U.S. and E.U. officials may be willing to negotiate with China over the subsidies given to the Chinese solar industry and the dumping of panels at a loss to these companies. The New York Times is reporting that instead of tariffs -- which are in place in the U.S. and are being planned in Europe -- both regions would set caps from China and set a minimum price producers must charge in lieu of tariffs. The theory is that this would eliminate the problem of dumping (selling panels for less than what they cost) while not cutting China out altogether.
It also solves some challenges for each region. In the U.S., Chinese companies can use a process called "tolling" in Taiwan or another region to render the tariffs ineffective. So this would effectively raise the prices of Chinese solar panels in the United States.
The negotiation between Europe and China may be even more important for everyone involved. Europe is discussing a 50% or higher tariff on Chinese panels, which would take a huge bite out of a thriving domestic solar installation industry. But the tariff would also be a huge negative for Chinese manufacturers because of a loss of sales. If the E.U. and China can resolve their issues with a less onerous tariff or price increase, it could help all sides.
Who is this good for?
Until we know the details of a negotiated agreement, it's hard to tell whom a deal would be good for. We do know that historically, Yingli Green Energy (NYSE: YGE), Trina Solar (NYSE: TSL), and Canadian Solar have gotten a majority of revenue from Europe, so avoiding punitive tariffs would be advantageous for these companies.
So, there's upside in Europe versus tariffs that might be implemented as early as next month. Depending on how a deal is structured, Chinese manufacturers may end up charging higher prices, hurting sales but raising margins. This could potentially be a positive across the board, assuming manufacturers outside China don't steal too much share.
Whom is this bad for?
One of the rules that needs to be considered is that the U.S. solar industry has to agree to a negotiated resolution, or the tariffs will remain in place. Depending on where you are in the industry, the currently low (or non-existent) tariff is advantageous, so a negotiated solution would harm the solar industry.
Take SolarCity (NASDAQ:SCTY.DL) as an example of a company that may fight a negotiated solution. The company uses Yingli and Trina modules, so higher prices from a negotiated solution would raise their costs. Most downstream channels, which benefit from low panel prices, would have a similar opinion.
But manufacturers that are trying to produce modules in the U.S. or Europe, and companies such as SunPower (NASDAQ:SPWR) and First Solar that manufacture in Asian countries outside China would love a negotiated solution and the higher panel prices that would come with it.
Right now, your position in the industry will probably determine how you feel about the status quo, high European tariffs, or a global negotiated solution.
If a negotiated deal is reached, I see Chinese manufacturers suffering more in the U.S. than they currently do but avoiding devastation in Europe. SolarCity may have to find new suppliers for its installations if costs go up, a challenge for a company growing rapidly.
Why the pop in Chinese stocks today?
The big question today is why Chinese solar stocks are up while SunPower and SolarCity are down.
The first reason is Yingli's announcement that shipments wouldn't fall as much as anticipated. Gross margin will be 4% to 4.2%, although investors are hoping this will bring the company closer to a profit as the year goes on.
Chinese solar stocks often pop on any kernel of good news, and Yingli's numbers are decent while a deal with Europe and the U.S. could be seen as positive. I just think the market is getting ahead of itself, assuming all deals are positive for everyone involved. A more nuanced look would tell you that China faces higher prices in the U.S. and Europe, which isn't necessarily good.
On the flip side, if Chinese manufacturers are forced to sell for higher prices, this could raise margins. A negotiated deal could actually help the financials for Chinese companies, an inadvertent consequence that U.S. and European officials may not be anticipating.
A look inside First Solar