Solar ETFs In Focus On Chinese Import Tariffs - ETF News And Commentary
21 March 2012 - 6:34PM
Zacks
Although oil prices remain elevated, alternative energy hasn’t
exactly seen a renaissance in months past. Instead, it appears that
many are abandoning alternative energy tactics for more traditional
hydrocarbon sources, looking to add supplies in both oil and
natural gas over developing solar and wind power.
However, not all countries have given up on alternative energy
as China continues to storm ahead in this sector. While this has
been welcomed news for many who are pushing for more alternative
energy usage, many do not like how the country has gone about
becoming the dominate player in the space (read Oil Bull Market Is
No Place For MLP ETF Investors).
In addition to having an undervalued currency—a factor which can
help with exports—Chinese solar companies have pretty much
unlimited opportunities for financing which has helped them to ramp
up supply and bring marginal costs down extremely low.
This has also led to accusations of dumping, whereby Chinese
companies sell their products at a loss in order to push the less
subsidized American firms out of business. In fact, SolarWorld
Industries America estimates dumping margins in excess of 100%
while worldwide prices for panels have fallen by about 40% in 2011
alone.
Given the hurt that this has put on the domestic solar
manufacturing industry, as well as the fact that this is one of the
few exporting industries and it is an election year, many looked
for the government to do something in order to at least partially
rectify this situation. It appears that in some small way these
wishes have been granted as the US Commerce Department announced
that it would impose tariffs on solar panels imported from China
(read Forget FXI: Try These China ETFs Instead).
However, the tariffs are quite low across the board and are
unlikely to have much of an influence on the broad solar market.
Duties were below 5% across the board with Trina Solar
(TSL) seeing fees of 4.7%, Suntech Power (STP) having to
pay 2.9%, and 3.59% for everyone else.
Industry analysts were expecting a tariff for quite some time,
but few participants thought it would be this low. Those in the
market took this as a great time to buy Chinese-based solar
manufacturers as the two aforementioned companies and
Yingli Green Energy (YGE) all added at least 7.9%
on the day with YGE and STP pushing higher by more than 12%.
Meanwhile, for large U.S. manufactures like SunPower
(SPWR) and First Solar (FSLR), the news
wasn’t taken very well at all. SPWR fell by over 7% while FSLR
tumbled by over 4% as well, suggesting that the tariffs aren’t
reason enough for many to be bullish on the U.S. side of the space
(read Follow Buffett Into Clean Energy With These Solar ETFs).
However, it should be noted that more tariffs could be coming
down the pike for the space and that there is still the dumping
issue to resolve. As a result, investors could see Chinese firms
drop and American firms rise, assuming that the new rules turn out
more favorable than the current plan has.
Impact On Solar ETFs
Unfortunately for those invested in the sector via ETFs, the
move wasn’t very positive either. Both products—the Market
Vectors Solar Energy ETF (KWT) and the Guggenheim
Solar ETF (TAN) -- only added about 1.5% in the session.
This was likely due to both funds affording their top two weights
to the U.S. and China, a factor that allowed the American firms’
losses to offset the Chinese gains on the day.
Nevertheless, the significant gains in the Chinese solar market
on the news were more than enough to outweigh the American slump,
reason to push TAN and KWT higher on the day. Nevertheless, both
funds are still down significantly over the past one month and one
year periods, suggesting that it will take more than a few small
subsidies to correct the market (read First Solar Guidance Routs
Solar ETFs).
Furthermore, given the muted response from the ETFs, and the
roughly equal allocation between Chinese and American firms in
these products, this could be a case where an individual security
selection approach is needed. For investors who believe that
more tariffs are likely and that a full dumping charge will be
levied, U.S. firms could be the big winner. If, however, the status
quo reigns or only small slaps on the wrist are taken, Chinese
companies could win out and be the better buy.
Either way, however, the broad solar sector will remain risky
and solar ETFs will likely have a muted response to the tariff
developments. Furthermore, it seems hard to imagine a scenario, at
least in the short-term, in which both countries’ solar industries
can benefit so investors must make a choice one or another if they
want to make a play on the space (read Clean Energy ETFs: Thrive
With These Two Broad Funds).
Given the tiny tariffs initially proposed, I am skeptical that
the U.S. will take a hard-line stance on such an important trading
partner. However, the upcoming election could push more politicians
to take a tough on China approach, especially in regions where
solar is more popular. Due to this heavy risk and uncertainty—as
well as the poor Zacks Rank for many solar stocks-- solar ETFs seem
like a weak bet and investors should wait for a brighter future
before making a play on this shaky, and politically sensitive
industry.
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FIRST SOLAR INC (FSLR): Free Stock Analysis Report
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