Chinese Reaction to U.S. Solar Tariffs Could Boost LDK’s Silicon Business

The Chinese government has said that it is ‘highly concerned’ about the recent imposition on tariffs of up to 250% on its solar export by the U.S. Department of Commerce. ^[1] Some of the voices in the industry expect the Chinese to react with retaliatory tariffs, potentially targeting polysilicon imports. Chinese polysilicon producers have faced problems as global prices of the commodity have fallen and small producers have struggled to stay afloat. LDK Solar (NYSE:LDK) has romped up its polysilicon production capacity over the past few years and will increase capacity even further in 2012. Although the tariffs by the U.S. Department of Commerce will have a negative impact on LDK’s cell and module business, if China imposes tariffs on polysilicon, the company will be able to sell its output at higher prices in the local market. Polysilicon is the main raw material for panel manufacturers like Suntech Power (NYSE:STP).

We have a $3.67 price estimate for LDK Solar, which is at a 30% premium to its current market price.

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LDK’s capacity push

LDK has plans to increase its polysilicon production capacity from 17,000 MT/annum at the beginning of the year to 25,000 MT/annum by the end of 2012. ^[2] According to the plans, LDK could increase production capacity even further over the next couple of years. The rise in production capacity comes at a time when spot prices are below the operating cost for most players.

Smaller Chinese polysilicon producers have faced difficulty in competing with large scale producers based outside the country, and government officials have discussed the possibility of introducing tariffs to protect the industry. The tariffs from the U.S. government on Chinese solar equipment could provide a push for the Chinese government to implement counter-tariffs on polysilicon imports.

For year ended December 31, 2011, LDK had an average polysilicon selling price of $56.4/ kilogram, which fell around 6% over the same period last year. This is almost double the prevailing spot price for polysilicon in the market. Players like LDK sell a huge proportion of its output through long-term contracts, which were signed when prices were higher. However, if Chinese authorities put import tariffs on polysilicon, an increase in product price in the local market could push up LDK’s revenues from the business, helping the company tackle the downturn.

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Related articles

• Rising Polysilicon Prices Lift LDK’s Outlook as China Curbs Production (trefis.com)
• LDK May Reduce Workforce As Industry Conditions Deteriorate (trefis.com)
• Suntech Sees Upside as Polysilicon Prices Continue to Drop (trefis.com)
• China cries foul after U.S. sets tariffs on solar imports (chinadailymail.com)

1. U.S. Solar Tariffs on Chinese Cells May Boost Prices, Bloomberg [↩]
2. LDK Form 20-F [↩]