That’s because most of the silicon in the world’s solar Stocks is made in Xinjiang. A report by geopolitical consulting firm Horizon Advisory questions whether Xinjiang forced labor is an ingredient in the products of China’s solar producers.
By Bill Alpert
Americans are paying more attention to a desert corner of northwest China called the Xinjiang Uighur Autonomous Region, where the international community says the government has herded Muslim minorities into internment camps and forced-labor programs. Investors better pay heed, too.
Xinjiang might pose a surprise conflict for President Joe Biden’s environmental plans and to investors who prioritize environmental, social, and corporate governance, or ESG, factors. That’s because most of the silicon in the world’s solar Stocks is made in Xinjiang.
A report by geopolitical consulting firm Horizon Advisory questions whether Xinjiang forced labor is an ingredient in the products of China’s solar producers.
The report cites solar companies with Xinjiang-supplied content, including Daqo New Energy (ticker: DQ), JinkoSolar (JKS), GCL-Poly Energy Holdings (3800.Hong Kong), Xinte Energy (1799.Hong Kong), and LONGi Green Energy (601012.Singapore). Jinko-supplied solar plants are being built in America by NextEra Energy (NEE).
“This is a tough issue, and it’s hard for people on this side of the ocean to really know what’s going on there, other than to know that there is forced labor and no one outside of China denies it,” says Paul Rosenthal, a trade lawyer at Kelley Drye. Rosenthal has spent 20 years advising West Africa’s cocoa industry on how to avoid forced-labor problems.
Solar stocks like Daqo have soared with Biden’s green energy plans. Depositary shares of the Xinjiang-based silicon maker have risen fivefold in the past six months to $115 and lifted Daqo’s market capitalization to $8 billion.
Shares of the exchange-traded fund (TAN) and the Invesco WilderHill Clean Energy ETF (PBW) have doubled over the same stretch, in part thanks to substantial holdings in both Daqo and JinkoSolar. Daqo shares may have gotten an extra lift from the recent short-squeeze mania, given that a quarter of its free-trading float was short as of January.
But concern over Xinjiang labor issues and the potential for congressional import restrictions could take some of the shine from those shares and grow awkward for Daqo’s depositary institution JPMorgan Chase (JPM), for ETF sponsors like Invesco (IVZ), and for ESG investors intent on doing well by doing good.
On Thursday morning, the U.S.-based Solar Energy Industries Association issued a statement opposing the use of forced labor within the solar supply chain and committing to develop a protocol to trace the source of raw materials. So far, 175 members have signed the pledge, including the U.S. subsidiaries of Jinko and LONGi.
One of the few U.S.-based analysts covering Daqo, Phil Shen of Roth Capital Markets, downgraded his Buy rating to Neutral last fall because of the risk of congressional actions. Shen noted that demand for Daqo’s silicon was strong, and said he had no evidence that it used forced labor.
But he saw a potential for U.S. legislative or executive action on Xinjiang. At the time, Daqo said in a statement that “the impact on its business from potential measures taken by the US Government would be limited given that its wafer customers are serving the global solar [photovoltaic] market.”
Asked about political risk to its solar industry, the Chinese Embassy in Washington referred Barron’s to a series of news conferences in which Chinese officials described their programs for the Uighurs as poverty alleviation and re-education to prevent terrorism. Grateful workers gave testimony.
JinkoSolar told Barron’s that it condemns forced labor and doesn’t use it in its Xinjiang factories. Although Daqo declined to answer questions from Barron’s, it responded to recent news reports with a Jan. 15 statement saying that it “has a zero-tolerance policy towards forced labor in its own facilities and across its supply chain.”
Invesco said it doesn’t control the indexes mimicked by its ETFs. GCL-Poly, Xinte, LONGi, and NextEra did not respond to requests for comment.
Forced labor was one of a number of “crimes against humanity” cited by outgoing Secretary of State Mike Pompeo in his Jan. 19 finding that China was committing genocide against Xinjiang’s non-Han ethnic groups.
The determination followed a year of mounting censure by the U.S. government that included: a July 2020 warning to businesses of the risks of forced labor in their Xinjiang supply chains; a U.S. Treasury financial bar against dollar financial transactions with the Xinjiang Production and Construction Corps, or XPCC, which has run Xinjiang since the 1950s; and import bans on Xinjiang cotton and tomatoes.
Chinese officials have said the U.S. sanctions interfere with China’s internal affairs and harm U.S.-China relations.
Biden administration officials say they agree with Pompeo’s genocide finding. A new Democratic majority in the Senate improves prospects for a bill, passed overwhelmingly by the House last year, that would ban import of goods made in the region unless producers prove they have not used forced labor.
