Out of China's Frying Pan and Into its Fire
Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The future fate of green energy rests in the hands of America’s future President. It was evident in the First Presidential Debate that Governor Romney is not a fan of government subsidies to renewable energy producers. President Obama seems to be on the other side of the aisle.
Politics aside, the issue of green energy in my view is not debatable. There’s no denying the fact that renewable energy, especially solar energy, remains an essential alternative source of energy to America’s other less environment-friendly and foreign-reliant power generation sources. Additionally, despite the pressures of high unemployment, the green energy industry created over 3.1 million green jobs. One segment of the green energy sector, the Solar industry, is slowly moving towards grid parity and commodization has made it more affordable to use in present times, compared to half a decade ago. Demand has seen significant growth over the past two years and according to GTM Research, the production capacity of solar industry is up from 1.8 GigaWatts in 2011 to 3.2 GW in 2012.
Source: GTM Research
Another factor that goes in favor of the green energy industry is the heavy retirement of coal-fired plants across the country--partly because of the country’s switch to natural gas and partly because of environmental regulations. Reuters reports that in the next five years, more coal-fired plants will be closed down which are forecasted to have a production capacity of 59,000-77,000 Megawatts. While major US utility companies are busy building new natural gas plants, it may be the right time for renewable energy companies to move in to fill the gaps created by the coal-backed plants.
Keeping in view that other renewable energy producers may win in the long run, however, there’s a part of the US solar industry which recently felt shock-waves from China that shook it to its core.
The process of Photovoltaics, used to generate solar energy, mainly makes use of mono- and poly-silicon and cadmium telluride as the fundamental inputs, amongst a few others. The following chart shows the top international producers of polysilicon in the world. Amongst the leading producers, privately held Hemlock and MEMC Electronic Materials (NYSE: WFR) are the two noteworthy US companies. LDK Solar, GCL Solar and Daqo New Energy are the Chinese manufacturers.
Earlier this year, the US imposed anti-dumping import duties of over 35% on Chinese solar equipment manufacturers. The idea was to bar the Chinese competitors from selling equipment at very low costs to take away market share from the US manufacturers. The US Department of Commerce also recommended duty on Chinese Solar energy companies that import equipment from back home. This varies between an approx. 14.8% for imports made by Suntech, 16% by Trina Solar (NYSE: TSL) and 15.2% for all other Chinese manufacturers. However, the US government’s tax imposition has put the country at a position where, a step taken forward or backward, makes it lose anyways.
The Ultimate Dilemma
If the country goes ahead with these tariffs, then there is a good chance that China will retaliate with a punitive tariff on imports from US solar companies in China. The Chinese solar equipment manufacturers make up roughly 60% of the world’s total production and the US solar market alone buys 20% of it. China wouldn't want to lose its US market share at any cost. Chinese companies, including GCL and LDK Solar have made their government aware of their post-tariff troubles in their ministry’s early investigation and the Chinese Government has come into motion to settle the issue with the US. If punitive tariffs are actually adopted, U.S. polysilicon makers Hemlock and MEMC Electronic Materials would be in serious trouble.
If the government retreats from its move, competition from low-priced Chinese companies will continue to elbow out US companies from the industry. The prices of polysilicon have fallen to such low levels that they don’t even cover the manufacturers’ production costs anymore. The intense competition in the industry and the hefty tariffs are already driving many out of business for generating losses after losses. Again, this would jeopardize the survival of the two US companies.
Romney is of the view that China's extremely cheap pricing is unfair to local companies. It is being speculated that his criticism of Chinese policies may spark a trade war between the two countries, if he takes office. The Obama administration, that has imposed the current tariffs, doesn't see it any differently but the President apparently seeks stronger ties with China as a valuable trading partner. We don't really know in whose court the ball will finally rest, but one thing is certain--the future of the two US polysilicon manufacturers, Hemlock and MEMC Electronic Materials, looks bleak. My stance is bearish on MEMC Electronic Materials. Hold until the elections.
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