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July 24, 2017

Solid Play in Solid Waste

by Debra Fiakas CFA

The last article “Advanced Disposal Services:  Hauling a Heavy Load” on July 18th inspired a closer look at the solid waste management sector in which it competes.   The solid waste industry is growing at a good pace between 1.6% and 2.0% per year, largely on population growth and the human penchant for consumption and waste.  In the U.S. solid waste collection is still populated by many localized, family-owned businesses, despite the emergence of several large consolidators that now command as much as 55% of the revenue in waste handling and disposal.  Fragmentation creates ample opportunity for the incumbents to ratchet up growth rates.

Advanced Disposal Services is the most recent in the sector to enter the public capital markets with an initial public offering of stock.  There are several seasoned securities in the sector and that begs the question, what is the best stock to own in the group. 

For investors who are looking for value, the solid waste sector is not fertile ground.  The average price multiple in the selected group presented in the table here is 35.31times expected earnings.  This is well above the average ‘forward price earnings’ multiple of the S&P 500 Index at 17.6 times expected earnings in 2017.  Only Stericycle (SRCL:  Nasdaq), a provider of specialty waste collection and disposal services for the health care industry, compares to the broader market with a forward PE of 16.08.  Among the plain vanilla garbage haulers, Waste Management (WM:  NYSE) appears to be the best value with a forward PE of 21.71.


Company Name
Symbol
Price
Forward Price-Earnings Ratio
Price-Earnings to Growth Ratio
Forward Dividend Yield
Return on Assets
Advanced Disposal Services
ADSW
$23.40
41.70
2.62
-
2.41%
Casella Waste Systems
CWST
$16.55
23.31
7.24
-
5.08%
Clean Harbors
CLH
$56.46
47.05
1.33
-
1.96%
Covanta Holding
$13.30
95.00
-2.55
7.49%
5.71%
Heritage-Crystal Clean
HCCI
$16.125
21.50
1.07
-
4.04%
Meridian Waste Solutions
MRDN
$1.50
neg
na
-
neg
Newalta Corporation
NAL.TO
$1.28
neg
neg
5.0%
neg
Republic Services
RSG
$64.80
24.73
2.54
1.98%
4.88%
Stericycle
SRCL
$77.51
16.08
2.18
-
4.75%
Veolia Environmental
$22.33
na
na
3.93%
2.28%
Waste Connections
WCN
$63.90
26.74
1.90
0.75%
5.09%
Waste Management
$75.32
21.71
2.27
2.27%
7.42%


Since its growth that is the primary attraction to the solid waste industry, a view on value relative to growth might be a better method for sussing out a winner.  The Price-Earnings to Growth Ratio puts value and growth in perspective.  Here again it is another specialty services player, Heritage Crystal Clean (HCCI:  Nasddaq) that offers the most attractive value against growth with a ‘PEG ratio’ of 1.07.  Even that measure suggests just fair valuation for the Heritage parts cleaning and waste solvent handling service for auto maintenance and other industrial companies.  The outsized PEG ratios of the rest of the regular waste haulers reveals just how much investors seem to like this sector.

Some investors might be quite happy ‘paying up’ to own shares in a solid waste management company. The business model is conducive to strong cash flow generation on the back of reliable recurring revenue streams.  Several pay ample dividends, delivering enticing yields even at current price levels.  The top of the list is Covanta Holding (CVA:  NYSE) with a forward dividend yield of 7.49%.   

The skeptical investor might need some comfort in the quality of an investment target.  Return on assets provides a measure of efficiency to see which company makes the most out of the trucks, handling equipment and landfills that are necessary for waste management. The winner in this contest is the ‘big guy’ Waste Management, which last year wrung income from its assets at rate of 7.42%.

This simple exercise reveals one truth in waste handling:  scale matters.  The most asset efficient company, Waste Management, is also among those that deliver strongest earnings and dividends, making it a solid play in the solid waste sector.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

July 10, 2017

REX American: Culturally Frugal

by Debra Fiakas CFA

Among the surviving public ethanol producers in the U.S. is REX American Resources (REX:  NYSE).  Based in Ohio, REX American is an ethanol fuel producer with owned nameplate capacity near 215 million gallons per year.  Additionally, the company distributes by-products of the ethanol production process, including distiller grains and non-food grade corn oil.  REX has full or partial ownership in six ethanol production plants located in the Ohio, South Dakota, Illinois and Minnesota.

