A fresh buying opportunity may finally be unfolding in the solar sector.
In Tech Trader Daily on Friday, Eric Savitz broke news that the U.S. government is launching an official investigation into alleged unfair trade and investment practices by the government of China in green technologies. Across the board, solar stocks were slammed in reaction to this news with single-day declines as much as 10% (ReneSola [SOL] and Evergreen Solar [ESLR]). First Solar was a key survivor, rallying into the close to end the day up 1.6%.
*Chart created using TeleChart:
Through the Office of the United States Trade Representative, U.S. Trade Representative Ron Kirk restated a complaint that was filed by the United Steelworkers (USW) early last month:
“The petition alleges that China employs a wide range of World Trade Organization (WTO)-inconsistent policies that protect and unfairly support its domestic producers of wind and solar energy products, advanced batteries and energy-efficient vehicles, among other products, as China seeks to become the dominant global supplier of these products. According to the petition, these policies include export restraints, prohibited subsidies, discrimination against foreign companies and imported goods, technology transfer requirements, and domestic subsidies causing serious prejudice to U.S. interests. The petition further alleges that China’s policies have caused the annual U.S. trade deficit in green-technology goods with China to increase substantially since China joined the WTO, making China the top contributor to the U.S. global trade deficit in the sector.”
Given how strong September was for solar stocks, it is clear the market never believed the U.S. would take action on this complaint. Now that the U.S. has decided to proceed, news-related volatility is likely to soar in the sector. We may have to wait as long as 90 days to hear China’s response: “The U.S. Trade Representative has decided to delay for up to 90 days the request for consultations with the Government of China for the purpose of verifying and improving the petition.” If the U.S. decides to launch an official complaint with China, contentious negotiations could then proceed for many months. In other words, the trading and investing landscape in solar just got more difficult…but therein lies the potential opportunity.
We might assume First Solar could be a big winner in this dispute, but First Solar has already moved to gain a foothold in China by striking agreements to help plan and build major solar farms in the “Empty City” of Ordos. Losing that deal in a trade dispute would be a serious setback to First Solar’s key strategic pillar of developing major solar projects.
Chinese-based solar stocks should plunge the most, but I am not interested in trying to short them on this news. After all the dust settles, I think a mutually agreeable resolution will materialize. For example, last month, Chinese solar company Suntech Power Holdings (STP) began manufacturing solar modules in a plant in Arizona that should add 150 jobs by the end of 2011. The press release proudly announcing this accomplishment demonstrates Chinese solar companies are already keenly aware of the touchy economic climate with the U.S. (emphasis mine):
“Suntech selected Goodyear based on a combination of factors, including costs, logistics, and statewide renewable energy policies, as well as a supportive local business climate. The Greater Phoenix Economic Council played a key role in assisting Suntech with its selection process. Suntech remains encouraged by Arizona’s clear and consistent policy commitment to the growth and development of solar, including the state’s policy to meet 15% of its energy consumption with renewable sources by 2025 and distributed generation set-aside.
‘Solar jobs follow solar installations, and more than 60% of all industry jobs are created in sales, finance, and installation, in jobs that cannot be exported. On average, the solar industry employs about 15 to 30 people for every MW of installed solar capacity – 6 to 8 times more than the traditional energy industry,’ noted Dr. Zhengrong Shi, Suntech’s founder, chairman, and CEO, at the grand opening. ‘The governments that advance clear and consistent policies to diversify with clean energy will create thousands of green jobs while achieving energy security.’
‘The initial capacity of our Goodyear facility is three times larger than our first module production facility built eight years ago, in 2002; and the cost of generating solar energy has fallen by more than 50% since then,’ added Dr. Zhengrong Shi. ‘Just imagine what we will accomplish over the next eight years as we work together and continue to drive solar to cost competitiveness in the United States, and everywhere under the sun.'”
In other words, I believe that any dispute will be resolved without creating a damaging change in overall market dynamics. Any ensuing sell-off from this news of a brewing trade dispute likely represents a fresh buying opportunity – assuming of course that this quarter’s earnings announcements proceed at least as well as last quarter’s.
On a related note, I think ESLR’s 10% decline on Friday was less about the potential dispute with China and more a continuation of the pullback from its parabolic move on Tuesday and Wednesday. I took this sell-off as an opportunity to begin nibbling on the shares. However, I am still waiting for news clearly confirming that something materially good is finally unfolding at the company.
(I recently wrote two articles demonstrating a small sample of the Chinese government’s strong sponsorship of its solar industry:
LDK Solar Secures Its Future with Credit from China
Centrotherm Photovoltaics Continues Its Success in China)
Be careful out there!
Full disclosure: long FSLR call spread, long ESLR shares