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    Wednesday, December 04, 2013


    The EU-China Deal; What We Know and Don't Know

    August 2013 (Greentech Media Research)


    After months of uncertainty, the standoff between the European Union and Chinese solar manufacturers has finally reached a resolution. An agreement consisting of a minimum price floor and a cap on import volumes was adopted with unanimous consent by the European Commission, and agreed to by 90 out of 140 of the Chinese companies covered in the initial complaint. The manufacturers included in the agreement will avoid paying hefty anti-dumping duties, which rose from 11.8 percent to 46.7 percent on August 6th, on all their exports to Europe that fall under the volume cap. The main findings regarding how the price undertaking will impact demand are as follows:

    • The price floor and volume cap are dynamic arrangements that will enable Europe to take advantage of market-wide cost reductions and avoid supply shortfall. However, the means for adjusting these measures is not yet clear, and the exact price and amount is unconfirmed.

    • The price floor will be set using publicly available data from pvXchange and Bloomberg. At the time of the price undertaking, the price on pvXchange for a Trina solar 240W polysilicon panel was €0.56/W($0.74/W). The floor will change with 5% fluctuations in price, likely adjusted on a quarterly basis.

    • The volume cap is widely reported to be 7 GW, which would be consistent with comments from EU Trade Commissioner Karel de Gucht. The China Chamber of Commerce is assigning the allocation of the volume cap among the manufacturers who signed onto the agreement. Any shipment volume exceeding the cap will be subject to 46.7 percent import duties.

    • A €0.56/W ($0.74/W) price floor would hurt the financial viability of larger projects across Europe already facing weakening policy support. However, residential demand is likely to stay stable- and may even grow as countries with an active developer base losing business from larger projects move to the residential segment.

    • While shipments from Chinese companies to Europe in 2H13 will be low— likely between 0.5 and 1.5 GW — installations will be higher than in 1H13 as developers clear out inventory ahead of tariff cuts in 1H14.

    There are still several open questions on the deal:

    • How will the price floor be determined and communicated? How often will it be adjusted?

    • Is the volume cap based on projected demand for Europe, and if so, what is the baseline? How will this be adjusted for higher or lower demand?

    • How is the volume allocated among Chinese manufacturers?

    • How will the EU Trade Commission monitor and enforce the price?

    • Will residential consumers absorb increased costs for modules, and seek higher efficiency products? Or, will demand for lower efficiency products increase as customers strive for self-consumption?


    The trade dispute stemmed from accusations that Chinese companies were selling solar products into the EU market at prices well below fair value. In the course of its investigation, which began in September 2012, the European Commission found that subsidies from the Chinese government enabled 140 companies to sell panels on average at 88 percent below cost—allowing these manufacturers to capture 80 percent of the EU market in 2012. This conclusion led to provisional tariffs of 11.8 percent starting in June, and prompted a two-month negotiating period between the European Union’s trade representative Karel De Gucht and the China Chamber of Commerce.

    This is the largest market dispute in the history of these two countries, with total sales of solar equipment exceeding $28 billion in 2011. Although the new price undertaking will replace the 46.7 percent tariffs for the 90 companies who agreed to the terms, the investigation by the EU into unfair trade practices will continue.

    Structure of the Deal

    Remarkably few details on the deal have been released so far, but the broad contours are well-known: the agreement sets a minimum price for modules, cells, and wafers as well as a maximum volume that can be imported into the EU without invoking import duties of 46.7 percent. To date, neither party has specified the exact minimum price. It is known that efforts to peg it to the price of raw materials proved unsuccessful, so the commission will use available data from Bloomberg and pvXchange to set the price. The widely reported price floor of $0.74/Wis based in the spot prices listed on the pvXchange database at the time of the agreement. GTM Research sources confirm that the price floor will be updated about every 3 months, which meets expectations that the floor would be respond to market conditions so that Europe is not precluded from industry-wide cost savings. GTM Research sources also confirm that a 5 percent fluctuation in prices will prompt a change, although it has been reported that those adjustments could take up to 9 months to take effect. During the dispute, many European manufacturers requested tariffs of 80 percent and are unhappy with the alleged price floor of $0.74/W, which they believe to be far too low.

    The annual volume cap, although widely reported at 7 GW, has also not been confirmed by either party. EU Trade Commissioner Karel De Gucht asserted the volume cap would be low enough to prevent Chinese companies from having the 80 percent market share they boasted last year, but high enough to prevent a supply shortfall since European companies cannot provide the full difference. Sources have posited that the allocation will be based 65 percent on historical shipping record and 35 percent by other factors— such as brand awareness, technological competitiveness, and product quality differentiation.

    Others have stated that the tier one manufacturers have each been allocated 10 percent of the total volume. It is important to understand that while the quantity was set by the European Commission, the allocation to different participating companies will be set by the Chinese Chamber of Commerce. This allocation has not been revealed. Around 1.8 GW remains to be allocated after Chinese manufacturers reportedly shipped 6 GW throughout the year ahead of the settlement.

    Finally, the European Commission has discussed options for preventing Chinese manufacturers from skirting the price floor and volume cap. Methods include selling products at the agreed price and then discounting inverters or mounting kits, issuing retroactive discounts, and setting up manufacturing plants outside of China in other low-cost Asian countries. Early in the dispute, Chinese companies shipped into Croatia to avoid tariffs. No clear method for ensuring the conditions of the agreement are met has been determined.

    EU Market Implications

    The impact of the minimum price floor on European demand varies by market segment. In 2H13 and 1H14, there will be reduced demand for large-scale projects as the combination of higher module prices and reduced policy support from EU governments kicks in. Alternatively, residential demand will likely remain stable or even increase.

