Crash strategies

The extreme price wars and fierce competition on the international solar market are bringing forth some strange fruit. Manufacturers are offering increasing quantities of merchandise, although customers do not want to buy any more. And although prices are plummeting, they continue to do so nonetheless. In the case of solar silicon the prices for the key raw material in the industry are dropping to new levels every day and nevertheless the world’s leading manufacturers are still relying on unbridled expansion. In a talk with pv magazine, Matthias Fawer, Director of Sustainable Investment at Bank Sarasin in Switzerland, assessed this corporate strategy as being both “contradictory and incomprehensible.” In 2011, companies increased their production by 30 percent compared with the previous year, the bank wrote in a market analysis. Demand was unable to keep pace, as confirmed by data from Robert Schramm-Fuchs and Shai Hill, analysts at the London office of the Macquarie Group. While the offer for silicon still quite accurately corresponded to the demands of the semiconductor and solar industries in 2010, the oversupply of polysilicon in 2011 amounted to already 20 percent of the quantities available. In concrete figures: the output plus inventory carryovers from the previous year amounted to 265,000 metric tons (mt) of polysilicon for the semiconductor and solar industry, compared to an industry demand for only 213,000 mt. The London analysts anticipate a world market volume of newly produced crystalline modules in the amount of 21.5 gigawatts (GW) for 2011 – or a 10 percent increase over the previous year. Translated into module capacities, the oversupply is equivalent to approximately six GW.
At the same time, the prices for silicon metal on the spot market declined by 60 percent over the course of the year to less than 30 U.S. dollars (USD) per kilogram by December 2011. According to information provided by the Norwegian polysilicon specialist, REC, they plummeted by 35 percent from October to December alone. By way of comparison: In 2008, a kilogram of the silver metal cost as much as 475 USD.

2012: Thirty percent surplus

For 2012, the analysts forecast further aggravation of these market imbalances. While the producers will make raw materials available for 35 GW according to the current state of planning, the solar industry will only be able to sell barely more than 24 GW of output. Thus the surplus volume will increase to 30 percent. “For the market to return to equilibrium in 2012, our global demand forecast would need to be exceeded by 11 GW, or polysilicon production would need to be reduced by 90,000 mt”, Schramm and Hill wrote in their analysis. “The market needs more rationalization,” they concluded.
But the market has already been moving in this direction for some time now, and this can be seen particularly in China. The Macquarie analysts draw reference to a study by the China Nonferrous Metals Industrial Association which concludes that 90 percent of the country’s polysilicon suppliers were affected by oversupply, and thus considered a stop in production. This involved smaller companies in particular with relatively limited levels of production. Compared with the market leaders GCL-Poly Energy, LDK Solar, Daqo New Energy and ReneSola, they represent the majority in terms of numbers with a total of 30 to 40 companies. “But each of them is operating with small volumes,” Jean-Francois Memandi from the Swiss UBS Investment Bank told pv magazine. “Thus they are not competitive at current market prices. We expect them to leave the market.” And the complaints of Chinese companies with regard to subsidies for polysilicon plants in the USA will also hardly make a difference. “These battles won’t have big effects on the markets,” comments Memandi.

China: Only four will make it

If the analysis of the financial experts proves to be correct, then the bell has been sounded for the end of the broadly diversified Chinese polysilicon industry. According to Macquarie, over 30 Chinese companies provided for just under 47,000 mt of polysilicon in 2011 and thus produced nearly as much raw material as the four large Chinese players altogether. However, this relationship will significantly shift to the disadvantage of the smaller companies already in 2012: “We believe that the combined production of the Chinese polysilicon producers outside the top four could fall by 75 percent. Virtual zero production could come from outside the top four already by 2013.” Apart from that, only the capacities of those integrated companies that produce part of their requirements in-house such as, for instance, Yingli Green Energy will probably remain.
The Chinese state will hardly have an interest in feeding the mouths of “the tier-2 companies,” suggests Sarasin analyst Fawer, but instead will make resources available to a few players of significant order. Market leader GCL-Poly Energy is gearing up the facilities at its polysilicon production site in the province of Jiangsu for full expansion. For 2011 the company has planned a production increase of more than 70 percent to reach a total of 31,000 mt, which would mean – compared with the previous quarter – a doubling of the output in the fourth quarter alone. According to information provided by management, the group aims to expand its capacities even further to 65,000 mt by the middle of 2012 and would then boast the largest production potential worldwide.
The plans of the Japanese company Tokuyama are also ambitious, although the chemical company had to admit during a conference call in the middle of November “the annual polysilicon sales volume is expected to be lower than estimated.” Nevertheless, construction of the new polysilicon factory in Malaysia is to be accelerated and it shall be put into operation already in the spring of 2014 instead of in 2015 as previously planned. In accordance with the wishes of management overall capacities are to increase from the current 9,000 to 30,000 mt, and the share of the world market from five to 10 percent.