The company relies on corn feed stock for its dry milling ethanol production process.  Like any other ethanol producer, that puts REX American in a vulnerable position if corn prices rise faster or to an egregious high level relative to fossil fuels, which help determine ethanol selling prices.  This is called the ‘crush spread’.  REX uses forward commodity agreements to lock in raw materials prices as well as ethanol selling prices.  However, these fixed price contracts typically do not last more than three or four months.

REX management has done a fairly good job of handling the ‘crush spread’.  In the twelve months ending April 2017, the company recorded $466.7 million in total sales, providing $34.0 million in net income or $5.16 per share.  Importantly, the company turned 17.9% of each revenue dollar into operating cash flow.  The strong cash conversion rate has helped build cash balance at the end of April 2017 to $181.9 million.  With no debt, REX American has one of the strongest balance sheets among companies in the ethanol sector.

REX American stands out among small-cap companies  -  habitually profitable, naturally cash generative and capital conservative.  However, we do have some concerns about management’s ability to act decisively or to take bold or aggressive action in their market.  The balance sheet is fully capable of supporting debt to finance acquisitions or new build ethanol production.  However, there are no concrete plans for such expansion.

Cash assets are now greater than the book value of the Company’s property plant and equipment.  Management’s investment plans are increasingly under scrutiny.  While management describes plans to expand capacity, these are very small investments relative to the total cash resources.

Although the management team might not be as culturally agile as most small, innovative companies, the REX American group can be admired for its conservative nature.  Conservatism has helped build a frugal operating structure that generates strong operating cash flows.  In the end it is shareholders who benefit from management’s penchant for staying the course with proven strategies rather than taking bold actions.
At a price-earnings ratio of 21.3 times the current fiscal year consensus estimate, the stock appears priced well above its peers in the ethanol industry.  This should give investors pause.  The ethanol industry is subject to considerable uncertainty, which is not supportive of premium valuations.  For example, in November 2016, the U.S. Department of Environmental Protection announced the 2017 requirement of 15.0 billion gallons for conventional renewable fuels.  This equals the statutory requirement.   Despite this action well before the end of the calendar year, the ethanol market did not benefit from the expected certainly but was instead roiled by a temporary moratorium imposed by the Trump administration.

REX shares are rated at Trim by Crystal Equity Research given that fundamental valuation is at an egregious premium that may not be sustained.    The stock has shown considerable strength in trading in recent weeks.  Should the stock go through another retreat, tradings might be tempted to add to overall positions.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. As of the date of this article, Crystal Equity Research has a Trim rating on REX shares.

July 07, 2017

Recycler Priced for Recovery

by Debra Fiakas CFA

Shares of Appliance Recycling Centers of American (ARCI:  Nasdaq) has trended downward over the last year, despite some strong fundamental progress in the company’s position the recycling sector.  The corporate name tells at least part of the company’s story.  Besides recycling appliances such as washers, dryers and refridgerators, ARC also sells new and like-new appliances right out of the box.  The company has eighteen stores branded ApplianceSmart across the country.  Services to electric utilities and other energy companies related to energy efficiency programs provide yet another revenue source.

In the twelve months ending March 2017, ARC reported $101.5 million in total sales, providing $1.2 million in net income or $0.19 per share.  Importantly, operations generated $2.0 million in cash flow during this same period. The profits are a welcome improvement over losses reported in fiscal years 2016 and 2015.  Sales had been declining and did not fully cover operating expenses in 2015 and 2016.

Besides having a spotty track record in producing profits, ARC also has debt on its balance sheet.  At the end of March 2017, the company had $6.2 million in total debt on its balance sheet.  This represented a debt-to-equity ratio of 47.52.  Debt at any level might give some investors pause, especially if there is no consistent profitability.

Still there are some elements in the ARC story that should interest investors.  In April 2017, the company opened a new recycling center in the Milwaukee area.  The company has teamed up with a state program to recycle old kitchen appliances, cleaning up the environment and removing unsafe, uneconomical appliances from neighborhoods.  The company also launched new contact center services to consumers called Customer Connexx.  The service supports scheduling of services of local utility programs related to appliance safety and energy efficiency.

