Trump's Paris Decision Bodes Ill For The Solar Industry

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Includes: FSLR, KWT, TAN
by: EnerTuition
Summary

We estimate the probability of U.S. ITC making a penalty recommendation on the Suniva suit at greater than 90%.

Once the ITC makes a recommendation, the decision will be in the hands of the president. What will he do?

We do not find the prognosis for the U.S. solar industry to be positive, with the exception of First Solar.

This article is a continuation of our coverage on the Suniva Section 201 case. Readers unfamiliar with the case should start with our first article on the subject here.

The developments from this case are likely to have big impacts on the solar industry. First Solar (NASDAQ:FSLR) is likely to be the biggest winner, while the rest of the solar industry will see considerable volatility in the months ahead. Industry indexes Guggenheim Solar ETF (NYSEARCA:TAN) and VanEck Vectors Solar Energy ETF (NYSEARCA:KWT) could meaningfully decline.

As of May 2017, the Suniva Section 201 case had been accepted by the U.S. International Trade Commission and furthermore, SolarWorld (SRWRD) became an official petitioner on the case. While there has been some uncertainty in the past due to Suniva's history, the expected addition of SolarWorld has made the Section 201 case much stronger. With the U.S. ITC putting the world on notice effective May 25, investors can benefit from reviewing the case and assessing the impact of the case on the industry.

Given the seriousness of the matter and the strong chance that the petitioners will prevail, let's consider the timeline of the case. As per U.S. ITC:

Following receipt of a petition for import relief, as amended and properly filed on May 17, 2017, the Commission has instituted investigation No. TA-201-75 pursuant to section 202 of the Trade Act of 1974 (''the Act'') to determine whether crystalline silicon photovoltaic (''CSPV'') cells (whether or not partially or fully assembled into other products) are being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing an article like or directly competitive with the imported articles. The Commission has deemed the petition, as amended, to have been properly filed on May 17, 2017. The Commission has determined that this investigation is ''extraordinarily complicated'' and will make its injury determination within 128 days after the petition was filed, or by September 22, 2017. The Commission will submit to the President the report required within 180 days after the date on which the petition was filed, or by November 13, 2017.

While, in theory, the case could reach the president's desk before Nov. 13, 2017, given the cited complexity of the case and the proposed timetable, we find an earlier decision somewhat unlikely. What is more likely is that the proposed remedy will be forwarded to the president close to the Nov. 13 deadline. Prior to Nov. 13, a key date to watch in this context is Sept. 22, 2017, as the commission should make an injury determination by this date.

Given that Suniva is already in bankruptcy and SolarWorld is on the verge of bankruptcy, it's clear that the low prices from the Chinese are hurting the U.S. manufacturing industry. Also, given that many companies in the solar space have gone out of business and continue to go out of business, mostly due to low-cost Chinese competition, injury will be easy to prove.

We expect that the industry will argue injury to the installer space and argue that installers create most of the solar jobs in the U.S. However, we expect this to be a tough argument to win given that the industry continued to expand despite similar claims in the past during AD/CVD determination. It is easy to argue that much of the solar growth has been driven by subsidies like ITC and net metering, and that a small incremental cost to solar cells and panels will not materially damage the solar installation industry.

Given the past AD/CVD determinations against Chinese solar companies, we believe that the latter argument will prevail and that the chance of an injury determination is north of 90%. If an injury determination is made, then the penalty recommendation is likely to be similar to that of AD/CVD investigations from the past. In other words, we give it a better than 90% chance that U.S. ITC will rule in the petitioners' favor that an injury has occurred, and expect that the tariffs will be in the 10 to 20 cents range.

If the ITC recommendation happens as we expect it to, it will be in Trump's hands by Nov. 13, 2017 (assuming he is not ensnared by the damaging Russia investigation and is still the president). How is Trump likely to react? It is widely rumored that Trade Secretary Wilbur Ross is a proponent of using Section 201 on trade matters. Prior to the presidential elections, Trump's team put out a "Seven-Point Plan To Reform NAFTA And Stop WTO 'Cheaters'" here. This document no longer exists on that website, but can be seen at the Real Clear Politics website. The seventh and final point in the document states:

If China does not stop its illegal activities, including its theft of American trade secrets, I will use every lawful presidential power to remedy trade disputes, including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962.

Isn't it quite a coincidence that Suniva chose Section 201 to litigate its trade case? Ever since Suniva started its Section 201 action, the solar industry has been hoping that the Trump team's platform is election talk and that Trump will change his thinking on Section 201 - like he has changed his position on China.

However, that calculation likely changed dramatically when Trump announced that he would withdraw from the Paris Climate Treaty. It should be noted that several polls have shown that staying with the treaty was supported by the majority of Americans. Many in the business world, including several high-profile CEOs, have opposed the pullout. Nevertheless, Trump's commitment to the base that voted him into office has prevailed.

In justifying his Paris decision, Trump said: "I was elected to represent the citizens of Pittsburgh, not Paris." Investors and the solar industry should take heed. The Paris decision makes it likely that Trump will adopt the U.S. ITC's recommendations. The best chance for the solar industry might be to influence the ITC to the greatest extent possible in order to get a lenient decision. That's because once the recommendation leaves the ITC, the prospects do not look good. It does not help that there are unconfirmed rumors of Suniva having close ties with Trump's campaign team.

For those who are optimistic and hoping for a different outcome, we have one thing to say: Suniva is in Georgia. Georgia is a red state that went the Trump way, and with the president's repeated assertions that he cares more about the people who elected him than any international norms, the odds favor Trump resorting to protectionism.

Furthermore, note also that First Solar laid off about 1,600 workers in November due to the solar module supply glut. Of these, about 450 employees were estimated to be in Ohio - yet another state that helped put Trump ahead on the electoral college map. It's also where he has repeatedly promised to bring manufacturing jobs back.

As we have addressed in earlier articles, First Solar is likely to be the biggest winner if the Section 201 action materializes. The downside for other solar companies is difficult to estimate, but it is likely that the Guggenheim Solar ETF and the VanEck Vectors Solar Energy ETF will see considerable volatility in the months ahead.

Our view on FSLR is that it's a buy. Our view on TAN and KWT is that they're ones to avoid.

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Disclosure: I am/we are long FSLR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.