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The Solar Wars Have Begun

The U.S. Department of Commerce has fired the first shot in the next trade skirmish with China.  While the situation with Iran is also due to come to a head soon, this issue has all the potential to escalate into a full-blown trade war.  Chinese solar manufacturers of conventional solar panels will be hit with an anti-dumping tariff ranging from 31% to 250% according to Digitimes.  This will be in addition to an anti-subsidy tariff of between 2.9 and 4.7%.  Anyone looking to add solar power to your house in the U.S. better get that HELOC paperwork filed now.

Who am I kidding?  No one in the U.S. can actually qualify for a HELOC anymore.  And if they did, they’d only use the money to make their mortgage payments.

And that’s what was so cool about this.  Solar panel prices had dropped to the point where one didn’t necessarily have to take out a second mortgage to get in on the renewable energy action.  PV panels can be had for wholesale prices, less than $1.00 per watt.  Now the entire industry has been thrown into turmoil over what is obviously a political issue.

The biggest Chinese manufacturers such as Suntech (NYSE:STP) and Trina Solar (NYSE:TSL) will be hit with the lowest tariff of 31%, while smaller manufacturers are just going to have to abandon the market paying up to 249.96%.

Absorbing Costs

A number of high profile U.S. solar firms filed for bankruptcy in 2011 as prices dropped 50% and they could not compete.  The most famous of which, Solyndra, did so after receiving $535 million in subsidized loans from the U.S. government.  If the U.S. is now alleging that China’s government is doing so for Suntech and Trina Solar then the complaint here is one of quality not quantity.

Unlike Solyndra, which looks like one of the biggest frauds perpetrated with government money, Suntech’s a profitable company, though, gross margins dropped to less than 10% in 2011 and they are forecasting a further reduction in sales by 30% this quarter.  Demand for solar panels has fallen off a cliff since the U.S. and E.U. governments scaled back subsidies for their solar industries.  The whole industry is suffering from over capacity and shrinking demand.  This collapse in solar prices was devastating for the burgeoning thin-film solar industry and companies like First Solar (NASDAQ:FSLR) saw sales drop and inventories rise from $196 to $496 million over 2011.  With France and Germany making up nearly half of First Solar’s sales and Europe now entering a continent-wide recession which Germany will have to fund their prospects in the near-term are dim. Thin film technology was promising when costs per watt were higher.

Because, no matter how you cut it, solar technology is still not good enough to make it an attractive return on investment at anything other than current depressed prices.  In a high sunlight region of the world at $1.00 per watt, not including anything else like batteries, inverters, copper wiring (not insignificant with DC electricity) and maintenance, a $200 panel takes 56 months at $0.12 per KWH to pay for itself.   Given that the panel cost is normally just 20% of a full installation those numbers push well up past the expected service life of the system itself.  When one considers that with a 50% drop in the price of the panels resulted in just a 3.6% drop in the price of the installed system one has to wonder just where all the money is going.

Poly-Headed Hydra

The solar industry in the U.S. was reported to have created 100,000 jobs in 2011 only one-fourth of which were in manufacturing, the rest were associated with installation.  So, this begs the question why this tariff and why now?

Moreover, this move by the U.S. will likely prompt a similar response by China over U.S. exports of poly-crystalline solar panels into China, about $700 million per year.  In essence we could be seeing the beginnings of a full-fledged trade war between the U.S. and China that has its roots in the Chinese cap on exports of rare-earth metals last year.   Just wait until the Chinese pay for Iranian oil with gold next month.

Sunpower (NASDAQ:SPWR) lost $0.67 per share in their most recent quarter while ramping up production of their latest high-density panels which cost them $0.86 per watt to produce.  By contrast Suntech is targeting a production cost of $0.65 per watt.  Multiplying Suntech’s cost of production by the tariff and the cost of Suntech’s imports to the U.S. equal Sunpower’s production costs.  Coincidence?   Sunpower cannot even claim the technology crown along with Sanyo anymore as Suntech just announced they’ve cracked the 20% efficiency barrier using standard monocrystalline silicon wafers and will be putting them into production soon.

Sunpower cannot actually sell systems up front at full price in the U.S.  Most of their business is to municipalities, which are all bleeding red ink, not a sustainable market.  They are seeing their best growth in the Asia-Pacific region, with Japan and China their biggest customers.  Their hope for residential installations comes in the form of essentially a second mortgage lease-to-own program at 7.99% over 20 years.  With 25% of mortgages in the U.S. underwater, where is the incentive for U.S. home-owners, already struggling with mortgage payments, to enter into a 20 year lease on their power system? 

With China announcing their plan to have 15 gigawatts installed by 2015 and 50 gigawatts installed by 2020 every solar manufacturer that survives the current shakeout from over supply will be looking at a huge opportunity. 

It is one that is far higher than the one represented by potential installations in the U.S.  This again, begs the question, why would the U.S. impose a 31+% tariff on Chinese-sourced solar cells risking their firms being shut out of a potentially enormous market when:

  • The tariff can be easily avoided by out-sourcing production to Taiwan or Canada
  • The American consumer is benefiting from the insanely low prices of good solar panels

These trade barriers are never good for the end user who always has to pay the price for the intervention into the market.  By the logic of the U.S. Department of Commerce Amazon should be sued for selling the Kindle Fire too cheaply.  When you subsidize something you get more of it, and in the case of solar panels we have certainly gotten more of them.  If the U.S. does not want them at that price, then someone else will and their companies will likely be on the outside looking in while China moves on. 

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Peter Pham is an author, international fund manager, and a registered financial director by the Cayman Monetary Authority (CIMA). In 2013 he published his first book entitled, The Big Trade: Simple Strategies for Maximum Market Returns. He currently manages the portfolio of a global hedge fund and runs an asset management company, Phoenix Capital.  (read more)

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