Solar Silicon to Bottom as China Halts Factory Expansion

Polysilicon, the raw material used by the $38 billion a year solar industry, is forecast to bottom near a record low next year after the leading manufacturers in China and South Korea halted factory expansions.

The spot price will fall 6 percent to about $18.20 a kilogram by mid-2013 and then is likely to stabilize, according to the median estimate of five analysts surveyed by Bloomberg. The commodity crashed from $475 in 2008 and is down 27 percent this year to $19.36 on Oct. 1, the lowest in at least a decade.

Producers led by GCL-Poly Energy Holdings Ltd. in China and OCI Ltd. of South Korea have stopped expanding factories after doubling capacity between 2009 and 2011. While the resulting glut gutted margins as it depressed prices to near or below output costs, most producers will avoid shutting plants, Joe Osha, an analyst for Bank of America in San Francisco.

“Instead, demand is going to grow, and eventually you are going to get to the point where supply and demand balance, probably in 2014 or 2015,” Osha said in an interview. “This is going to bottom the long, painful way.”

GCL-Poly reported its first half-year net loss since 2009 on Aug. 24 and is halting capacity expansion plans to focus on cutting costs. The company, whose stock has dropped 46 percent in 2012, said it produced polysilicon for $18.90 a kilogram in the first half, down 14.5 percent from a year earlier.

Line Retrofit

LDK Solar Co., the sixth-biggest maker by capacity, said it almost didn’t produce polysilicon in the second quarter because of a retrofit plan aimed at cutting production costs in half to about $20. South Korea’s OCI Co., the third-largest, also halted an expansion this year.

Most manufacturers cut output or stopped boosting scale in the past few months, while many small Chinese makers halted lines altogether earlier in the year. The surplus, however, is too large for prices to start rebounding anytime soon, according to Sean McLoughlin, an industry analyst at HSBC Bank Plc.

A “realistic” bottom for spot prices, excluding the occasional effects of distressed sales, is $18, McLoughlin said. “At $18, you’re reaching into reported cash cost levels of some of the top producers, which becomes a strong resistance point,” he said in an interview.

Polysilicon, which is silicon refined for use in panels that convert sunlight directly into electricity, accounts for about a quarter of the costs to make the photovoltaic devices. Those panels produce the majority of the world’s solar energy. The material is also a crucial ingredient for semiconductors.

Hemlock and Wacker

The top five makers, which also include Germany’s Wacker Chemie AG, U.S.-based Hemlock Semiconductor Corp., and Norway’s Renewable Energy Corp., could produce enough silicon to satisfy all current demand for panels, according to analyst estimates.

The price survey comprised forecasts from Bank of America Corp, HSBC, Macquarie Bank Ltd., Maxim Group LLC and Bloomberg New Energy Finance.

“Polysilicon will keep falling for some time and will stay low for years to come,” Martin Simonek, solar analyst for New Energy Finance, said by phone. “Demand for solar panels in the second half is expected to weaken so oversupply will not improve, even though there’s some reduction in supply.”

Hitting bottom will take years because silicon is a “high fixed cost, low variable cost” business where the tendency is to keep operating unless prices go below cash cost, Osha said. Those costs typically include production expenses and exclude depreciation.

Market Share

The top five companies are likely to increase market share, while those with more than 10,000 tons in annual production are likely to keep producing, and the rest will have to shut down because they can’t be competitive, he said.

Polysilicon capacity is currently enough for 40 gigawatts to 45 gigawatts in photovoltaic panels, which compares to a demand forecast of about 31 this year, Barclays Plc said in a research note on Sept. 5. Capacity has risen less than 10 percent since the end of last year, according to Bloomberg New Energy Finance.

GCL-Poly, Wacker and most analysts expect 30 gigawatts to 35 gigawatts of demand this year. That’s 10 percent to 20 percent more than last year.

Barclays sees 33 gigawatts in solar panel demand during 2013, driven by cheaper polysilicon and stronger markets outside Europe. As the glut persists, the bank sees the largest companies increasing their market share of already about 85 percent by exploiting their cost and scale advantages.

“The PV industry has attracted too many players,” Wacker Chief Executive Officer Rudolf Staudigl said on July 25. “It will take time to shut down or absorb the capacity surplus even though the market keeps growing.”

Slimmer Margins

The German company’s operating margin dropped to 9 percent in the second quarter from 17 percent a year ago. OCI, the second-biggest manufacturer, reported its margin narrowed to 6 percent from 33 percent over the same period. Smaller players such as China’s Daqo New Energy Corp. have been posting losses and negative margins for several quarters.

The spot price of polysilicon has been falling since February, dragging down the price of long-term contracts for the material derived from sand. Such contracts, which still account for a large part of sales, are now in the $23 to 25 a kilogram range, according to most analysts. Only last year they averaged about $51 a kilogram, depending on quality, BNEF data shows.

The price of polysilicon may be influenced by potential anti-dumping measures in China against suppliers in the U.S. and South Korean, according to the analysts.

Dumping Probe

On July 20, China’s Ministry of Commerce started a one-year anti-dumping probe on solar-grade polysilicon imports from those countries. The ministry will make preliminary findings as early as November, officials at Daqo and Jiangsu Zhongneng Polysilicon Technology Development Co., two of four makers that brought the case, said last month.

“Should there be significant import tariffs against U.S., Korean or even EU producers, then the whole picture would change,” Robert Schramm-Fuchs, analyst for Macquarie Bank Ltd., said by phone. “It would delay consolidation and concentration in the industry.”

China now holds about 25 percent of global polysilicon capacity, of which less than 15 percent comes from medium or small companies, according to Barclays. The much-needed shakeout at the bottom is “frustratingly slow” due to the country’s unwillingness to allow market forces to eliminate unprofitable and uncompetitive participants, it said.

The tariffs would support Chinese polysilicon makers while delaying the supply demand balance the industry needs, according to the analysts. Most solar panels that use the material are manufactured in the country.

“Introducing duties in China will not help anyone, except possibly a few obsolete Chinese polysilicon manufacturers,” said Simonek from BNEF. “International makers would have to drop their prices further to sell there, and the duties would increase the price of the raw material, making Chinese modules uncompetitive. It’s like sowing the bench you’re sitting on.”

Copyright 2012 Bloomberg

Lead image: Red arrow down via Shutterstock

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