Bottom line: The EU is likely to resolve its latest dispute with Chinese solar firms over implementation of a year-old pricing agreement, but the clash will undermine trust and hints at future conflict over the issue.
After several months of relative quiet, Chinese solar panel makers are back in the headlines this week with another looming trade dispute in Europe. This particular story, and much of the industry’s woes over the last 2 years, stems from broader western allegations of unfair government support for Chinese panel makers. In this case China and the EU signed a deal a year ago to resolve their dispute, but now the EU is accusing several Chinese firms of violating the deal.
The EU had previously threatened to levy punitive tariffs on Chinese panel makers, saying they received unfair support through policies like cheap loans from state-run banks and low-cost land from local governments. Washington made similar claims and ultimately did impose punitive tariffs, but the EU took a more conciliatory approach and reached a settlement after the intervention of several top government leaders.
The China-EU agreement reached last year didn’t really address the issue of unfair government support. Instead it attempted to level the playing field by calling on Chinese companies to voluntarily raise the prices of their panels to levels comparable to those of European firms. (previous post) Now we’re getting word that the European Commission has told at least 3 Chinese panel makers it believes they may be violating the agreement. (Chinese article)
It’s unclear if the action is limited to the 3 firms, which are named as Canadian Solar (Nasdaq: CSIQ), ReneSola (NYSE: SOL) and ET Solar, or if more names may also be involved. At least one of the trio, Canadian Solar, has issued a statement saying the European Commission has notified it of “potential issues” associated with its compliance with the agreement. (company announcement) It added it believes it has complied with the deal, and that no decision has been made yet by the EU.
The news sparked a sell-off for Chinese solar panel stocks, with ReneSola and Canadian Solar down by 6 percent and 2 percent, respectively, in the latest session. ReneSola is particularly vulnerable in this instance, since it relies completely on exports for its sales. Following the sell-off the shares have lost more than half of their value over the last 6 months, and are coming close to the $1 mark. Shares of other major solar panel makers also sagged, with Yingli (NYSE: YGE) and Trina (NYSE: TSL) also down by about 3 percent.
It’s slightly surprising that Canadian Solar investors were relatively less worried about the news, even though the company was named in the reports and confirmed the situation. But the fact of the matter is that investors have probably worried about this particular agreement ever since it was signed a year ago, and companies are being punished based on their exposure to the EU market.
The reason for investor concerns is relatively straightforward. Put simply, Chinese firms are famous for reaching this kind of deal, and then doing everything they can to undermine such agreements if doing so will benefit themselves. Thus, for example, a Chinese firm may sign an agreement agreeing to raise its prices, and then immediately start looking for loopholes in that same agreement that allow it to continue charging its previous lower prices.
It’s hard to comment in any detail on this particular development without knowing more about the European Commission’s queries. Those queries are almost certainly being prompted by complaints from local solar panel makers, who are hugely distrustful of their Chinese rivals. At the end of the day, the 2 sides will probably resolve this issue and the EU may implement a stronger system to ensure compliance. But this development will undermine the credibility of the Chinese companies, and could also hurt their sales as they are forced to raise prices to fully comply with the settlement.