Shares of Appliance Recycling Centers are trading below a dollar a share, which might be off-putting for some investors.  For those who are not shy of penny stocks, ARCI could be your stock.  The shares are now priced at 4.2 times trailing earnings.  There is no forward price-earnings ratio given that the company has a limited following among sell-side analysts.  With recent demonstration of recovery (no pun intended!), the stock appears to be priced at a bargain.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

July 06, 2017

Oh, No! Renewable Energy Group CEO Departs

Oh, No! Renewable Energy Group CEO Departs

Intirim CEO plans no strategy change

Jim Lane

In Iowa, Renewable Energy Group (REGI) announced that Dan Oh has resigned as President and Chief Executive Officer and as a member of the Company’s Board of Directors. The resignation was effective July 3, 2017. The Board of Directors appointed long-time director Randolph (Randy) L. Howard as Interim President and Chief Executive Officer.

Howard is a 33-year veteran of Unocal, has been on the REG board since 2007 — so, a familiar face — at 67, may not be in the job for the long-haul, but a strong interim pick.

Oh departs as the company’s stock hit a 3-year high of $13.39 in Monday trading, and has surged 46.2% in the past 12 months, topping the notable surge in biofuels equities which has seen the Zack’s biofuels sector average jump 30.6% year-on-year.

REG stock traded down a whopping 5.74% on the news, closing at $12.40.

Staying the course

“The strategy is in place and there’s no change,” CEO Randy Howard told The Digest. “That is our #1 message. We placed markers on the table and we intend to execute, and today we are seeing part of that execution as we bring in leaders who can take us to that next level.”

Howard is the iCEO for now, but there’s no sense of a caretaker — the company will continue to drive while the search takes place. “We’ve grown dramatically, and we’ve presented to our investor community a growth perspective for our biodiesel projects, and for hydrocarbon projects like Geismar, and new products. We’ll need leadership that can manage can build big projects like that, and manage companies of that scope and scale. I obviously hope to accelerate that growth, there’s no time limit on the search [for a new CEO], and I am all in until we get it right, with the long-term leadership that can take us to the next level.”

Projects there are, but also the ongoing project known as public policy. The EPA proposed a 2019 “no growth” RVO. But Howard was not dismayed.

“We see in the next several months,” Howard predicted “public policy coming together to give the biodiesel a secure future for an extended time. Not this year to year of tax credits, RVOs and import penalties. All of it we think is coming together, so that we will have a public policy in place that permits the industry to manufacture to its capacity.”

Meanwhile, Howard pointed to the short-term organic growth opportunities. “We have opportunities such as our Ralston plant where we were birthed, to increase capacity — and projects like these can fundamentally can help us grow in the mid to long term. I think that’s why investors have become excited in recent months. They see benefits in the financial short term but also a vision for long-term growth. Not just running a set of assets.”

Bullish outlook, yes. But there’s some ‘whoa Nelly’ in terms of expectations on timing. Think ‘expansion to 112 million gallons at Geismar’ as an all-but-certain reality. Think the same way about optimization of existing assets. Think “not ready to make that decision, but soon” on further doubling Geismar’s capacity as much as 234 million gallons — specific volumes to be better studied before decision time. As far as greenfield hydrocarbon projects, Howard noted, “the other facilities we are looking at, that’s not this year for sure. That’s all in process, but there are a lot of issues to work through when it comes building greenfield projects.”

A three-year stock high

Late last month at the company’s Investor Day in New York City, the company pointed analysts confidently towards $150 million or higher annual earnings, saying that they saw $100 million or more coming from the company’s biodiesel operations and as much as $50 million in annual earnings from its renewable hydrocarbon business based in Geismar Louisiana.

Oh said that the company would be “expanding, adding geographies, products and markets and capturing more downstream margin, citing the development of speciality products. Though Argentine imports have surged into the US in response to favorable prices for advanced biofuels, Oh predicted that “trade sanction activity is underway, and it looks like going to happen.” He saw the import and export trade “moving back to balance”. And he said that a reinstatement of the $1.01 per gallon biomass-based diesel tax incentive “seems likely”.

