According to Axios, President Trump is very likely to impose tariffs on solar imports if the International Trade Commission finds "injury" in the Suniva/SolarWorld Section 201 trade case. "I would place the odds of the president agreeing to some type of remedy at 90%" is not the kind of quote solar manufacturers or investors want to hear at this point, but it's what one unnamed Trump official told the publication late last week.
For background on the case, I've covered the Section 201 trade case here and here, but until recently, the chances that it would result in the government setting minimum prices on solar component imports and imposing tariffs seemed low. As the case keeps moving forward -- and Trump seems to be hunting for opportunities to implement tariffs -- it now appears that investors should brace for the likely outcome of the president disrupting the entire solar power industry.
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First to feel the heat from solar tariffs
Let's start by considering what will happen on the installation side, where the impact of tariffs is most clear. The cost of solar modules would go up if any actions are taken by the president, and the cost of every new residential, commercial, or utility scale project would rise as well. GTM Research estimates that more than half of all projected solar installations from 2019 to 2021 would be cancelled.
On the residential side, Tesla (NASDAQ: TSLA), Sunrun (NASDAQ: RUN), and Vivint Solar (NYSE: VSLR) would all be hurt by higher module prices. But a residential solar installation is nearly three times as expensive as a utility-scale installation on a per watt basis, so increases in module costs will have a muted impact on the homeowners' total expense in comparison to utility project developers.
If tariffs are put in place, I could see these installers focusing on higher efficiency modules, which have a higher cost per watt but squeeze more power from each roof. They could also raise prices incrementally as manufacturers adjust strategies.
Utility-scale installers like sPower -- recently purchased by AES (NYSE: AES) -- and the development arms of Canadian Solar (NASDAQ: CSIQ), First Solar (NASDAQ: FSLR), and SunPower (NASDAQ: SPWR) will also take a big hit. In fact, U.S. projects could be canceled if tariffs are put in place because they will be rendered unprofitable. Companies that are dependent on utility-scale projects in the U.S. will be hurt the most because they're the most price sensitive.
Solar manufacturing is up in the air
The big unknown is how this will affect solar manufacturers domestically. First Solar is the only company with significant U.S. manufacturing capacity, with 550 MW of capacity being built in Ohio and the option to grow to 1.1 GW. SunPower has a small pilot plant and may be looking to build next generation capacity in the U.S., but for now, most of its capacity is in Asia.
SunPower also has about 400 MW of capacity for its P-Series product in Mexico, and Canadian Solar has about 30 MW of module capacity in Canada, either of which could potentially skirt tariffs because of NAFTA.
Outside of these plants, most of the manufacturing capacity of JinkoSolar (NYSE: JKS), JA Solar (NASDAQ: JASO), Trina Solar, Hanwha Q-Cells (NASDAQ: HQCL), Canadian Solar, SunPower, and First Solar resides in Asia. And that capacity will be a direct target of any Trump-imposed tariffs.
The devil will be in the details, though. A price floor could benefit a company like SunPower, which already sells panels at higher per-watt prices because it makes more efficient products. First Solar could also avoid tariffs if rules are written such that the tariffs apply only to silicon-based solar cells and not thin-film products of the type it makes. Tesla is making modules and roof tiles in the U.S., but it's Panasonic that is making the solar cells for them, and it's likely importing a lot of its materials today. Until we know precisely what the tariffs will apply to, and how Tesla is compensating Panasonic, it will be tough to know if Gigafactory 2 will be a benefit for the company's solar ambitions.
We've also seen solar manufacturers get around tariffs by moving processing equipment to Vietnam or Malaysia to avoid tariffs specific to Chinese solar cells. The impact on specific companies could change depending on whether the rules are written broadly or are focused on specific countries of origin.
What is clear is that most solar manufacturers will be hurt by the tariffs. A small number could benefit if they are able to get around them somehow, but most will have to look outside the U.S. for demand in the future.
Don't expect a smooth ride for solar stocks
The ITC is expected to send its recommendations to Trump by the end of this month. If it recommends price floors and/or tariffs, expect chaos in solar stocks. Installers are the most likely to take a hit, given that there's no upside to them in more expensive solar modules. Chinese manufacturers will also see a negative impact -- one that will force them to turn their focus to other international markets.
The two possible beneficiaries are First Solar and SunPower, and the impact of a protectionist decision on those companies can only be estimated once we know the final rules that get written by the administration. Tesla could also benefit depending on how rules and its own supply agreements with Panasonic are written, although I would bet that any windfall would go to Panasonic.
Investors should buckle up for a crazy end to 2017 for solar stocks.
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