How Chinese Import Duties Could Help Polysilicon Suppliers — and Hurt Everyone Else

China, the biggest buyer in the $5.5 billion market, plans to issue a draft ruling in February on dumping and unfair subsidy allegations made against foreign suppliers such as South Korea's OCI Ltd., Hemlock Semiconductor Corp. of the U.S. and Wacker. The country's first import tax would boost prices from unprofitable levels, the world's largest polysilicon maker said. 

"The industry is abnormal, with all the major producers suffering losses at previous prices ranging from $15 to $16 a kilogram," said Lv Jinbiao, deputy manager of Jiangsu Zhongneng Polysilicon Technology Development Co., a unit of China's GCL- Poly Energy Holdings Ltd., the world's biggest polysilicon manufacturer. GCL-Poly's shares have leaped 38 percent in one month in Hong Kong.

Lv, whose spoke in a phone interview, forecast the spot price to recover to as high as $25 a kilo if import duties are set this year. That's up from $16.16 recorded on Jan. 21.

Solar-grade silicon, which plunged from a record $475 in 2008, led Hong Kong-based GCL-Poly and OCI in 2012 to stop expanding production capacity as a supply glut crushed margins. GCL-Poly had a 65,000 metric ton (143 million pounds) a year capacity in 2011, data compiled by Bloomberg Industries show.

Share Performance

Many small Chinese makers suspended lines altogether last year. The 12-member BI Global Leaders Solar Polysilicon Competitive index that includes both companies skidded 68 percent in the two years through 2012.

Duties, if they are imposed, would be paid by importers in China who then would try to pass the extra cost on to buyers. Higher costs for the most expensive ingredient in photovoltaic panels could in turn push up their price.

That would raise Chinese prices of polysilicon, while forcing overseas producers to "cut selling prices to compensate at least to some extent," said Stefan Freudenreich, an analyst at Equinet Bank AG in Frankfurt.

The foreign polysilicon makers most affected could be OCI, Wacker, Hemlock and Norway's Renewable Energy Corp., according to data compiled by New Energy Finance data, a unit of Bloomberg LP. They're the top producers after GCL-Poly.

Price Power

Chinese manufacturers including Lv's company increasingly are setting the global price for polysilicon, the most costly ingredient in solar-power devices. They've undercut prices of many Western manufacturers for years typically by selling at prices more aligned to the fluid spot market. That has forced more expensive competitors to break their multiyear fixed-price contracts to supply makers of solar cells and wafers.

Western polysilicon producers will start another round of price renegotiations for long-term contracts with "spot price- linked price clauses, with frequent adjustment periods," Freudenreich said.

Jiangsu Zhongneng's Lv expects long-term contracts with fixed prices to vanish in 2013 in China.

"Buyers may use high import duties as the force majeure to terminate old contracts," provided that situation wasn't specifically ruled out in their agreements with buyers, Lv said. "Otherwise they will choose compensation to end the orders and then purchase at spot prices."

Share Rebound

A price increase would help rescue unprofitable Chinese producers including GCL-Poly and Daqo New Energy Corp. Shares of GCL-Poly, the parent of Jiangsu Zhongneng, fell 28 percent last year, and Daqo fell 5 percent. They have rebounded 38 percent and 63 percent, respectively, in 2013.

The anti-dumping penalties proposed by Chinese polysilicon makers amount to about 54 percent for imports from the U.S., 49 percent for those from South Korea and about 11 percent for polysilicon from the European Union, according to New Energy Finance.

China opened the investigation last year to determine whether foreign suppliers of polysilicon are selling below cost in the nation, acting on complaints filed by four companies including GCL-Poly's Jiangsu Zhongneng and Daqo. The move followed a decision by the U.S. government to impose duties on Chinese suppliers of solar cells to the American market, and moves by the European Union to follow suit against Chinese solar imports.

February Decision

China plans to issue preliminary findings on Feb. 20 and a final determination on June 20, Lv said.

"The preliminary announcement should also be interpreted as a 'warning' signal to the EU, which is currently investigating the possible dumping of Chinese photovoltaic products," Freudenreich said.

If China set a "reasonable" duty in February, that would ease the EU's potential duties against Chinese solar products, Bryan Li, chief financial officer of Chinese solar-panel maker Yingli Green Energy Holding Co., said in an interview in Baoding, China. Li said a reasonable duty is "about 10 percent," otherwise buyers would find it hard to afford purchases.

China is also investigating whether the U.S. and European Union are subsidizing makers of the silicon-based commodity.

"The Chinese government has to find the right balance between giving local polysilicon manufacturers some support and securing supply of high purity polysilicon at an acceptable price for its leading module producers," said Freudenreich. "Taiwanese buyers should profit from lower prices as more material is likely to be redirect away from China."

Increase Prices

Solarworld AG, which led a group of manufacturers in a complaint against Chinese competition, expects the EU to announce anti-dumping duties as early as May, Chief Executive Officer Frank Asbeck said earlier this month in an interview.

"Duties will at least partially increase prices, therefore they create a lose-lose situation" for producers and buyers, Daniel Seidenspinner, an analyst at B. Metzler Seel Sohn & Co. KGaA in Frankfurt, said by e-mail.

Seidenspinner said he expects the polysilicon price will rebound this year, assuming a 12 percent increase in 2013.

The 2.2 percent rebound in 2013 in spot prices is because of "cessation of year-end inventory liquidation and a bit of advance buying by Chinese customers ahead of what could be a nasty import tariff decision" after major polysilicon makers around the world decreased output since September, Robert Schramm-Fuchs, a London-based analyst at Macquarie Group Ltd., said in a Jan. 23 e-mail.

Idled Plants

Schramm-Fuchs said if idled plants don't return to production, then the biggest manufacturers have the potential to cover their full costs, including depreciation.

"If the polysilicon producers maintain production discipline, the spot price has upside potential to recover to the fully-loaded cost of the majors of $22 a kilogram during the course of the year," Schramm-Fuchs said.

After that "the risk for spot prices is skewed to the downside again as idled capacity will return to the market and expansion projects could be re-accelerated given the price signal."

Any tariffs could benefit the four polysilicon makers that petitioned for them -- LDK Solar Co., Daqo, and China Silicon Corp. and GCL-Poly -- and potentially hurt much of the Chinese solar-supply chain, and even global demand for installations.

"The tariffs would damage China's domestic module, cell and wafer makers as it would raise production costs and further squeeze the economics of module manufacturing, already under pressure from severe price declines," Aaron Chew, analyst for Maxim Group LLC, said in an e-mailed research note.

For those reasons Chew said he doubts the tariff will be imposed.

Copyright 2013 Bloomberg

Lead image: Photovoltaic solar panel with coins via Shutterstock