Oh pointed to the “growing global distillate market,” and said that, in contrast to the travails of ethanol producers, “we don’t have tension with petroleum,” because of the global call for more heavy-duty, distillate fuel. The world needs more of what we do.” Oh noted at the time that just a 3 percent increase in global demand would increase the market for diesel by 12 billion gallons, and noted that LMC and EIA projections saw the distillate market growing from 480 billion gallons per year to more than 700 billion by 2030.

REG’s Competitive Advantage

We’ve noted it before, REG has been building a mini-trading behemoth, accessing a wide range of lower cost, lower carbon intensity (CI) raw materials that gives the company “pricing flexibility”, and “reliability as an off-take customer for key suppliers of contract-manufactured fuel”. The company also notes that it is “a preferred supplier to key customers and trading partners” known for an “ability to meet stringent customer specifications” with its REG-9000 biodiesel product. For carbon value, the company ability to deliver a massively advantaged molecule with 50% lower CO2 emissions has given it access to $1.00+ per gallon RIN credits that have been giving biodiesel the cost advantage it has needed.

REG’s Growth

Accordingly, the company has been on a production tear, growing 39% annually since 2010, reaching 567 million gallons of production in 2016, and displacing 3 million tons of CO2 last year.

The company was growing with the industrial sector, in many ways — global biobased diesel production had risen from just over 4 billion gallons at the height of the “green fuels craze” in 2008 to more than 10 billion in 2016, and LMC is projecting the global production will top 14 billion gallons by 2020.

The boom has been particularly on in California, where sales of biomass-based diesel rose, according to the California Air Resources Board, from less than 20 million gallons in Q4 2012 o 110 million gallons in Q4 2016.

One trouble spot in boom times? Surging imports from Argentina and Indonesia in 2016 — according to REG, an 843 percent increase over 2014 for Argentina and 117% increase for Indonesia. The US Department of Commerce will determine on August 22nd whether countervailing duties will be imposed over charges of dumping. The European Commission imposed antidumping duties on Argentine and Indonesia biodiesel for five years starting in Q4 2013, crushing the volume of fuels shipped to the EU.

Overall in 2016 the company recorded a record $2.0 billion in revenue and recorded $102 million in adjusted EBITDA. Overall, EBITDA has been growing even faster than the gallonage — the company has recorded a 67% annual growth rate in earnings since 2010 when the com[any was essentially a break-even proposition, before RFS2 kicked in strongly starting in 2011.

Overall, revenue has doubled since 2012; although the company’s annual EBITDA has been on the up-and-down, following the mercurial policy ups and downs in DC. and the low energy prices seen since 2015. EBITDA reached a high of $148M in 2013 and dipped to $50M in 2015 before recovering last year.

However, the balance sheet has been strengthened — net working capital has doubled since 2012 and book value has almost doubles, and the company had $82 million in cash and just $217 million in debt, which is down from a high of $252 million in 2014.

Feedstock Market Outlook

In its analyst presentations, REG saw corn oil supplies expanding with a growth in US ethanol exports, and an uptick in animal rendering fats with meat production numbers climbing. Oh said that the company would continue to intensify its efforts on waste feedstocks. The company presented this overview of historical price data on feedstocks and molecule prices — the “crush spread”:

The big growth opportunity? The EU

REG acquired its first production capacity in Eastern Europe, Petrotec, not long ago, and strategically there’s a strong rationale, with a advanced biofuels target under the proposed Renewable Energy Directive set in the 1.5-9% range, or an overall 6.5 billion gallons market. “ REG noted that the “RED II proposal aims to expand success by growing and emphasizing the lowest carbon advanced biofuels.”

Geismar, the Rock Star

The old Dynamic Fuels plant, which REG acquired in 2014 after it had been idled for nearly two years, never produced more than 75% of its nameplate capacity in any given month, and what REG described as “significant Mechanical & Processing Issues” dropped utilization as low as 20% in selected months. With new catalysts and upgrades to the technology, the Geismar plant reached 100% of nameplate in December 2016 and has produced in aggregate more than it’s nameplate capacity since then. The company acquired 82 acres at the GEismar site and is aiming at expansion at a site strategically located less than a mile from the Mississippi and less than 3 miles from the Bengal pipeline. Another set of upgrades are taking place in June.

