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June 5, 2013, 10:56 A.M. ET

Solar Stocks Plunge on European Tariffs, Downgrades

By Ben Levisohn

Years ago, Saturday Night Live ran a fake trailer for a movie called "Glacier." If memory serves, a solemn voice intoned, "You knew it was coming, you had plenty of warning, now it's here."

The same could be said about Europe's solar tariffs, which finally became a reality yesterday, though in a more muted form than expected. The Wall Street Journal reports:

"The tariffs will come into force Thursday at 11.8%, a quarter of the average level seen in a European Commission plan circulated last month that called for duties of between 37.3% and 67.9%, depending on the company. The tariffs were supposed to average around 47%. They will cover solar panels and their main components, solar cells and silicon wafers, which the commission says Chinese companies are dumping at below fair market prices. All manufacturers will face the same 11.8% tariff for the two-month period.

Mr. De Gucht is giving Chinese solar-panel manufacturers until Aug. 6 to propose an acceptable alternative to the tariff plan. In trade disputes this is usually a commitment to sell solar panels in the EU above a minimum price and limit the quantity of panels they sell in Europe. If an agreement isn't reached, the tariffs will come into force at the originally planned level."

Citigroup's analysts believe everyone loses in a solar trade war. They write:

"Either tariffs or forcing Chinese manufacturers to sell at a higher price in a settlement would lead to lower installation levels, materially impacting associated industries. Most importantly we think the balance of system suppliers will be adversely affected by lower installation levels and increased pricing pressure to make project IRR's work. In addition, trade relations between China and Europe may be further impaired if the EC goes ahead with higher tariffs. This would make it more difficult for polysilicon and solar equipment producers to export into China; China has been considering polysilicon import tariffs for a while and this may be the trigger to impose them."

Stocks most hit by the new duties include Trina Solar and Yingli Green Energy, while First Solar and Sunpower could benefit.

The tariffs prompted Goldman Sachs to downgrade Trina Solar and JA Solar to sell, where they joined Yingli Green Energy. Analysts Amy Song and Lingling Hu write:

"We believe any tariff scheme could limit penetration of the EU market by Chinese cell/module makers and increase pricing competition in other markets, while the cost structure might even hike slightly due to the domestic poly tariff scheme, and this is likely to result in another structural down-cycle for export-focused midstream (cell/module) makers. Hence, we downgrade Trina Solar/JA Solar to Sell from Neutral, with target prices of US$4.0/4.2, implying 32%/43% potential downside. Meanwhile, we reiterate our Sell on Yingli Green Energy, with a target price of US$1.0, implying 65% downside."

Source: http://blogs.barrons.com/emergingmarketsdaily/2013/06/05/solar-stocks-plunge-on-european-tarrifs-downgrades/

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