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Trade tariffs slow margin recovery at wind turbine makers

SNL Image

A Vestas blade factory in Colorado.
Source: Associated Press

Wind turbine suppliers are struggling with unpredictable headwinds as the trade war between the U.S. and China threatens to slow a long-awaited recovery in equipment margins.

Denmark's Vestas Wind Systems A/S, Spain's Siemens Gamesa Renewable Energy SA and General Electric Co. subsidiary GE Renewable Energy are stumbling over tit-for-tat import tariffs just as they are preparing to capitalize on stabilizing prices for their products after a slump caused by the switch to renewable auctions.

"We have been good at mitigating the additional cost that we anticipated for this year" due to the trade war, Vestas CFO Marika Fredriksson said on an Aug. 15 earnings call. "Unfortunately there have been changes in the tariff, meanwhile ... we cannot mitigate 100% of all the surprise factors that are out of our control."

The volatility is causing a headache for the companies because they are used to good visibility on their project pipelines for several years into the future.

Negotiators from China and the U.S. are due to meet in September but in the meantime both countries are already threatening additional levies. Since last year, the trade spat has resulted in escalating tariffs on $250 billion of Chinese goods and retaliatory tariffs on $110 billion of U.S. exports.

Vestas on Aug. 15 tightened its full-year EBIT margin guidance to 8% to 9%, from a previous outlook of 8% to 10%, which Fredriksson said was due to direct costs from the tariffs and higher spending on transportation as the company shifts around its supply routes to source materials from other countries. That is forcing it to increase land transports in particular, where capacity is already tight.

"The type of products that we are shipping [are] very bulky, so there is definitely a scarcity from that perspective," she said. Vestas' EBIT margin dropped 5.5 percentage points year-over-year to 6% during the second quarter, which was also due to higher raw material costs and delivery of low-priced projects contracted during late 2017 and early 2018.

Stabilizing turbine sales prices are expected to filter through into higher earnings soon, following a precipitous drop caused by the switch to auctions, but trade tensions are now threatening to dampen that positive impact across the industry.

Fredriksson said Vestas is still targeting a double-digit EBIT margin and has a "positive view" of 2020, due to the price stabilization and expected high installation volumes, but cautioned that the volatility of trade relations is making forecasts much harder.

U.S. import tariffs have also led Siemens Gamesa to lower its profitability outlook for the current year. CFO David Mesonero predicted on July 30 that the trade war will translate into a €15 million hit to the company's full-year EBIT, as most costs are passed on to customers. That equates to 4% of the company's sales in the U.S., twice as much as the company had forecast at the start of the year.

"The U.S. is becoming more important this year and next year," he said. "So this is sadly what is affecting us in a more negative way."

GE, which tops the list of the largest onshore wind turbine suppliers in the U.S., registered a net impact of $90 million from U.S. tariffs on imports from China in the second quarter alone, according to Senior Vice President and CFO Jamie Miller. The company expects the total to climb to $400 million to $500 million for the whole year, mostly in its healthcare and renewables divisions.

Fredriksson said Vestas is also trying to shift the price impact to customers and suppliers, but will feel the squeeze from contracts signed during the first half of the year. The company has previously estimated that the tariffs will add 1.5% to its overall costs without any mitigation. Claus Nielsen, an analyst at Nordea Markets, reckons the decreased margin guidance means Vestas is writing off about €100 million in profits for the year.

Some suppliers have made permanent investments that go beyond just shifting transport routes. Nordex SE, a German turbine supplier, has increased blade production at its factories in Mexico and Spain and closed a supply deal with TPI Composites Inc. in Turkey to remain "competitive selling to the U.S.," CEO José Luis Blanco said on an Aug. 14 earnings call. He added the extra investments will have a low double-digit million euro impact on profits this year.

"[For] 2020 and 2021, I think we are well equipped," Blanco said. "We are in the implementation of the supply chain reconfiguration in order to have this as a one-off cost and not as a permanent cost for Nordex."