Solar Tariffs Round II Begins, Yingli In New JV

Yingli in smart new JV

The new year has just begun, and already we’re getting signals that 2014 will be full of new twists and surprises for the solar panel sector as it struggles to emerge from its downturn dating back nearly 3 years. A clash involving Chinese panel makers accused by western rivals of receiving unfair state support looks set to enter a new phase, based on an announcement of new action in the US by SolarWorld (Frankfurt: SWV), the German panel maker that has led the charge against the Chinese companies. Meantime, a separate new joint venture announcement from Yingli Green Energy (NYSE: YGE) looks smart, and reflects the new reality that China will become a major driver of solar plant construction in 2014.

The solar sector’s prolonged downturn is the result of massive oversupply, following a build-up in China that has the nation now producing more than half of the world’s solar panels. That build-up has led to resentment from western panel makers, who say the Chinese build-up was largely the result of unfair state support via incentives ranging from tax breaks to cheap bank loans. Both the US and European Union conducted probes into the matter, and the US imposed punitive tariffs against the Chinese manufacturers last year after determining the claims were true.

Now SolarWorld, which made the original complaint in the US, is saying it will file a new complaint with the US International Trade Commission (ITC) to close a loophole that has allowed many Chinese panel makers to avoid the punitive tariffs. (company announcement) The loophole allows Chinese-made modules to avoid the tariffs if they contain solar cells made in countries outside China. Solar cells are the key component used to make modules, which are the finished product used to generate solar power.

This particular loophole was widely discussed when the US first announced its tariffs last year, and many of China’s solar panel makers said they would be able to avoid the punishment by using solar cells manufactured offshore. I find it difficult to believe the US was unaware of this loophole when it announced the original sanctions, since it was so widely discussed at the time. Accordingly, I doubt SolarWorld’s new complaint will result in any new action by the ITC. Still, the issue is likely to make headlines during the year, and there’s a small chance we could see some new punitive tariffs to close the loophole.

Moving on, Yingli’s newly announced joint venture with Datong Coal Mine Group is much less controversial and looks like a smart business model as China gets set to embark on an ambitious construction program to build solar power plants with 35 gigawatts of capacity by 2015. We’ve already seen a number of major new projects announced recently by other panel makers, including Trina (NYSE: TSL) and ReneSola (NYSE: SOL).

But unlike most of the previous tie-ups that involve partners with little or no experience in the energy sector, this new venture looks a bit smarter because Datong is China’s third largest coal producer and thus should have quite a bit of experience in the sector. (company announcement) Equally important, Datong’s status as a company with a real business means it should have a strong cash flow to pay for new projects. That contrasts with many other new project developers, which look mostly like special entities set up by state-run organizations to execute Beijing’s ambitious solar construction program.

For all those reasons, this new tie-up looks like a smart move that could serve as a template for other panel makers to follow. I’ve previously said there’s a real danger that many of these new projects could run into difficulties because plant developers may lack financial resources and operating expertise needed to succeed. But on the surface at least, this new Yingli partnership looks like it should have a good chance of success and could lead to a major new source of reliable business for Yingli.

Bottom line: A new anti-dumping complaint by SolarWorld in the US is unlikely to succeed, while Yingli’s new joint venture looks like a smart template for new solar plant construction in China.

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