The Bigger Picture: U.S. Trade Tariffs And The Global PV Module Industry

The U.S.’ Section 201 trade case has finally reached a conclusion, but several questions about the details remain. This situation is understandably generating confusion and uncertainty across the global PV module supply chain.

Although the new tariffs applied to crystalline silicon photovoltaic (CSPV) cells and modules are scheduled to become effective on Feb. 7, the presidential proclamation also notes that the decision is potentially subject to changes. In theory, the process is open to requests for exclusion, and South Korea has already announced that it will file a petition with the World Trade Organization (WTO). Others may follow. It is possible some technology exceptions – N-type technologies, for example – could be added later, but the complexity of the process means modifications to the existing resolution could take a long time.

According to the resolution, all Generalized System of Preferences (GSP) beneficiary countries that account for less than 3% of total imports will be exempted – with the exception of Thailand and the Philippines, since they “accounted for more than three percent of total imports.” This leads us to ask several important questions that could affect whether manufacturers decide to build manufacturing capacity in the U.S.

Module capacity is readily available in some of the GSP countries, potentially allowing manufacturers to export tariff-free modules to the U.S. India, Brazil, Turkey and other GSP countries now have significant module capacity, and so do other countries with small capacities, which could be now used to export modules to the U.S.

Some manufacturers might decide to use these existing lines or create partnerships with these countries, as an alternative to setting up manufacturing in the U.S.. However, there is a major caveat: total shipments per country cannot exceed the aforementioned 3% of total U.S. imports, and it is unclear if total imports from the GSP countries could be capped.

The presidential proclamation also states that if there is a “surge in imports,” tariffs could be applied later. Thus, recent analysis about other countries with significant manufacturing capacities supplying the U.S. should be viewed with caution.

Will factories be built as a result of the tariffs?
Based on recent IHS Markit forecasts, the resolution could result in some additional construction of module manufacturing capacity in the U.S. in order to fully maximize the annual 2.5 GW quota of tariff-free cell imports. However, it will not bring a significant number of cell-manufacturing expansions.

When making the decision to build cell and module manufacturing capacity in the U.S., a manufacturer must be certain it will be able to sell at a price that is higher than the global average for four years. It must also have a firmly secured sales pipeline guaranteeing a return on investment in such a short period of time; otherwise, it faces the risk that if imports or policy changes cause module prices in the U.S. market to drop, there will be no other markets available to absorb those higher-cost cell and modules. Moreover, based on the resolution, the competitive advantage of setting manufacturing in the U.S. grows smaller every year, since global solar cell prices will continue to fall and the import tariff will be also reduced.

JinkoSolar’s recently announced plans to build manufacturing operations in the U.S. should be viewed in this light. Although the company declined to provide further details, local news reports have suggested JinkoSolar’s planned project will likely be built in Jacksonville, Fla., and subsidized by the Jacksonville City Council – which means local subsidies in the U.S. might be used to attract international manufacturing activity, even after the 201 resolution passes. It does not seem, at this point, that many other companies will follow JinkoSolar’s lead.

Global module prices and procurement trends
A lot has been written recently about the 201 resolution and its short-term and mid-term effects on module demand and PV installations in the U.S., but not much has been revealed about what effects the 201 case could have on global module prices and procurement trends.

To provide some background on the global impact of the 201 resolution, it is also necessary to first discuss the current policy situation in India, where the Directorate General of Anti-Dumping and Allied Duties (DGAD) in July opened an investigation of imports from China, Malaysia and Taiwan. The investigation is expected to be completed by the end of 2018. India also announced, in parallel, the forthcoming establishment of a safeguard provision for modules from these countries of origin in to avoid a surge in imports ahead of the anti-dumping investigation. This decision is imminent, and it will bring the imposition of 70% duties on cells and modules during the safeguard period, which can be extended up to 200 days.

The outcome of the 201 case, along with India’s “safeguard provision,” could lead to the closing of the second- and third-largest PV markets to cell and modules manufactured in China, where more than 70% of all modules were produced in 2017. The implications of restricting access to Chinese cells and modules in the largest PV markets cannot be underestimated.

The Bigger Picture: U.S. Trade Tariffs And The Global PV Module Industry

Module demand is forecast to remain very strong in China for the entire first half of the year because projects need to be connected before June 30, 2018, to be eligible to receive the 2017 feed-in tariff. However, if the Chinese market is not able to maintain a high volume of demand in the third quarter, after the end of the grace period, module prices might start declining earlier and faster than anticipated. There is a potential for strong demand from many emerging regions, but higher-than-anticipated module prices in the first half of 2018 are impeding many non-Chinese markets, due to worsening project economics. Developers in these markets are currently waiting for module prices to drop below current levels before beginning any new procurement.

The 201 case also affects procurement from Thailand, Vietnam, Malaysia and other Southeast Asian countries. Leading Chinese manufacturers previously expanded manufacturing capacity in this region to bypass the trade barriers to Chinese products implemented in Europe and in the U.S. a few years ago. Shipments from this region have dominated U.S. imports in recent years.

Since imported CSPV modules will be subject to the U.S.’ initial 30% tax, it is possible that only higher-efficiency modules manufactured in Southeast Asia would be sold in the U.S. market. Standard modules with high prices, after the 30% tax is applied, will be less attractive for developers, and these products will find it more difficult to compete against local and thin-film modules.

As an unintended consequence, the volume of modules available to Europe would automatically increase, which could drive down prices and incentivize developers to buy modules in Europe in the second half of 2018. However, some European projects have no deadline until 2019, and there is no clarity about whether or not the current minimum imported price (MIP) scheme applied to Chinese and Taiwanese cell and module imports will be extended after September 2018. Many developers might have more incentive to wait and see what transpires, rather than immediately buy modules.

Given the current 201 resolution and the upcoming safeguard provisions in India, only tremendous growth of the Chinese market in the second half of 2018, along with strong demand from Europe, could prevent a slowdown in global module demand and a subsequent impact on the global supply chain in the third quarter of this year. The effects of the 201 case will significantly affect the strategies of cell and module manufacturers and module procurement in the U.S. market over the next four years, but it will also result in major consequences for the global supply chain, at least through the second half of this year.

Edurne Zoco is research director of solar and energy storage at IHS Markit.

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