Solar ETFs, which were shining brightly since the start of this year, took a beating lately on apprehensions over higher import duties on Chinese solar panels and other related products. The U.S. Department of Commerce announced last week that duties of 18.56% to 35.21% would be levied on cheap Chinese products in an attempt to boost the U.S. solar market and level the playing field.
Prior to this, in 2012, the Commerce Department levied anti-dumping duties of 25.96% and countervailing duties of 15.24%. Tariffs were only applied to the cells used to make the panels. The added burden stems from the unfair subsidies that Chinese manufacturers are offered by their government. The duties will now be enforced on both cells and final solar panel products.
The decision is linked to one of the prime charges by SolarWorld Industries America, a German solar manufacturer with major operations in the U.S. The allegation says that Chinese solar product makers are enjoying the undue advantage of escaping the duties that were enforced by the Department of Justice in 2012.
The duties now await the commerce department’s confirmation on or around August 18 which will undergo a review program for 45 days by the US International Trade Commission until the final mandate is passed around October 3.
Winners & Losers
While this news came as a boon to the U.S. solar companies including First Solar Inc. (FSLR), SunPower Corp. (SPWR) and SunEdison Inc. (SUNE), Chinese companies like JinkoSolar Holding Co., Ltd. (JKS ), Yingli Green Energy (YGE) and Trina Solar Inc. (TSL) were punished badly (read: Solar ETFs Shine on Trina Solar Earnings Beat).
Overall, TSL, YGE and JKS lost 4.5%, 4.1% and 7.5% following the news, while FSLR, SPWR and SUNE added 3.9%, 6.9% and 6.1% respectively, though the U.S. stocks too started to slump lately, probably on concerns that purchase of solar panels by domestic sources will become costlier now and curtail demand.
While U.S. stock performance initially turned lucrative winning over the Chinese companies, the ETF view does not appear that smooth. There are presently two ETFs available in the solar energy space – Guggenheim Solar ETF (TAN) and Market Vectors Solar Energy ETF (KWT). Both the ETFs have considerable exposure in China which put the duo at risk (read: 3 Green Energy ETF Buys for St Patrick's Day).
American firms dominate TAN’s portfolio with nearly 42%, followed by China (25.26%) and Hong Kong (16.13%). Coming to KWT, U.S. takes more than one-third of the portfolio, closely followed by China (34.0%) and Taiwan (15.7%). Quite understandably, TAN and KWT lost 2.33% and 1.71%, respectively, last week.
Can the ETFs Rebound?
Solar ETFs are sitting on the fence at present. Research agency GTM elaborated on the dependence of the U.S. on Chinese imports saying about 50% of the solar equipment installed in the U.S. last year were imported from China. In the rooftop solar sector, another flourishing area, the Chinese contribution was 71%.
On the other hand, investors should note that solar industry in the U.S. expanded about 76% in 2012 despite the levy of import duties. Moreover, the demand scenario is shaping up well for the sector as evident from the stellar Q1 installation number.
According to an analyst, total solar panel installations will likely hit 6.6 gigawatts this year, thanks to the increased demand from residential rooftop systems and more than 12 gigawatts of work-in-progress utility projects (read: Will Solar ETFs be Powered by Earnings Beat?).
There is no doubt that cheap Chinese imports contributed in pushing these activities northward, but the recent levy might give some benefits to homegrown companies to expand. This is a dicey situation for the U.S. solar companies with scope for market share gain at one hand and likely loss of customers in view of price rises on the other.
Whatever be the case, the decision is yet to get the official seal. Till then, investors can try out Solar ETFs as the broader market trends remain enthusiastic, but with great caution.
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