China has decided to retaliate against U.S. tariffs imposed on Chinese imports last year with tariffs of their own. Polysilicon coming from the U.S. will now be subject to a 53%-57% tariff, increasing the largest cost associated with solar panels. South Korea was also hit with tariffs, and a judgement against Europe is likely coming.
This clearly elevates the solar trade war between the U.S. and China and is intended to be a shot across the European Union's bow. Europe is has already put an 11.8% tariff on Chinese imports; if a negotiated solution between the two regions can't be reached by Aug. 6, then the tariffs will go up to an average of 47%.
The real irony is that China may be hurting itself with its actions, and the biggest companies in solar will take the brunt of the hit.
The impact of solar tariffs
About 80% of the polysilicon used in Chinese solar panels actually comes from the U.S., Europe, and South Korea; if costs go up 53%, they may have to look for alternatives. Yingli Green Energy (NYSE: YGE) has already warned that the tariffs will increase costs for Chinese suppliers and that some of the biggest manufacturers would likely be hit by the move. The effect really depends on where you sit, but most major module manufacturers import some of their polysilicon, even if they make the rest in-house.
There will be winners, though. Shares of polysilicon maker Renewable Energy fell 7% in trading immediately after the announcement because the company will likely see either lower prices or lower demand. But shares of GCL Poly, who manufactures in China and is the biggest polysilicon maker in the world, jumped 4% on Friday after the news was announced. Renesola (NYSE:SOL) and LDK Solar (OTC:LDKYQ) also have lots of unused polysilicon capacity that will likely experience more demand because of the move. The question is if they have sufficient quality to supply the industry.
When I talked to polysilicon equipment maker GT Advanced Technologies' CEO, Tom Gutierrez, last year he said that many Chinese manufacturers can't make the high-quality polysilicon needed for solar panels and that's why U.S. manufacturers can still compete. At the very least, demand will go up for Asian manufacturers who can manufacture with high quality standards, likely raising solar costs.
Foolish bottom line
Solar module manufacturers will be the most adversely affected in the near term. Trina Solar (NYSE: TSL), for example, makes about half of its own polysilicon but must buy 1.2 GW worth from outside suppliers. Yingli has already said that tariffs will adversely affect costs. The irony of imposing tariffs on U.S. solar exports to China is that China will be the one hurt by them in the long run.