The Department of Commerce Finding

· The U.S. Dept. of Commerce on Jan. 27, 2012 makes a critical circumstances finding on Chinese solar cells/panels.

· The finding was based on import data from Suntech Power and Trina Solar [Editor's note: see Trina response here] for the three-month periods of October to December 2011 vs. July to September 2011 and the four-month periods of September to December vs. May to August 2011.

· All the data points show that imports tracked greater than 15 percent in quantity and value, and in Department of Commerce parlance, this degree of activity is termed as 'Massive' if it happens in a short period of time.

· U.S. Customs and Border Protection's Port Import Export Reporting Service (PIERS) data shows a massive surge in solar cell/module imports in recent months. Suntech Power's imports have surged 76 percent in November 2011, compared with October 2011, and Trina Solar's imports have risen 209 percent in the 1H December 2011, compared with the 1H November 2011.

· We also note that PIERS data shows that Chinese imports of solar cells/modules in January through November 2011 are up 346 percent by quantity and 138 percent by value. In November 2011 alone, Chinese solar cell/module imports surged 438 percent in volume and 47 percent in value compared to November 2010.

· The critical circumstances finding is likely based on PIERS data, and if the Department of Commerce imposes countervailing duties (CVD or anti-subsidy), they will apply 90 days retroactively to all Chinese solar cell/module imports brought into the U.S. from December 3, 2011.

· We note that the preliminary determination on CVD is now scheduled for March 2, 2012 and was recently postponed from February 13, 2012, and was also previously postponed from January 12, 2012. We believe further delays are unlikely.

· We note that aside from CVD duties, the Department of Commerce is scheduled to issue a preliminary ruling on anti-dumping duties (AD) on March 27, 2012, with a separate finding on "critical circumstances" for the anti-dumping investigation. Further, a final determination of both CVD and AD will only be complete by first week of October 2012.

Bottom Line

· The "critical circumstances" finding is the writing on the wall for Chinese solar cell/module imports in terms of what to expect on March 2, 2012. The U.S. is sending a clear signal that rules of engagement on trade do matter.

· Given compelling evidence of China's state-sponsored asymmetric competition and predatory capitalism in solar PV, we are firm in our view that China's abuse of competitive/trade rules has destroyed capital efficiency, created structural imbalances across the industry, and suppressed price discovery, capital formation, risk and mitigation.

· Solar PV stocks are recovering from the sharp and vicious correction seen in 2011, and trade on tangible book value (TBV) based on survival economics, not earnings. We do not expect earnings for most c-Si players until 4Q12. We maintain our constructive stance on the sector (since November 30, 2011) despite ongoing challenges in the U.S., Germany and China, as cost elasticity will take time but will catch up to price elasticity.

· Despite some cries from solar rooftops that the U.S. imposition of tariffs on Chinese solar cells/modules will lead to major job losses, we believe that the solar industry and companies will adjust to the altered dynamic as they have to the reduction of subsidies every year, and if anything, will emerge stronger based on innovation and healthy competition.

 Ample Evidence in the Public Domain

• As we noted previously, the disconnect between solar module ASP and cost is not easy to dismiss. For 4Q11, shipment-weighted ASP guidance for Chinese solar PV modules tracks $1.04/W, but actual ASPs will likely be below cost, given module pricing in the ~$0.80/Wp to $0.90/Wp range in December, which saw a dramatic ramp in installations.
• We note that costs are sticky (despite lower poly/materials costs) and estimate that the Chinese c-Si module cost structure will track ~$1.03/Wp (including ~$0.07 adjustment for shipping, warranty, insurance, capacity ramp, and stock compensation).
• For reference, 3Q11 shipment-weighted ASP for publicly listed Chinese solar PV companies was ~$1.28/W versus costs of ~$1.24/W (and ~$1.15/W normalizing for write-offs). This is for leading, publicly listed companies and not the second- and third-tier names in the private domain that are largely scale- and/or cost-challenged. However, the true cost structure stacks up much higher when extensive, wide-ranging direct and indirect subsidies and other costs are included.

Hari Chandra Polavarapu is the Managing Director of Solar/Cleantech Research at AURIGA USA LLC.