raise prices, though as
there is not enough thin film capacity to fulfill current demand
supply constraints are likely. As with installers and distributors,
though the current petition does not set a date for tariffs it still

US Module Assemblers: Prices for crystalline cells will
increase and this group will have to pay them to stay in business.
Margins will feel the pain and it will be difficult to pass much of
the price premium to customers  Investors and Developers: With
low PPA bidding the norm, higher prices for modules will affect
profitability. If the modules have already been purchased beware of
retroactive pricing – not in place yet but you never know. If
modules have not been purchased you will pay more per Wp. 

Thin film manufacturers: This group is probably secretly (or
not so secretly) hoping the US minimum price and $0.40/Wp tariff on
crystalline cell imports is enacted. Why? – no more price pressure.
Expect prices for thin films to increase almost immediately while
supplies remain constrained.  High end monocrystalline
providers such as LG and SunPower: These manufacturers have already
met the minimum price but may get hit with the $0.40/Wp on imported
cells.  If so, these manufacturers will have to absorb the

Paula Mints is founder of SPV Market Research, a
classic solar market research practice focused on gathering data
through primary research and providing analyses of the global
solar industry.  You can find her on T
witter @PaulaMints1
and read
her blog here.

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