    Many large projects, certainly including systems over 1 MW and perhaps including systems over 100 KW, were on the edge of financial viability even with prices in the $0./W range and strong government incentives. As a result, cuts to feed-in-tariff programs across Europe and a presumed price floor of $0.74/W will significantly hurt demand. These developers may look at strong demand in Asia for new opportunities. For the residential and commercial market, the price floor is not likely to affect demand because these projects are still cost effective. However, it may actually lead to growth in some countries, such as Germany, the UK, and Italy, where well-established installer bases who are losing other local market segments may rush to the residential space.

    Aside from the volume of residential demand, the price floor could also alter the nature of what systems are installed. The current trend towards self-consumption, resulting primarily from feed-in-tariffs dropping below retail rates, has altered the objectives of many residential consumers. Instead of seeking to produce the maximum amount of electricity in order to take advantage of the feed-in-tariff, consumers are now optimizing their systems for self-consumption. This will likely lead to a trend in smaller systems being installed.

    Under these new circumstances, how will the price floor affect demand? It is possible that the price floor will lead to increased demand for higher efficiency systems, as companies seek to differentiate their products as prices approach the floor. This would not be a dramatic shift in markets like Germany but would represent a change in the imports of the UK, France, and Italy. If this occurs, there is speculation that the agreement could push lower efficiency products to other markets— such as the U.S.—as top tier companies’ look for new places to sell their products. On the other hand, consumers desire to use their systems for self-consumption means that they could seek to install a higher number of lower efficiency modules across their roof space.

    Alternatively, some have questioned the value of higher efficiency modules given the trend towards self-consumption, as there is plenty of roof space for lower efficiency, cheaper modules. This would mean residential demand would shift more towards lower priced modules, perhaps from places other than China.

    This lends credibility to the theory that competitors from Taiwan or Malaysia, who had module prices between $0.05/W and $0.10/W higher than Chinese companies before the imposition of tariffs, could seek to take advantage of the price floor to increase their market share. Overall, it remains to be seen how consumers will react, but we see increased demand for higher efficiency modules as more likely given that residential demand in Europe is somewhat inelastic, with the high rates for retail electricity creating more price tolerance from consumers.

    The overall volume of 2H13 shipments to Europe from Chinese manufacturers is likely to be low. If the volume cap is in fact 7 GW, shipments to Europe in the first half of 2013 in anticipation of tariffs are reported between 5.5 and 6.5 GW, restricting second half shipments to between 0.5 and 1.5 GW. This artificial market constraint may be a forgone conclusion, however, as suppliers have already committed much of their second half shipment volume away from uncertainty in Europe and towards the strong demand in Japan, China, and India.

    Despite lower shipments, European installations are likely to be higher in 2H13 than 1H13 as this backlog of shipments gets connected—particularly in key European markets such as Germany and the UK which are facing tariff cuts at the beginning of 2014. There are a few reasons that this surge will be qualitatively and quantitatively different, though, than end-of-year booms in the past. First, it is an increase of installations compared to the slow growth in the first half of the year, as opposed to 2011 or 2012 levels. Second, it will be concentrated mainly in the residential market—since the price floor has hurt the financial viability of large-scale projects. Since larger projects have typically driven most of the end-of-year demand in the past, this marks a shift in both the kind of installations and the total number of megawatts installed.

    Ramifications on U.S. Module Pricing

    There has been some discussion in industry circles about what impact, if any, the EU settlement would have on U.S. module pricing dynamics. A key determinant of the price of Chinese modules sold in the U.S. has been Taiwanese cell pricing dynamics (Chinese vendors have been using Taiwanese cells to avoid the U.S. import tariff), and a key factor behind the recent increase in Chinese module prices in the U.S. (from levels of low $0.60/W in Q1 2013 to &0.70/W-$0.72/W currently) has been a significant run up in Taiwanese cell ASPs in June and July of this year, to levels as high as $0.45/W in July. Part of the reason for this increase was the belief (or at least hope) that the EU import tariff would eventually be implemented; if so, this could have led to increased demand for Taiwanese cells from Chinese suppliers, who would then assemble them into modules in regions such as Eastern Europe or India.

    With news of a negotiated settlement, Taiwanese cell pricing has fallen back to $0.40/W-$0.41/W in the past two weeks, leading some to suggest that these cost decreases for Chinese suppliers to the U.S. could be passed on in the form of module price declines.

    While this makes sense in principle, we have yet to see any such trends materialize, and conversations with numerous Chinese suppliers have revealed that there are no plans to lower U.S. prices in the foreseeable future. On the contrary, U.S. module prices have continued their rise in the weeks following the tariff, and there is a shortage of tier-1 Chinese modules in the U.S. market for Q3 and Q4 2013. The primary driver for this phenomenon is the explosive growth in the higher-priced Japanese market, where Chinese-made modules are selling for as much as $0.85/W at a lower input cost (since internally-produced Chinese-made cells can be used for non-U.S. shipments). This has shifted allocations away from the U.S. for the time being, as suppliers have changed their strategic focus away from obtaining traction in high-potential markets like the U.S. and towards generating positive cash flow in the near term.

    As shown below, our outlook on tier-1 Chinese module ASPs bound for the U.S. (cost, insurance, freight) sees ASPs rising to $0.72/W in Q3 2013 and staying firm in Q4 – a 16 percent increase from Q4 2012 levels. We anticipate relative stability in Q4, as lower-tier Chinese firms come in and attempt to steal share away from the top-tier firms and gains from lower cell pricing are factored in.


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