Why the USITC Could Find that Imports Were Not a Substantial Cause of Serious Injury to the US Solar Industry – Data from the Staff Pre-Hearing Report

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Eric Selmon Hugh Wynne

Office: +1-646-843-7200 Office: +1-917-999-8556

Email: eselmon@ssrllc.com Email: hwynne@ssrllc.com

SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

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August 15, 2017

Why the USITC Could Find that Imports Were Not a Substantial Cause of Serious Injury to the US Solar Industry – Data from the Staff Pre-Hearing Report

Today the U.S. International Trade Commission’s (USITC’s) is holding hearings regarding Suniva’s Section 201 Safeguard filing, petitioning the U.S. government to impose restraints on imports of solar PV modules and cells. For more details on this proceeding, see our note from June 27, What Is the Risk of Tariffs on Solar Panels? A Legal Analysis of Potential Outcomes of Suniva’s Section 201 Petition. In this note we examine the implications of the data in the USITC staff pre-hearing report. Based on the data in the report, we now believe the probability of the USITC making a negative injury determination is as great as it making a positive determination.

Portfolio Manager’s Summary

  • In April 2017, Suniva Inc. filed a safeguard petition under Section 201 of the Trade Act of 1974, petitioning the U.S. government to impose restraints on imports of solar PV modules and cells. In evaluating Suniva’s safeguard filing, the USITC must determine whether “an article is being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing an article like or directly competitive with the imported article.”
  • The USITC’s determination involves a three-part test to determine whether the imports have caused injury to the domestic industry. Specifically, the USITC must find that:
    • Imports have increased (generally analyzed over the prior five-year period).
    • The industry has been seriously injured or is threatened with serious injury. Serious injury is defined as a “significant overall impairment in the position of the domestic industry,” evidenced by idling of production facilities, losses across significant portion of the industry and significant unemployment in the domestic industry.
  • Increased imports are a “substantial cause” of the serious injury. A “substantial” cause is defined as one of equal to or greater importance than any other cause of injury.
  • After today’s hearing, the USITC will vote on an injury finding on September 22. Afterwards, if an injury finding is made, there would be a hearing on remedies on October 3, followed by a vote on remedies on October 22 and a report to the President on November 13. If a positive determination is made, the President will have 60 days, or until January 12, 2018, to make a determination as to which remedies to implement, if any. Those remedies are to take effect within 15 days of the President’s decision, or by January 25.
  • On August 1, the USITC staff issued a pre-hearing report compiling all of the data submitted in questionnaires filled out by parties to the proceeding and industry participants. This data, plus what is presented at the hearing, is the core of the information on which the USITC will be making its injury determination. Although much of the data was redacted, the pre-hearing report included two important disclosures.
  • First, no firms requested that data be gathered on “other possible alternative products”, which suggests that the USITC is unlikely to treat cells and modules as separate products, as we suggested in our June 27 note.
    • It is still possible that, if an injury determination is made, President Trump could treat cells and modules separately, applying tariffs to modules to encourage their assembly in the US, but not on cells.
    • By avoiding tariffs on cells, this distinction would reduce the impact on the U.S. market for solar energy. It would likely increase solar panel prices only moderately, as foreign module manufacturers would rapidly build module assembly plants in the U.S. The impact on costs would thus be limited to the difference between module assembly cost in the U.S. and abroad.
  • Second, and more importantly, the aggregate data on the finances of the solar manufacturing industry tells a story that potentially contradicts the argument that there is a serious injury and that imports are a substantial cause of such injury.
  • On the one hand, the report documents dramatic growth in imports from 2012-2016, from 2.2 GW and $1.9 billion in 2012 to 12.8 GW and $7.1 billion. Over this period, several US manufacturers closed their plants and exited the business.
  • On the other hand, as can be seen in Exhibit 1, the US manufacturing industry, in aggregate, saw sales volumes and revenues increase from 2013-2016, the period of most rapid import growth, while gross margins, operating losses and EBITDA improved in each year from 2013 through 2015.
    • Even 2016 is much more positive than it appears, as there was a large impairment taken by a company in the industry, the amount of which was redacted and, therefore, is not excluded from income or EBITDA in Exhibit 1.
    • In addition, six new module manufacturing plants opened in the United States in 2015 and 2016. The associated start-up costs may distort the 2016 data.

Exhibit 1: US Modules Producers’ Financial Results, 2012-16

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Source: USITC, SSR analysis

    • Finally, capacity utilization has remained relatively steady during this period, and employment has rebounded.
  • As a result, even though there is evidence of injury at the company level, in the aggregate, a strong case can be made that there was no “serious injury” to the industry, since it is in better condition than in 2012.
    • Alternatively, if injury did occur, it can be argued that imports are not a “substantial cause” because it was producing less and losing dramatically more money in 2012, when imports were 1/6 the current level.
  • There are many factors the USITC is directed to consider in determining both whether imports are a “substantial cause” of injury and whether there was a “serious injury” to the industry. The staff report provides evidence both for and against a positive determination on both issues, but enough evidence in presented for the USITC to be able to make a negative finding on either issue.
  • As a result, unlike our previous view that the USITC was highly likely to make a positive determination, we believe there is now at least an equal chance the USITC will make a negative determination.

Exhibit 2: Heat Map: Preferences Among Utilities, IPP and Clean Technology


Source: SSR analysis

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