Europe and China Settle Solar Dispute -- Who Won?

Europe's long solar trade battle with China appears to be over for the time being, and China got the upper hand once again. Solar import tariffs of 11.8% put in place in June won't be replaced by tariffs that average 47% for most manufacturers, but will instead be replaced by a price floor.  

According to early reports, 90 of China's 140 exporters will be covered under an agreement to set a price floor of $0.74 per watt for solar panels. Other manufacturers will face the old tariff deal, but they don't appear to represent a significant percentage of the supply. Also, the price is not significantly higher than modules are already going for in Europe. Chinese modules are selling for around $0.65 per watt both in the U.S. and Europe, so it's an increase but not a back breaker.  

The effect on Chinese solar stocks
To put the price floor into perspective, Yingli Green Energy (NYSE: YGE  ) had an average selling price of $0.67 per watt in the first quarter. The price increase would amount to about 11% under the new plan.  

The good news for Yingli and other manufacturers is that this will likely widen their margins a bit in Europe. The company had a gross margin of just 4.1% last quarter, so the price floor could increase that to about 14% in Europe. Trina Solar (NYSE: TSL  ) also gets a large percentage of revenue from Europe, and will see an increase in its 1.7% gross margin when the new rules go into effect.

The bad news is that European and non-Chinese manufacturers will now be more cost effective. Even a few cents is important in solar these days, so now things like efficiency and quality will come into play more than they did when Chinese manufacturers were competing just on cost.

Who wins?
It's important to remember that the only change from two months ago is that Chinese panels will have a higher price. So, companies such as LDK Solar (NASDAQOTH: LDKSY  ) , who were trying to compete on price alone, will likely be left in the dust. Investors should focus on higher-quality manufacturers like Yingli Green Energy, Trina Solar, and Canadian Solar (NASDAQ: CSIQ  ) as potential winners from the negotiated solar deal.

The question is whether or not this will help bring these companies to a profit? For Canadian Solar and Trina solar, it just might, when combined with high margins in Japan. Earlier this month I calculated that Trina needs to generate a 9.9 cent gross margin on each panel and Canadian Solar needs an 8.9 cent gross margin just to break even. They may be able to get close to those margins if they can cut costs as the year goes on. Yingli, however, needs a 17.3 cent gross margin to break even because of its high debt load, which is still too much to overcome.

Foolish bottom line
There are pluses and minuses to the negotiated solar deal for Chinese suppliers. Volume to Europe will likely go down but margins will go up -- if China, Japan, and the U.S. can fill the volume gap, then it may become a net positive. We'll learn more when companies give third-quarter projections, so stay tuned for the financial ramifications. For now, the highest-quality, highest-efficiency manufacturers will likely become winners by taking share from their lower-quality neighbors. 

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