Two dozen senators from both parties reintroduced a version of the import ban on Jan. 27. Roth analyst Shen doesn’t expect hearings on the bill for a month or two, and notes that the Senate version would give importers 10 months after passage before responsibilities kick in.
The U.S. government hasn’t specifically called out Xinjiang’s solar industry. As a whole, China now produces three-quarters of the world’s solar-grade polysilicon, and over half of China’s output comes from Xinjiang.
As an unusual mix of government, paramilitary organization, and state-owned business, the XPCC has furnished Xinjiang’s solar start-ups with laborers transferred from the region’s agricultural areas, according to local press reports and government announcements. Critics liken the moves to the mass internment of Xinjiang Muslim families.
“There are clear things that are red flags as indicators of forced labor or abusive labor campaigns,” said Emily de La Bruyère, a researcher with the consulting firm Horizon Advisory, whose recent report on labor practices at China’s solar producers has set off waves in the industry. “What we did was identify how those red flags connect to the solar industry.”
Horizon cites reports in the local press, such as the Changhi Daily, describing how dozens of Muslim minority workers were bussed to dorms for indoctrination and work at Daqo’s two big suppliers of raw silicon.
In April 2020, a government agency said in a release that it was subsidizing 78 workers brought to JinkoSolar’s silicon wafer factory in Xinjiang. By July, the Xinjiang government said it was subsidizing 564 Jinko workers. Xinjiang press also described labor transfer programs to the world’s No. 2 polysilicon producer, GCL-Poly.
A U.S.-based representative and lobbyist for Jinko, Ian McCaleb, said the government labor program at its Xinjiang factory was voluntary, with the workers all signing standard employment contracts.
Knowing the origin of every ingredient in a solar panel isn’t a cinch, because silicon mixes through many hands and levels of refining, wafering, and cell manufacture. The import bill passed in September by the House, 406 to 3, would put the burden on importers to show that products of Xinjiang manufacture weren’t made with forced labor.
Easier to document are polysilicon producers’ alliances with the U.S.-banned XPCC, which are disclosed in securities filings. After the U.S. blocked money and products from XPCC-owned entities, at least one company listed on the Hong Kong stock exchange—the water utility Xinjiang Tianye Water Saving Irrigation System (840.HongKong)—said it shuffled its ownership to dilute an XPCC stake. As the heat rises in the U.S., both JinkoSolar and Daqo are readying listings on the Shanghai Stock Exchange’s Sci-Tech board.
Daqo operates almost entirely in Xinjiang, and its draft Shanghai prospectus has page after page accounting for its subsidized deals for energy, land, and research with “the Corps.” In the three years ended in March 2020, Daqo tallied $25 million in government subsidies from Xinjiang’s rulers.
Daqo declined to answer Barron’s questions about that. With the help of government support, and a Chinese bar on the import of U.S. polysilicon by China’s solar wafer industry, Daqo’s production soared from 6,000 metric tons in 2014 to 75,000 tons in 2020. It preannounced profits of $150 million for 2020, on a doubling of revenue to $700 million.
The Solar Energy Industries Association is developing a supply-chain traceability protocol that American solar firms could use to demonstrate that their products were free of forced labor. The easy way to do that, says the trade group’s general counsel, John Smirnow, is to stop using stuff from Xinjiang.
“There are credible reports of forced labor in the region,”said Smirnow.”We’ve seen linkages to the solar supply chain. That’s just a risk we don’t want.”
“In the fall, we started to encourage companies to move out of the region,” he says.
While JinkoSolar says that its own operations in Xinjiang practice fair labor, representative McCaleb says the company is assuring its U.S. customers that they will receive solar products only made outside Xinjiang. JinkoSolar’s big American customer NextEra Energy didn’t respond to questions.
A sell-side analyst who saw solar’s political risks early was Roth’s Phil Shen, who downgraded Daqo after the U.S. House forced-labor bill. With 100% of its operations in Xinjiang, Daqo would find it hard to quickly dodge potential U.S. actions, Shen feared.
First solar Stocks (FSLR) might benefit from any restrictions on Xinjiang solar content, Shen said, because it uses a nonsilicon technology and manufactures in Southeast Asia.
Shen was alone in downgrading Daqo from a Buy, and perhaps too early, as the stock has since risen from a split-adjusted $40 to $115. The other analysts listed by FactSet are all based in Hong Kong, where they’ve maintained Buy ratings and declined to respond to questions from Barron’s.
Daqo’s original U.S. banker, Morgan Stanley, held over 600,000 depositary shares of the stock, as of January. It didn’t respond to our queries. Nor did JPMorgan, which administers Daqo’s depositary shares in the U.S. Asked about the hefty Daqo holdings of Invesco Solar, Invesco representative Jeaneen Terrio said the ETF follows the MAC Global Solar Energy Index.
Originally published at Barrons