June stock report: The EC and China try to cut a deal


Right now, investors in the solar equities market are experiencing something similar to what the polar bears must be suffering as the ice cap melts. They don’t know which way to jump for long-term safety and security, and even their current position is uncertain.

It's a time of ambiguity for solar stocks — and Europe and China's struggling manufacturers are holding on by the thinnest of margins as they await the outcome. Specifically, SolarWorld AG (SRWRF) was down 47.3% on the New York markets this month; Abengoa SA (ABGOY), down 9.5%; LDK Solar (LDK), down 24.3%; and ReneSola (SOL) down 5% as markets opened on June 28.

What triggered the tension? On June 6, the European Commission (EC) began imposing punitive, antidumping (AD) duties on crystalline photovoltaic solar modules, cells and wafers manufactured in or imported from China. Levies of 11.8%, a rate much lower rate than originally had been contemplated, are being enforced for the first 60 days – a step that the EC hopes will persuade China to engage in conciliatory trade talks. Indeed, if the two major trading partners fail to reach a compromise at the bargaining table, provisional import duties averaging 47.6% will go into effect from August through early December.

China is the European Union's second-largest trading partner behind the United States — and the EU is China's biggest trading partner. Following discussions on June 21 at the annual EU-China Joint Committee meeting in Beijing, Chinese Commerce Minister Gao Hucheng emphasized that the importance of that trade dispute lay not only in the amount of goods involved, which is obviously substantial, but also in the need for cooperation by China and the EU in both the manufacturing and installation sectors of the solar industry. For his part, European Trade Commissioner Karel De Gucht confirmed that his team is looking very seriously at solutions — including pricing agreements and import limits.

In a conversation with pv magazine, Pavel Molchanov, senior vice president and equity research analyst at Raymond James & Associates in Houston, commented, "The Chinese manufacturers and European buyers and developers just don’t know what the tariff policy ultimately will look like. One possibility is that the negotiations will fall through, leading to extremely high punitive tariffs imposed on a long-term basis. From the standpoint of China's Trina Solar, Yingli Green Energy and JinkoSolar, that would be the worst-case scenario."

Conversely, Molchanov said, "The best-case scenario would leave a small tariff in place (in the 10% to15% range) at the cost of limiting the volume of imports of Chinese panels into the European market. That would still be worse than what has been the case up to this point, but it wouldn't be a disaster."

The view from abroad

Meanwhile, the U.S. industry is watching the developments across the pond and across the Pacific with great interest — but with little interference or participation. "American stocks are trading off a whole different set of fundamentals," noted Gordon Johnson, managing director at New York City-based Axiom Capital. However, he told pv magazine, "If the EU is weak, that’s bad for all stocks; it has a negative impact on the markets worldwide."

Johnson cites two developments that were expected to drive U.S. stock prices up this month but probably will have significantly less impact than expected.

First, there is the Master Limited Partnerships (MLP) Parity Act, which was re-introduced in April by U.S. Senators Chris Coons (Democrat-Delaware), Jerry Moran (Republican-Kansas), Debbie Stabenow (Democrat-Michigan) and Lisa Murkowski (Republican-Alaska) – and is now in jeopardy.

The bill was expected to level the energy playing field by giving investors in renewable energy projects access to a decades-old corporate structure that has been available only to investors in fossil fuel-based energy projects. Master limited partnerships combine the funding advantages of corporations and the tax advantages of partnerships. However, Coons, the leading advocate of the bill, moved from the Senate’s Committee on Energy and Natural Resources to the powerful Appropriations Committee last week, leaving the MLP measure orphaned and unlikely to pass into law.

Axiom's Johnson believes, "Now that Coons is no longer on the committee, this bill is going to be a lot harder for him to push. It never had real bipartisan support, but the Republicans said they would support the act if the Production Tax Credit and the solar Investment Tax Credit were eliminated, which Coons was never in favor of doing."

Molchanov is even more pessimistic. "There is no political, realistic prospect of the MLP Parity Act becoming law in this current Congress, period."

The second expected development – President Barack Obama's climate change speech, delivered at Georgetown University in Washington, DC, on June 25 — had been ballyhooed as a game-changer. Obama had intended to single-handedly reboot the nation’s strategy for staving off climate change by outlining a set of executive actions geared to reduce carbon emissions, build stronger and safer infrastructure to withstand extreme weather, and lead international efforts to fight global warming.

And solar stocks did rise — if only minimally and briefly — on the news of the speech.

However, Molchanov comments on the response to and eventual consequences of the address were caustic. "All of the policies that Obama talked about either were too minor to matter or were restatements of existing policies. As far as the more actionable or meaningful announcements, these things were telegraphed well in advance. Cutting the carbon emissions of power plants is foregone conclusion by now — and the Interior Department has been working on speeding up approvals and permitting for solar installations on federal lands for months."

"What's more," he said, "the piecemeal , purely regulatory approach that the president discussed is not going to create any significant changes in the way the U.S. solar market is evolving. I think the president understands that, in the current political environment, Congress is not even going to consider a carbon tax, cap and trade, or a national renewable energy portfolio. As a result, this speech just provided us with incremental steps [that will have little impact on the market]."

Gaining strength or going south?

So what stocks are doing well? Axiom's Johnson is optimistic about:

• SunEdison (SUNE), up 7.4% this month, with a $100 million infusion for distributed generation from Wells Fargo;

• SunPower (SPWR), up 2.1% (as one of its investments, Milpitas, California-based solar panel producer Solexel, received $14.7 million in equity investments from 12 backers);

• SolarCity (SCTY), down 21.9% (but up overall for the year, partially on the charisma of its chairman, Elon Musk, and with a big Walmart win on June 25);

• Suntech (STP), which is down 2% and effectively bankrupt, but still is winning projects);

• Yingli (YGE), down 7.5% (but, again, up 40.5% for the first six months of the year); and

• Canadian Solar (CSIQ), up 16.1% for the month and 19.3% for the last week on news of a deal with Samsung Renewable Energy Inc. to open a new manufacturing facility in Ontario. Canadian Solar Chairman and CEO Shawn Qu said the deal highlights his company's rapidly growing downstream solar power solutions business as it develops manufacturing capabilities for certain kinds of solar equipment.

A glaring omission from that list is Tempe, Arizona-based thin-film manufacturer First Solar (FSLR). Johnson said that the guidance from First Solar has been misleading. "If you look at First Solar’s numbers, 67% of the 2 GW — or 1.3 GW — that they expect to ship this year has not been contracted. In addition, 77% of the 2.5 GW — or 1.9 GW — that the company "expects to be shipped in 2015" has not been contracted.

"In fact," he continued, "if you look at the news from First Solar since its analysts day in April, just about zero large projects have been announced. When you consider that the lead time for a project is six months — and that, every day that goes by, they are failing to announce more projects in the pipeline — it's obvious they are not going to hit their 2014 numbers."

As for Polchanov, he commented, "I wouldn't call Suntech a strong player. I agree with Yingli and Canadian Solar, and I would add Trina Solar [TSL — down 14.5% for the month; up 37.6% for the year to date] and JinkoSolar [JKS — up 1.1% for the month; up 48.6% for the first half of the year]."

The author of this article has made no investments in solar securities.

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