The biggest opportunity is capacity expansion, and Geismar is slated for a 37 million gallon capacity increase, to north of 110 million gallons. An interesting opportunity worth noting? Specialty chemicals. The company says that its “Specialty Products Unit adds 10 MMGY of RHD capacity with an option to produce significantly higher margin specialty chemicals.”

Terminals and Energy Services

REG is aiming at life beyond producing fuels and chemicals, sold in to various third-party terminals. The company has identified seven terminal growth opportunity regions in the US.

The Life Sciences gambit

In 2015, REG acquired LS9 as the base for an entry into specialty chemicals and more. The division has been 11 years in the making with $135 million invested — and not much to show by way of revenue, although there have been a steady stream of brand-name partners such as ExxonMobil. The REG Life Sciences unit is a “fatty acid derivative platform” from idea to manufacturing, with a small facility already in place in Florida.

The company has identified 11,000 “unique structures” and assembled nearly 200 patents — to date, one multi-functional fatty acid (musk) has reached “phase 4 -pre-launch” and a second sale id expected in Q3 2017. Nine other products are in the development pipeline, i various stages of partner discussions — ranging from nutrition, esters plastics, fragrances, and polyamides.

Overall, REG Life Sciences aims to compete in four markets — flavors & fragrances, the C8/C10 platform, speciality polyamides and novel building blocks, with a total addressable market size of $25.3 billion, growing by more than 5 percent per year.

The Digest’s Take

Here’s your takeaway. REG is staying the course and ready to execute its strategy as unveiled with its investors last month in New York.

Transitions at the top always create nervousness. They involve regret for the loss of valued leaders. In this case, no reason for nerves. And reason to re-focus on REG’s big, big opportunity. If it executes the strategy, builds a large and strongly committed investor base, and gets the decisions right on expansion opportunities. A great strategy is validated by great execution.

Let’s salute Dan Oh and the company he built — the people and the systems that remain will be his substantial and substantive legacy. Now, let’s salute Randy Howard and the company that’s emerging — with growth opportunities that any company in this sector would envy.

Now, it’ll be noses to the grindstone in Ames as the company tackles decisions on optimization and expansion — Geismar, terminals, upgrades in the existing fleet, M&A opportunities, generating cash out of REG Life Sciences. It’s a heady set of opportunities and choices for REG as it aims to go from a 3-year high in the stock price to something even more special.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

July 05, 2017

The New US Solar Trade Dispute

by Paula Mints

In 2012 SolarWorld, facing significant price and margin pressure from cells/modules imported from China, filed trade petitions in Europe and the US under section 337 of the 1930 Trade Act. As a refresher on the Trade Act of 1930; this was the infamous Smoot-Hawley Act which began as a protection for farmers but after much debate fed by many special interests it was eventually attached to a wide variety of imports (~900). Other countries retaliated with their own tariffs. The US trade deficit ballooned. Smoot-Hawley did not push the world into the Great Depression but it certainly was a card in the Depression playing deck.

In 1934, as part of the New Deal, President Franklin Roosevelt pushed the Reciprocal Trade Agreements Act through and the short reign of protectionism in the US ended.

Back to 2012, following an investigation, tariffs on cells and modules imported from China were put in place. Despite high anxiety in the US and Europe over potential price increases, and a highly divided solar industry prices did not increase significantly. In many cases, for larger buyers, the tariffs were absorbed.

Goal of action: Attempt to correct the import/export solar panel imbalance.
Result of action: Aside from industry participants and observers lining up on one side or the other it was Business as Usual. Prices increased slightly for smaller buyers and did not decrease as rapidly for smaller buyers.

In 2014 SolarWorld amended its original petition to include cells imported from Taiwan. Significant tariffs were put in place. Despite renewed high anxiety in the US over potential price increases, prices did not increase significantly. In many cases, for larger buyers, the tariffs were absorbed.

