Today started as a slow day for solar stocks, but soon after the market opened, they sold off in furious fashion, reversing gains earlier in the week. JinkoSolar (NYSE:JKS) and Canadian Solar (NASDAQ:CSIQ) fell 12%, while JA Solar (NASDAQ: JASO) and Trina Solar (NYSE: TSL) dropped 9%, leading the industry's losses. The sell-off was broad, but these stocks took it harder than most.
The driver of today's move
There's growing concern that a solar trade war, similar to the one the U.S. launched last year, is brewing between the EU and China. EU officials have become frustrated with an unclear trade policy in relation to solar panels headed to Europe. Since there is a trade complaint launched by Germany's Solar World, there is some urgency to the matter.
European companies have similar claims as their U.S. counterparts about the solar industry in China. Loans from state-run banks have subsidized the industry, and manufacturers are now dumping product on the European market at below cost, making it impossible for local manufacturers to compete.
Trina Solar, JA Solar, Canadian Solar, and JinkoSolar have all accepted loans from state-run banks, and any tariffs implemented would hurt their sales -- and we're not talking about peanuts here. China exported over $25 billion of solar panels to Europe in 2011, and counts on the region for a vast majority of sales.
Trade war a brewin'
The best part of all of this is that China is accusing Europe of favoring European-made panels, and has threatened their own tariffs. Europe exports polysilicon to China, just as the U.S. does, and a tariff would reduce demand for the imports used to make panels. The irony is that this would make Chinese panels even more expensive, a double whammy for China.
Europe is frustrated by a lack of answers from China's government -- a government that's in the midst of a leadership change. If answers and changes to the solar industry don't come soon, the EU could implement a tariff, something it doesn't want to do, but may be forced to.
If Europe puts tariffs on Chinese panels, it would hurt every manufacturer in China, particularly Suntech Power, Yingli Green Energy, and LDK Solar, the three companies with the worst balance sheets and the most to lose. China is planning to install a lot more solar domestically, but it's nowhere near big enough to support the mammoth industry it has created.
China is already fighting an uphill battle in the U.S.; further challenges in Europe could be a disaster.
Interestingly, the winners in this potential mess were also down today. SunPower and First Solar (NASDAQ:FSLR) both traded lower today, even though they would benefit from higher-priced Chinese panels in Europe. That market used to be huge for both companies, but it's been a drag in recent quarters, as cheap, subsidized panels from China have flooded the market.
Long-term, these two companies would be winners if there is a solar trade war between the EU and China.
Foolish bottom line
This is one more reason to stay away from Chinese solar stocks. They're dangerous, even in a growing industry, and I wouldn't be buying any of the dips in price right now.
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