The strategy of the big ships

The Munich company Wacker Chemie also does not see any reason to slow down its expansion despite the current oversupply on the market. The company plans to increase its output from 33,000 mt in the year just elapsed to 45,000 mt in 2012 and 50,000 mt in 2013. As of the year 2014, there will also be additional new capacities with 15,000 mt in the USA. “We are primarily concerned with making quality available to the market,” is how corporate spokesman Christof Bachmair justified the company’s development strategy to pv magazine. The company sees itself in the lead in this respect. “The purity of the raw materials that are used decides on efficiencies and effectiveness at the end of the production chain.” UBS analyst Memandi shares Wacker Chemie’s point of view: “The more module prices are decreasing, the more important is the quality of silicon. We are in a battle of efficiency. This is the differentiator on the market. We don’t see any oversupply for silicon with the highest purity levels.” The story behind the ambitious plans of the silicon giants is an exceptionally optimistic view of the future: “We expect to see volume on the crystalline solar market increase to up to 26 GW for 2011 and anywhere between 27 and 33 GW for 2012,” says Wacker spokesman Bachmair. Growth impulses will come from Japan, China and the USA. Competitor Tokuyama expects to see a strong recovery of demand as of 2014/2015 in particular. According to a business presentation from the middle of November, the Japanese company expects to see the market grow twofold or by 80 GW between 2015 and 2020.
Peter Woditsch, however, does not share such optimistic assumptions. The senior consultant and silicon expert and former chairman of the board at the ingot and wafer manufacturer Deutsche Solar considers the plans for expansion as exaggerated. “With the decisions that have now been taken on expansion the current overcapacities will be written in stone for years to come,” he said when talking with pv magazine. Even if developments on the market are better than he anticipates, the expected progress when it comes to material efficiency will provide for less demand: “Requirements will be reduced over the medium-term from the current average of seven to five grams of silicon per watt.”

Long-term decisions

However, the decisions on expansion have already been made. “It takes two to three years to realize a new polysilicon facility,” notes UBS analyst Memandi. Such investments cannot just simply be cancelled. “Look at the past: In 2009 the industry reduced its investment plans and the market complained about undersupply.” And then there is the financial risk. “By postponing the investment, the companies would only save some money. But at the same time they have the volumes already contracted.” Thus, Wacker Chemie insists that the lion’s share of the capacities up to the year 2015 have already been sold. It is true that companies would have to renegotiate and compromise with their customers as far as prices are concerned, Wacker also admits. “But the companies received prepayments for the additional capacities; the money is already on the balance sheet. By not going ahead they would have to repay it, [which] in my opinion would harm them much more than continuing with the scheduled plans.” Yet this policy will hardly contribute to improving prices. “In view of continued overcapacities, the spot prices will not rise to more than 35 USD per kilogram over the long-term,” suggests Woditsch of Deutsche Solar. Of course this does not represent a problem for the large producers, after all their cash costs amount to approximately 25 USD. GCL-Poly even calculates with costs of only 20 USD per kilogram. Furthermore, the long-term contract prices are clearly higher than the prices quoted on the spot market. But due to lack of economies of scale, smaller companies will be ruined by such prices.

Downshifting

A substantial cost factor is electricity. “Even if efficiency has clearly increased in recent years, electricity – depending on the respective price – still accounts for about a third of the costs,” says Woditsch. Thus it comes as no surprise that manufacturers such as, for instance, Tokuyama head for more favorable production locations like Malaysia. The company proudly reports that it expects to see a profit margin before interest, taxes, depreciation and amortization of 50 percent “if the polycrystalline silicon price levels off at 40 USD.” Nevertheless, several manufacturers have meanwhile decided to put on the brakes in view of the continued price war. Although the world’s leading manufacturer Hemlock, which will realize a factory with a capacity of 10,000 mt at its Clarksville location, refuses to renege on its already adopted expansion measures, any other development steps have been put on the back burner, intimated Hemlock spokesman Jarrod Erpelding to pv magazine: “As a result of market volatility Hemlock Group’s site in Clarksville is adjusting the timing of future expansion to align it better with customer and market requirements. The adjusted pace of expansion will result in a small percentage of construction contractors ending work on the site.” Nevertheless, Hemlock’s capacity at the end of the year will increase from 44,000 mt in 2011 to 50,000 and 56,000 mt respectively in 2012 and 2013.
But this is just the beginning, predicts market observer Woditsch: “Further shutdowns, temporary or permanent, would make sense.” Rumors about a shutdown of the Italian manufacturing facility belonging to MEMC and a slowdown in expansion at the South Korean company OCI could prove to be quite realistic in his opinion. “In light of the high prices for electricity it will hardly be worthwhile to manufacture in Italy.” Up to now plans at OCI include connecting new facilities (P4 and P5) to the grid with a combined capacity of more than 44,000 mt by the end of 2012 and 2013, thus increasing the production volume to a total of 86,000 mt.
The analysts at Macquarie are also skeptical: “As polysilicon spot pricing continues to fall sharply, we would anticipate more supply side curtailment to be announced.” The unanimous opinion among analysts is that low prices and overcapacities will force most smaller players out of the market. “In the coming years the oligopoly of the four largest polysilicon manufacturers will be able to increase its overall market share from today’s 60 to over 70 percent,” predicts the Sarasin report (see graph on previous page). At the same time more than 40 companies will disappear from the market by the year 2014, the Macquarie analysts surmise, expecting that only some 20 companies will remain. It could take years for the market to return to some semblance of normality, says Woditsch. Unless there is a new, surprising boost in growth, “for instance from China,” ponders UBS analyst Memandi. That is presumably the only hope: that these strange excesses in the market will quickly be corrected again.