Goal of action: Attempt to correct the import/export solar panel imbalance.
Result of action: Despite angry shouts from both sides of the dispute (for and against) it was business as usual again. In old fashioned measurement terms, the needle on prices barely budged for larger buyers, and though prices increased for smaller buyers this was sometimesoffset by manufacturer or distributor sales on inventory. In late 2016 China slowed it exploding market sending global PV capacity immediately into an oversupply situation. Overnight prices crashed and margins collapsed. To support current production manufacturers began selling future production to large buyers at extremely low prices. Price decreases were in some cases available to buyers of smaller quantities.

Prices, in some cases, dipped below $0.30/Wp, lower than the price of a cell and below the cost of wafer-to-cell-to module production. Manufacturers, trapped in a spiral of buyer expectations and low margins, doubled down by selling future production to large quantity buyers in the $0.30/Wp to $0.40/Wp range.

Goal of action: Concerning the significant price drops, this was an attempt to sell off manufacturer inventory and it went awry. The goal of future pricing was to support current production.
Result of action: Lower prices for cells and modules for all buyers and extended unprofitability for manufacturers leading to a new round of manufacturer consolidation and creating a perfect situation for new tariffs and other government actions on imports. Meanwhile, sales of future production at low prices trapped manufacturers in a downward pricing spiral.
 
Figure 1 offers average prices, average costs and shipments from 2006 through 2016. Average prices and costs are the weighted average price (or cost) represent a global weighted average of the price paid for modules or the cost of manufacturing modules during a specific period. 

mints trade war fig 1.png


In April 2017 US-based (and 63% Chinese Owned) monocrystalline cell manufacturer Suniva filed for bankruptcy and shut down its cell and module facilities in the US. Simultaneously it filed a new petition under Section 201 of the Trade act of 1974 asking for a 0.78/Wp minimum price on all crystalline module imports and an additional $0.40/Wp tariff on imported crystalline cells.
 
The Trade Act of 1974, in theory, was designed to expand US manufacturing participation in global markets and reduce trade barriers. It also – and this is important – gave the President broad fast-track authority.  Under it the US president can give temporary relief to an industry.  Gerald Ford, who became the 38th president after the resignation of Richard Nixon, was president at the time.  The Trade Act of 1974 was deemed necessary because it gave the president a stronger negotiating position during the Tokyo multilateral trade negotiations. It was set to expire in 1980 and has been extended several times. President Bush used Section 201 in 2002 to increase tariffs on some steel imports to the US.

Section 201 of the 1974 Trade Act sets a higher bar for petitioners than the previous trade dispute.  The injury must be serious. The ITC (US International Trade Commission) has 120 to 150 days to report its findings to the president.

In early May SolarWorld Germany (SRWRF) declared itself insolvent and its US subsidiary while stating it would continue operations filed its intent to lay off its employees.  In late May SolarWorld joined Suniva’s petition.  
 
Goal of action: The goal of the latest petition seems to be to make a statement.   Result of action: Suniva is unlikely to survive. SolarWorld may pull itself out of danger.  US cell manufacturing is already comatose.  The most likely result will be higher prices for all participants. Should the petition be made retroactive for any period it will cause margin distress for US installers, developer and EPC. 
 
Nota bene, the 2012/14 petitions established a date for the tariffs to be implemented that took into account the timeframe required to investigate. That is, the tariff would go into effect at an earlier date than the decision.  The current tariff minimum import price petition does not include a date marker but this it is by no means certain that an earlier date wouldn’t be established if the proceedings go forward. The ultimate decider in the current case is President Trump.

Who did the earlier tariffs benefit? 
 
Several years later the solar industry still takes sides concerning the 2012 and 2014 trade dispute. Concerning the US, the 2012/2014 dispute did not lead to an increase in US cell manufacturing. One reason for this is long timeline from installing equipment, through pilot scale production to commercial activity.  It takes time. It takes money.  The decision to invest time and money in a vulnerable incentive-driven market is nontrivial. 
 
