Ready to hit the ground running

When China sneezes, many industries throughout the world catch a cold – that’s how important Asia’s largest economy has become to the global economy. This is something the international solar industry has also noticed over the course of this year. Development of the demand for PV in the world’s largest solar market has a very significant effect on businesses along the entire added value chain. According to market players such as GCL-Poly, the world’s largest silicon manufacturer in the industry according to market research company IHS (see pv magazine 03/2014), the mood of many a silicon manufacturer is tense because there have been signs of final demand in China weakening in the second quarter. When asked, the response of Wacker Chemie, the second largest silicon group, was, “We don’t talk about price trends.” This wasn’t always the case. It’s possible that falling prices are causing some companies to become sensitive.
After months of upward trends, the second quarter of 2014 has seen an end to the days of increasing prices in the solar-grade silicon market. According to surveys by PVInsights, while the price being paid on the spot market for a kilogram of second-grade high purity polysilicon was still more than $22 in March 2014, it recently dropped to less than $21.
One key reason for this, as explained by Johannes Bernreuter, head of German analysis company Bernreuter Research, has been that licensing procedures have delayed installations in China. He says that as prices at the end of the first quarter had also risen to the highest level in two years, it was apparently time for a correction. He also says, however, that the downward trend could soon be over again if the market in China gathers pace as expected. In a report on the first quarter, GCL says that at 3.9 GW Chinese demand in the third quarter is expected to more than double compared to Q2. It also reports that the company from Jiangsu is anticipating as much as 6.3 GW in new installations for the fourth quarter.
Bernreuter concludes that the licensing backlog for large-scale projects in China is clearing, that demand will pick up again and therefore so will the prices for silicon. He says that this is also indicated by the supply side. Although it is not characterized by short supply, the industry’s capacity utilization has not been as high for a long time. Bernreuter says that at the same time, the expansion measures announced by the industry are not being implemented as consistently as originally planned: “We only expect 10,000 to 15,000 metric tons of new silicon capacities to become effective in 2014. The majority of the expansion measures announced will only be available from 2015 onwards.”

Expansion plans

Take GCL for example: Alongside its Siemens reactors, the global market leader intends to commission new production lines based on the technology of fluidized bed reactors (FBR). We are talking here about 25,000 metric tons which, according to May’s quarterly report, should be available during 2014/2015. In Bernreuter’s estimation, FBR is not easy to implement. He thinks it will take until 2015. In his words, “We are expecting only a few thousand metric tons of new capacities.” SunEdison’s plans to implement a new FBR line jointly with Samsung Fine Chemicals in South Korea have also been delayed. The reason for this has been the tight cash situation at SunEdison, number six in the silicon world according to the IHS ranking. In June, rating agency Standard & Poor’s decreased its assessment of SunEdison’s creditworthiness to B- due to the company’s “weak free cash flow” and “vulnerable business risk profile.” In the ratings world B- is only one step above “junk” status.
Korea’s OCI has also postponed plans to expand capacity until 2015. “In the last conference call, the company gave the reason for this as bottlenecks affecting engineering services,” Bernreuter reports. The analyst says that China’s Daqo New Energy will also be unable to carry out the planned doubling of its capacity from 6,000 to 12,000 metric tons until 2015. He points out that for the current year, this would leave only the first factory of new entrant Hanwha, and a development project by Tokuyama, both of which intended to enter the market with 10,000 and 13,800 metric tons respectively but which experienced difficulties in starting their new production facilities.
In view of this, Bernreuter expects that silicon prices will head towards $25 in the course of “speculative over-reactions.” But he estimates that towards the end of the year they will come back down again to a level between $19 and $21 because by then it will be possible to feel the effect of the new capacities on the market.

Good supply of material

After two years of privation, this is good news for companies. According to GCL, the average sales price in the first quarter 2014 has increased in just one year from $16.6 to $21.7 – a massive 30% increase which has raised turnover and profit. This means that the solar-grade silicon industry is again able to demand higher prices for its products. Margins could rise even higher if the industry is able to further reduce its production and cash costs. At present GCL and Daqo are quoting their costs respectively as $17 and $14.50 per kilogram and falling. According to Bernreuter, GCL is getting ready to start up its own power plant that will cover 70% to 75% of its company-wide power requirement. The aim is to halve the electricity costs that are so relevant for silicon production. Competitor TBEA Xinjiang is also reducing costs by utilizing a new coal-fired power plant close to its own manufacturing plant.
When the new capacities come onto the market, capacities that, according to industry sources, can produce solar-grade silicon at a cost of less than $15 per kilogram, this will simultaneously increase the pressure on existing production lines. In the opinion of U.S. research company Solarbuzz, “This implies that much of the polysilicon capacity built previously may struggle to remain competitive, could run at low utilization or might be shuttered as new capacity comes online.” This question will be asked increasingly from 2015 on when the expansions in capacity that have been announced take hold. Solarbuzz forecasts more than 260,000 metric tons of new capacities by 2018. Although Bernreuter sees this figure as exaggerated, he nevertheless expects a very good supply of raw materials for the solar markets in coming years. This is also due to increasing material efficiency. The industry is steadily reducing its demand for silicon. Bernreuter says that while the average amount of silicon per watt necessary in 2013 was still 5.9 grams, the industry now only needs 5.5 grams. Wacker Chemie sees the five gram mark coming into sight.
At the same time, suppliers of the highest quality segment can still continue to expect premium prices for their silicon in spite of increasing capacities.
Manufacturers of tier-1 wafers and cells expect high purity levels so that they can guarantee reliable products. This will enable the silicon suppliers to ask for surcharges for such qualities. However, even they aren’t immune to the cost reductions of competitors. Wacker has concluded an agreement with the Chinese Ministry of Commerce “not to sell solar-grade silicon in China below a certain minimum price that is guided by the general market level.” With increasing silicon prices, this also safeguards new investments such as that which the German company is planning with its factory in Tennessee. The costs of this factory, however, are rising and in the meantime the company is having to take considerably higher capital expenditure into account. In its most recent quarterly report, the company says the reason is that the costs for materials and services for new chemical factories have risen due to the shale gas boom in the U.S. Wacker now envisages investments of $2.3 to 2.4 billion instead of the $2.2 billion originally calculated. This shows that even though the silicon industry has probably moved beyond its most difficult time, there will be no lack of challenges for the future.