After a month of knee-jerk trading, investors and analysts await EU tariff decision


In fact, more than a few industry experts are sitting tight and staying mum until June 5, when the European Commission is expected to reveal whether it will impose punitive tariffs on Chinese-manufactured solar modules. This will be the long-awaited conclusion of the continent’s anti-dumping (AD) and countervailing duty (CVD) cases. If duties are mandated, China’s panel prices in the EU, its largest market, will go up and demand will go down. That could trigger a final shakeout in China’s solar industry – but, possibly, too late to save many of Europe’s upstream producers. In any case, the decision will change the dynamics of the solar marketplace.

Trading up

At the end of last week, JA Solar (JASO) was up 43.1%, trading at US$8.03 (€6.21) per share on NASDAQ – after reporting on May 20 that its revenue had exceeded earlier forecasts; climbing 6%, to $270 million (€209 million). Overall, shipments in the first quarter of 2013 were 442.7 MW, above the company's previously provided guidance of 410 MW to 430 MW.

Baofang Jin, executive chairman and CEO of Shanghai-based JA Solar Holdings Co. Ltd., said the better-than-anticipated results could be attributed to the company’s recent exports. "We performed especially well in Japan, a high average sales price (ASP) market, which accounted for a record 38% of our module shipments in the quarter; while module sales to China declined from last quarter, due to seasonality and our shift in focus to markets with more attractive margins. We also made further inroads into emerging markets, including in the Asia Pacific, the Middle East, and Africa."

Exciting, right? Not so much, according to Gordon Johnson, managing director of New York City-based Axiom Capital Management. "What has happened," he told pv magazine, "is that earnings from JA Solar have been slightly better than expected. Margins came in at 6% versus the company’s previous guidance of 2.4%. But it is highly unlikely that the company is going to see real growth. Remember, this is a company that is effectively bankrupt. They are getting cash from the Chinese government."

"The performance of a lot of these solar stocks has been altogether ridiculous," Pavel Molchanov, senior vice president, Equity Research, of Houston-based Raymond Jones & Associates, advised pv magazine. "The euphoria that is being reflected in the stock activity is utterly disconnected from the fundamentals of the industry. When we see JA solar up 70% in one day after reporting a very small beat for Q1, guiding down for Q2 in shipments, and giving no increased guidance for the year, we have to think that the enthusiasm just isn’t warranted."

Molchanov's theory is that, "three points fly in the face of the way that Chinese stocks such as JA Solar and ReneSola (SOL) have been acting" – specifically:

• The European market "is practically frozen," and is likely to stay that way until there is clarity on the tariff;

• Solar leasing and other financing models are gaining traction, but almost all U.S. solar developers are capital- constrained, so "the U.S. will not soak up all of the excess supply" if a tariff is announced; and

• Despite some bankruptcies, the global cap between capacity and demand is still at 50%. Companies that have development portfolios – including America’s SunPower (SPWR) and First Solar (FSLR) – can temporarily mask the capital deficiency, but not for long.

Johnson also is skeptical about the continued strength of America’s number one and two manufacturers, First Solar and SunPower, both of which have turned to project development in order to find a way to market their own products profitably. He predicts that, once the heavily subsidized projects currently on the books are completed, they will not be replaced by equally lucrative ventures.

City of dreams

As for the other standout in the U.S. industry, the installer SolarCity (SCTY), Johnson and Molchanov concur that the company’s CEO, billionaire Elon Musk, is Silicon Valley’s current main attraction. Johnson commented to pv magazine, "People are buying any stock associated with Elon Musk."

Molchanov agreed, "SolarCity is a good company, but at its current price – it rose from $20 to $50 (€15 to €40) in ten days – I would say it is on a bubble. It would not be a good bet, save for the drawing power of Elon Musk."

The jump in ticker price experienced by SolarCity occurred in mid-May, when Musk revealed that he had obtained financing from the New York City-based investment banking and securities firm Goldman Sachs for $500 million (€387 million) in rooftop solar systems that the company will deploy this year. The deal, which represents the largest single such U.S. financing agreement, will enable SolarCity to build about 110 MW of solar power systems at nearly no up-front cost to homeowners and businesses, the company announced. The agreement was initiated in 2012 and expanded per its initial terms at the end of April.

The price of SolarCity shares also has been influenced by the success of Musk’s other leading-edge ventures in renewable energy and digital information, including SpaceX, PayPal and Tesla Motors. He is the chairman and CEO of the luxury electric sedan manufacturer, Tesla Motors Inc. (TSLA), which on May 22 repaid the U.S. Department of Energy (DOE) the $451.8 million (€350 million) remaining on an Advanced Technology Vehicles Manufacturing loan awarded in 2009. By May 24, Tesla’s stock was selling at more than $90 (€70) a share. According to Bloomberg, the shares have surged 174% this year.

Looking ahead

Looking ahead for the next month, the analysts are concerned about the EU decision and not much else. The ruling on June 5 will be temporary; to be followed by a permanent decision on December 5.

"No matter if it’s yea or nay [to tariffs]," opined Axiom’s Johnson, "the first half of next month, share prices will be up; the second half, prices will be down."

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Molchanov agrees that "prices will trend down over time." In looking at the trade case, however, he thinks that tariffs, specifically, may not be the ultimate solution. "There may be a tariff, or there may be some kind of a quota or trade cap," he commented. "Either way, that’s hardly an ideal scenario for the Chinese companies."

A quota – a government-imposed trade restriction that would limit the number or value of the modules imported to the European Union during a specified time period – would, in theory, increase the volume of domestic EU production and protect member countries by restricting foreign competition.

Finally, Molchanov postulated, "In June, the temporary tariffs would go into effect. Down the road, we would expect to get news on the long-term resolution. The devil is in the details on these things. If the tariff is replaced with some kind of quota or cap, then obviously the industry will want to know what the details are."

The European Commission put out its own statement this week, to deal with the rumors swirling around the temporary ruling, pronouncing, "At this stage, any potential temporary measures are an emergency response to rebalance the market place for European companies facing life-threatening dumping and unfair competition from China's solar panel industry. Currently, 30 000 jobs are at risk in that sector. The Commission is obliged to see the ‘big picture' and take decisions based solely on the evidence. The decision on possible provisional measures in this case must be taken by 5 June according to the legal process."

Edited by Vera von Kreutzbruck.

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