U.S. anti-dumping tariffs – What will change?

The industry has now had a chance to take stock of the U.S. Dept. of Commerce’s announcement that it will impose an import tariff on PV cells, or PV modules that contain cells, manufactured in China.

By Sam Wilkinson, Senior Market Analyst, IMS Research (IHS Inc.) May 30, 2012

The industry has now had a chance to take stock of the U.S. Dept. of Commerce’s announcement that it will impose an import tariff on PV cells, or PV modules that contain cells, manufactured in China. The preliminary findings of the anti-dumping case, which was initiated in October 2011 when a group of PV manufacturers led by Germany’s SolarWorld filed a trade complaint, revealed that a tariff of approximately 31% would be levied against a specified group of the largest Chinese cell manufacturers, and a rate of 249% against all other Chinese manufacturers. This was in addition to March’s introduction of less severe countervailing duties to negate the allegedly unfair subsidies that Chinese suppliers benefit from.

The announcement has initiated industry-wide discussions, negotiations and announcements, varying from quickly and quietly putting new strategies into action, to retaliating with more finger-pointing and further trade action. Here, I wanted to discuss and explain some of the possible outcomes.

Possible outcome No. 1 – Pay the tax

Whilst it is unlikely that any suppliers will pay the tax in the future; in the short-term, the duties will have a significant financial impact on Chinese manufacturers. Shipments made to the U.S. between February and May are included in the 90 day retroactive window and are subject to the tariffs. This will result in Chinese suppliers recording charges that negatively affect margins in Q1 and Q2’12. IMS Research, recently acquired by IHS Inc., predicts that in total taxes in the region of $100m will be imposed on Chinese manufacturers for shipments during this 90 day period. This is not a welcome addition to already squeezed margins and strained balance sheets.

Possible outcome No. 2 – Side-step the tax

Certainly, a number of modules were imported over the last 3 months that will be included in the 90 day retroactive window, but moving forward Chinese manufacturers will not accept absorbing the extra cost of the tax or consider raising prices in such a highly competitive and price sensitive industry. This was highlighted when Chinese Suntech, the world’s largest PV cell and module manufacturer, announced in its recent earnings call that ‘no products that we manufacture in the U.S. or ship to the U.S. today are subject to these tariffs’.

The reality is that as the regulations cover only the manufacturing location of the cell, suppliers will undoubtedly identify alternative sourcing strategies to side-step the tax altogether. One clear strategy for avoiding the import duties is to purchase cells from outside China for use in modules intended for the U.S. market, and it is highly likely that module manufacturers will favour Taiwanese manufacturers as a convenient source of low-cost cells. IMS Research predicts that Taiwanese cell manufacturers will enjoy stronger demand as a result, placing them in a strong position to improve their profit margins which have recently all but disappeared.

This could lead to up to Chinese suppliers looking to avoid the import tax could lead to over 1 GW of additional cells being purchased (rather than manufactured) by Chinese suppliers in 2012. This ultimately means that utilization of cell lines in China will slow in the short-term and whilst many suppliers had previously aimed to develop cell capacity at the same rate as their module capacity, many may now strategically adapt their expansion plans so that their module capacity exceeds their cell capacity accordingly.

Another unlikely (but possible) outcome is that Chinese manufacturers that are confident of future business opportunities in the U.S. look to acquire or develop cell production facilities outside of China. Whilst the state of balance sheets throughout the industry makes large capital investments hard to justify in today’s climate, opportunities for acquisition are available.

Possible outcome No. 3 – Abandon the market

All analysts (including myself) have consistently proclaimed that the U.S. market will be the ‘biggest’ and ‘most important’ market in the future. In 2012 it is forecast to account for 10% of installations, with this share predicted to rise to 15% over the next 4 years. However, huge opportunities also exist in other emerging markets, including China which already overtook the U.S. market in in size in 2011 and is forecast to continue exceeding it each year for the next five years. Many suppliers, particularly those that are less established in the U.S. market, may consider exiting the market altogether in favour of concentrating on other opportunities.

The tariff could also have implications on the arrival of new technologies to the U.S. market. There is a long line of Chinese manufacturers that have recently developed, or are currently developing, a range of high efficiency mono-crystalline cells. These products are aimed primarily at applications where space is at a premium, such as the residential and small commercial sector which accounts for over 25% of the U.S. market. However, the U.S. won’t be seeing these products any time soon if they’re subject to an additional 30% tariff.

Possible outcome No. 4 – Fight back

Perhaps the biggest danger to the industry is that other regions may follow the U.S.’s lead in initiating and imposing such tariffs. Currently, talk of the EU and other key markets carrying out similar trade action is just rumours. However, the possibility exists, and wider-spread import tariffs would add further complexities and challenges for the supplier base and would have a huge impact on sourcing strategies and growth of the industry.

Whispers of the Chinese retaliating with similar taxes on U.S. companies importing into China are also being heard. As 25% of global polysilicon capacity is located in the US, and 75% of polysilicon suppliers’ potential customers are located in China, that would change the game.

What difference do the tariffs make? Do they matter?

Given that all the options for avoiding paying the tax will lead to at least a small increase in Chinese module suppliers’ cost structures when serving the U.S. market, it is likely that we will see some small price increases or at least stabilisation pricing in the region. The supply chain (of Chinese products) is also likely to be stalled temporarily as suppliers negotiate alternative supply contracts in order to avoid paying the tariffs, which is likely to result in some projects being pushed back. Questions may also well be raised over the short-term bankability of even tier-1 products if further tariffs could be introduced in the final ruling. As Chinese module manufacturers currently hold a share of over 50% of the U.S. PV module market, these factors are likely to delay growth in 2012 and onwards. IMS Research recently reduced its 2012 forecast for installations in U.S. by more than 10% to 3 GW in response to the announcement.

It’s clear that there is a huge and highly complex web of possible outcomes and consequences. However, as most major suppliers will be able to effectively avoid the tariffs without highly significant cost increases, and a supply of ‘tariff-free’ panels from Chinese manufacturers is likely to be in place in the U.S. again very soon, the overall effect on market development will not be too severe.