In 2016 the US had 1% of US cell manufacturing capability and 1% of module assembly capability.  The cell is the electricity generating component of the module without which the module is just a frame. Module assemblers buy cells. As the US has significantly more demand than it does crystalline capacity US module assemblers must import cells. Table 1 presents US cell manufacturing capacity, shipment and US market demand from 2011 through 2016. 
 
mints trade war table 2.png

Observing Table 1, US manufacturing capacity remained flat during the period from 2011 through 2016 viewed through the lens of compound annual growth. On the face of it, the US supply and demand story seems clear, however, looking closer bumps in the supply/demand road are apparent.  To understand the market, the macro view, represented by compound annual growth rates, is informative, but the bumps in the road, that is the detail, are even more important.

mints trade war table 1.png

Table 2 offers a bumpier view of US supply and demand during the period after the first tariffs in 2012.  In 2013 US capacity to produce cells, again, the electricity generating component of the module, decreased by 16% decreasing again in 2015 by 9%.  In 2013 shipments decreased by 9% before seeing a 6% recovery in 2014. 
 
Demand, meaning modules acquired from all countries, increased by 70% in 2013, 40% in 2014, 25% in 2015 and 73% in 2016. Demand during this period and for the foreseeable future (assuming no changes) was and is primarily driven by the ITC.
 
In 2015 US capacity to produce cells increased by 60 percent as manufacturers brought new capacity online. Shipments increased by 38% primarily to serve the growing US market. Despite new capacity the US still could not serve its own market.  The new capacity that was available in 2015 was additional, that is, brought on line or added by manufacturers currently operating. It takes years, decades in many cases, to add new manufacturing capacity.  The only way new capacity can be brought on line in a country is to truncate the pilot scale to commercial production timeline. When manufacturers move too rapidly through pilot scale production the result is almost always poorer quality.

Table 3 offers four scenarios for 2017, low, conservative and accelerated. Table 3 provides two conservative scenarios based on manufacturing capacity. The reason for this is that though SolarWorld will likely shutter some capacity and lay off employees it may survive the year as it has done before. Should installers become anxious about SolarWorld’s survival and stop buying its modules the ripple effect of this would ensure the company’s failure. 

mints trade war table 3.png

The direct goal of the current tariff/minimum price action is murky. Following its bankruptcy Suniva took investment with the caveat that it file the petition. The goal of protecting US manufacturing is difficult to support as the US has very little cell manufacturing and cannot serve its own market. The US has more module assembly capacity but must buy cells to assemble from other countries. The petition affects crystalline cells and not thin films, at least for now. There is not enough global thin film capacity to serve the US market. 
 
Should the current tariff petition be enacted prices for cells and modules all demand side participants will increase and US manufacturing will not become more robust. The only to increase US cell manufacturing is to invest overtime and reward buyers to choosing US produced cells and even then, other components will need to be imported.

What the trade petition means to you
 
End users: It is highly unlikely that system prices will increase. Expectations for low system prices are cemented in (and highly publicized). End users do not have to choose to install solar. End users have buying power. 

Residential Installers: This group will feel the squeeze stuck between buyers who do not have to choose solar and distributors/manufacturers who will likely pass on higher prices.  Warning, however, though the current petition does not set a date for tariffs it still could.   Distributors: This group will face higher prices but can usually pass on at least part of the cost to installers.  As with installers, though the current petition does not set a date for tariffs it still could.    

Developers and EPC: Price increases will be smaller for this group but there will be price increases and slower decreases. Thin film manufacturers will be free to raise prices, though as there is not enough thin film capacity to fulfill current demand supply constraints are likely. As with installers and distributors, though the current petition does not set a date for tariffs it still could.       

US Module Assemblers: Prices for crystalline cells will increase and this group will have to pay them to stay in business. Margins will feel the pain and it will be difficult to pass much of the price premium to customers  Investors and Developers: With low PPA bidding the norm, higher prices for modules will affect profitability. If the modules have already been purchased beware of retroactive pricing – not in place yet but you never know. If modules have not been purchased you will pay more per Wp. 

Thin film manufacturers: This group is probably secretly (or not so secretly) hoping the US minimum price and $0.40/Wp tariff on crystalline cell imports is enacted. Why? – no more price pressure. Expect prices for thin films to increase almost immediately while supplies remain constrained.  High end monocrystalline providers such as LG and SunPower: These manufacturers have already met the minimum price but may get hit with the $0.40/Wp on imported cells.  If so, these manufacturers will have to absorb the tariff.   

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.

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