By Gerard Wynn
LONDON, May 29 (Reuters) - China's threatened solar duties on European Union products would harm its own industry, and appears more likely to be rhetoric in a dispute where both sides will gain from compromise.
The European Commission, the EU's executive, has accused Chinese firms of selling solar panels at below cost in Europe - a practice known as "dumping" - and plans to impose duties.
Following Chinese reminders of its significance as a trading partner, however, a majority of EU governments oppose the plan, a survey of member states showed on Monday.
Beijing has also wielded a stick, last year launching a study on imposing its own tit-for-tat duties on imports of European polysilicon, the raw ingredient of solar panels.
Chinese officials ratcheted up their rhetoric on Monday night, saying the country "would take necessary steps to defend its national interest".
But polysilicon duties would raise costs for China's module makers, just as EU duties would make solar panels more expensive and so harm its downstream solar installation industry.
Compromise may favour both sides.
Polysilicon is the main input in the manufacture of solar panels or modules. It is melted into ingots and sliced into wafers which are then printed with electrodes to make solar cells, in turn welded and framed into finished modules.
China has steadily developed a domestic polysilicon industry which may be aided further by import duties.
In February last year the Ministry of Industry and Information Technology issued the next five-year plan for the PV industry which specified goals by the end of 2015 which included promoting polysilicon producers with annual output of at least 50,000 tonnes.
In November, China's Ministry of Commerce launched an investigation on whether duties should be levied on imports of polysilicon from the United States, South Korea and the European Union.
China has not yet filed a complaint with the World Trade Organisation, the first step in a formal trade dispute.
The timing for a final decision is unclear but should be no later than the end of this year, while an interim judgement is expected at the end of June, say producers.
Major polysilicon producers include Germany's Wacker Chemie AG, U.S.-based Hemlock Semiconductor, South Korea's OCI Company Ltd and Chinese producers GCL-Poly Energy Holdings Limited and Daqo New Energy Corp .
Notwithstanding China's attempts to build a local industry, top Chinese module makers, including Hanwha SolarOne Yingli and JA Solar, have contracts with Wacker and/ or Hemlock.
Both Yingli and JA Solar state that some of these contracts extend beyond 2013. Trina Solar refers to contracts with German and U.S. suppliers.
In their latest annual reports, Hanwha said it "may be adversely affected" by Chinese polysilicon import duties; Yingli said "a large portion of polysilicon is from the countries subject to investigation"; and JA Solar said "the prices of our raw materials may increase".
They have options for evasive action.
One such would be a so-called tolling arrangement, whereby Chinese module producers continued to take delivery of western polysilicon under contract, but only after this had been processed into an intermediate product by an offshore third party such as a wafer manufacturer in Taiwan, as referred to by Hanwha.
"We are currently negotiating with some Taiwan suppliers to establish a polysilicon tolling business to replace the current supplier mentioned above to reduce our exposure to potential polysilicon tariffs," Hanwha said in April.
Such toll arrangements would raise costs, however.
Chinese import duties would have a wider impact beyond direct buyers of polysilicon from western producers, if the effect was to hike prices for the raw material generally.
That risk depends on whether domestic manufacturers and tolling arrangements could keep pace with Chinese demand.
Limiting polysilicon costs is vital in an industry which is struggling with global over-capacity, weak power demand in developed countries and shrinking subsidies.
China's Jinko Solar estimated silicon comprised 17 percent of total manufacturing costs, in its latest quarterly report in April.
Partly due to China's anti-dumping and anti-subsidy investigations polysilicon prices have already rebounded slightly since December 2012, although they remain below $20 per kilogram, Yingli reported in April.
Polysilicon market prices declined especially sharply last year as a result of new manufacturing capacity and pressure from falling module margins, reaching an historical low price of $14 per kilogram in November, module makers report. (See Chart 1)
That has seen manufacturers globally cutting prices and mothballing capacity.
Chinese import duties would help local polysilicon producers.
But the knock-on impact in higher costs for module makers may be more worrying as consolidation sweeps the global industry, and as Beijing tries to grow a domestic market where more installed capacity will depend on greater competitiveness with fossil fuel power.