The New US Solar Trade Dispute

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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

Obse
rving 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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