On August 3rd the EU commission issued an amendment to Regulation (EU) No 513/2013, originally designed to establish a provisional anti-dumping duty on imports of crystalline silicon photovoltaic modules and key components (i.e. cells and wafers) originating in or consigned from the People's Republic of China. The amendment makes into a law an arrangement of the minimum price undertaking and quantity limit removing the measure of punitive tariffs, otherwise to be applied on August 6th. This is the result of weeks of negotiations between the EU and the Chinese solar industry.
Even prior to the EU's official journal publication, Reuters and Bloomberg published a minimum price of 0.56 euro (US$0.74) per watt and a volume quota of 7GW per year. At the crux of the settlement are 90 to 95 companies, which agreed to the minimum price. Those that disagreed will be paying full duties on their exports. The EU commission had issued TARIC (Integrated Tariff of the European Communities) numbers to 131 Chinese entities, in order to identify them. Each invoice and CCCME (Chinese Chamber of Commerce) certificate, which must accompany each shipment, will also include TARIC codes identifying modules, cells, and wafers. The distribution of the 7GW quota has been left to the Chinese, granting CCCME control over who ships to Europe.
The list of "cooperating" companies was published by Chinese media, and with the exception of Daqo New Energy, all US-listed Chinese companies are on it. In general terms, companies will be exporting free of tariff until the limit is reached. This is the best possible outcome under the circumstances. Second, it will increase the average selling price in the region. This, coupled with lower processing costs, should bring higher gross margins.
Will the Chinese remain competitive?
Most likely, since Taiwanese and Koreans modules still command a premium, although the gap has been reduced. Japanese manufacturers have now moved away from Europe to a lot more lucrative market at home, and therefore, are not considered as contestants. This leaves European manufacturers, but if we believe Milan Nitzschke, EU ProSun President, they will not be helped by the agreement's conclusion. Originally, ProSun filed a complaint with the EU commission, which started the investigation into the Chinese being accused of dumping modules. Now unhappy with the outcome, ProSun has filed a case against the decision with the court of justice in Brussels.
Will there be a demand?
Without any doubt, the European market is slowing down, and 7GW is a lot less than the 12GW shipped there by the Chinese in 2012. Based on reduced numbers, and the fact that Chinese modules will still be cheapest, demand should be healthy at least for the quota retainers. If the demand is nicked, the selling will be done by the brand, warranty and efficiency, distinct options when comparing products with the same price. In this category, Yingli Green Energy (NYSE:YGE), Canadian Solar (NASDAQ:CSIQ) and Trina Solar (NYSE:TSL) are the best positioned to monetize those advantages, but JinkoSolar (NYSE:JKS) and ReneSola (NYSE:SOL) will be offering a lot more than many tier 2 companies can offer.
Is there an impact on profitability?
Yes, as $0.74 per watt at minimum has to be considered an improvement. This level of the price reflects Q2 2012 average selling prices (ASP). The processing costs from a year ago have a significant reduction and today's costs dropped on average by at least 10%. At $0.74 versus processing cost of $0.60, this would give a gross margin of 18.9%, a level not seen in years.
Yingli has shipped around 1.4GW to Europe, while Trina did around 700MW, representing 61% and 43% of worldwide shipments during 2012.
Until Q1 2013, the EU market had one of the lowest ASPs in the world. Both Trina and Yingli have actively sold modules elsewhere in order to avoid this impact. During the first half of 2013 for each company, the EU contributed 49% of the total deliveries. When including shipments to China, the average shows less dependence than 2012; still, the dependency on Europe has been undeniable. In comparison to Canadian Solar with only 19%, the EU is a vital market for the two. Canadian's non-reliance on Europe resulted in the highest gross margins out of all the Chinese thus far this year - a feat made possible by the focus on Japan, where the company is an undeniable 2013 volume leader. Accordingly, Canadian Solar's strategy helped the company to avoid negative effects of the low ASP in the EU, but those who rely on Europe should see uplift in the second part of the year with the minimum price benefits.
Finally, elimination and consolidation are certainly one of the objectives to bring balance to the industry, and no doubt CCCME has been given a tool to accomplish it. It is very likely that top US-listed companies will be the ones to reap the most benefits while small and medium-size players will be marginalized.
Disclosure: I am long TSL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.