Solar: Trina Looks Up, Beijing Waits On Tariffs

Trina margins stabilize

Several news bits from the solar sector show more signs of stabilization after a 2-year-old downturn, even as an ongoing trade war looks set to escalate. The big picture in these news bits does seem to reflect some cautious optimism returning to the sector after the prolonged downturn due to massive oversupply. But that turnaround remains very tentative, and the sector could easily return to turmoil if the current trade war continues to escalate.Let’s start by taking a look at the latest guidance from Trina (NYSE: TSL), one of the sector’s top players, whose newly updated first quarter guidance looks relatively positive. The most upbeat news has Trina confirming its previous guidance for first-quarter gross margins in the 1-3 percent range, which looks like a continuation of the steady improvement from 0.8 percent in last year’s third quarter and 1.9 percent in the fourth. (company announcement)

On the less positive side, Trina made a downward revision to its previous first-quarter sales forecast, dropping the number by about 7 percent to 390-400 MW. Investors seemed to focus on the good news with the improving margins, bidding up Trina shares by 4.6 percent after the report came out. Other solar shares rallied as well, with Yingli (NYSE: YGE) and JA Solar (Nasdaq: JASO) up 3.8 percent and 6.9 percent, respectively.

While Trina’s report pointed to stabilization, the outlook was much less certain in an ongoing trade war that has seen the US impose anti-dumping tariffs on Chinese solar cells and the European Union preparing to take similar action. Chinese media are reporting that a retaliatory probe by Beijing is nearly complete into unfair government support in the US, Europe and South Korea for makers of polysilicon, the main component used to make solar cells. (English article)

Analysts cited in the report say results of the probe have been ready for a while now, but that Beijing is waiting first to see if the EU will move ahead with plans to finalize its punitive tariffs of 37-68 percent. China has previously indicated it wants to negotiate a compromise to diffuse this crisis, but so far we haven’t seen any signs that the EU wants to take this approach.

I personally can’t blame the EU if it doesn’t want to negotiate, as Beijing has had a year now to try and start such talks and basically did nothing until the EU recently finished its probe. (previous post) But all that said, I honestly can’t see how punitive tariffs by China against imported polysilicon will help anyone. Such tariffs will drive up costs for Chinese solar cell manufacturers, and will also  hurt US and European polysilicon producers that count China as one of their major markets.

Finally let’s take a look at bankrupt former superstar Suntech (NYSE: STP), which has just announced that a majority of the holders of more than $500 million in its overdue notes have agreed to a new extension on talks to renegotiate the debt. (company announcement) The bonds were originally set for repayment in March, but Suntech defaulted due to its lack of cash. A majority of the bondholders agreed to an initial extension of the repayment until May 15, and bondholders have now agreed to further extend the date until June 28.

This latest extension may indicate the 2 sides believe an agreement can be reached and Suntech may ultimately be able to work out its cash problems, which may explain the 11 percent rally in Suntech shares after the news came out. Still, the road ahead for Suntech will be filled with challenges, and I would still only give the company a 50-50 chance of being able to emerge from bankruptcy as an independent, publicly listed company.

Bottom line: The latest guidance from Trina indicates the solar sector continues to stabilize, but further turmoil could lie ahead due to an accelerating trade war.

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