This week, the U.S. Department of Commerce announced a preliminary verdict on unfair Chinese subsidies for solar companies. As many suspected, a tariff will be put in place on Chinese solar imports. What analysts didn't expect was a relatively low tariff of 2.9% to 4.73% for manufacturers.
This news sent solar stocks into a frenzy on Tuesday. Yingli Green Energy (NYSE: YGE) and Trina Solar (NYSE: TSL) jumped because the ruling was viewed as a win for Chinese manufacturers, while SunPower and First Solar (Nasdaq: FSLR) have plunged on the same view.
But how is this new tariff really going to affect solar companies?
This isn't over
It's important to remember that this was only one part of the ruling against Chinese companies. There's also a dumping charge, and history has shown that this part of the tariff is often larger than the subsidy tariff. May 16 is the day we're scheduled to get a ruling on this, and then the International Trade Commission will need to complete its investigation.
The bottom line is, this is only the beginning of the tariff story in the solar industry, and future rulings will probably add more tariffs to Chinese products.
The impact will be minimal
A leading solar follower, Greentech Media, analyzed the potential impact of a solar tariff and determined, "It just doesn't matter." Solar manufacturers are already starting to move manufacturing to more local sites, including Mexico and the United States, or to low-cost countries such as Malaysia, India, or South Korea, where they can get around the tariff.
The site reports that you can already get quotes for trade-compliant modules to be delivered as early as the second quarter of this year.
There are simply too many ways around the tariff to make much of an impact, except unintended ones like moving manufacturing to Mexico.
The alternative is to kill solar
Analysts and investors may be surprised that the announced tariff wasn't higher, but I'm happy it wasn't. A higher tariff could have been disastrous for the entire solar industry, forcing a growing industry to cope with higher costs and less competition among solar manufacturers. The main factor that has driven the explosion in solar in the U.S. is dramatically lower costs, and if the Department of Commerce would have instituted anything near a 100% tariff as SolarWorld suggested, it may have stunted solar's growth.
Market trends are still in place
The stock market has obviously determined that the U.S. went soft on China and that this is bad for U.S. companies. But recent trends tell us that the opposite may be true.
Even before the new tariffs were announced, SunPower had the largest share of solar modules installed in California and had margins in line with the top Chinese companies. First Solar, despite its problems, still has the lowest costs and best gross margin in the business. These two companies would be the "winners" even with a small tariff.
Every penny that's added to the cost of a module from Suntech Power (NYSE: STP), Trina Solar, or Yingli Green Energy makes them less competitive in the U.S. market. Razor-thin margins could evaporate, even for these top-tier suppliers. For lower-tier suppliers such as Renesola (NYSE: SOL), Jinko Solar, and Hanwha SolarOne, which have negative gross margins, this tariff will only fuel more losses.
Maybe it's because I'm not in the business of predicting things like tariff rates and earnings per share that I don't see how the market's reaction makes sense. The market is reacting to a ruling with an eye on the short term, but this ruling only reinforces my long-term view of solar stocks. SunPower will benefit marginally from this ruling, and Chinese manufacturers will continue to bludgeon each other until the Chinese government is forced to let some of them fail.
I think the market has the reaction to this tariff all wrong. It won't kill Chinese solar companies, but it certainly doesn't help them. Then consider that there are probably more tariffs in the pipeline, and I see U.S. companies as the winners, even if the tariffs are small.
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