Declining Polysilicon Prices Force Chinese Firms To Rethink Expansion Plans

As polysilicon prices continue to plummet, Chinese manufacturers are beginning to hold back on their manufacturing capacity expansion plans. Prices for polysilicon have crashed over the last few years, falling from around $475 per kilogram in 2008 to about $19 per kilogram at the beginning of this month. ^[1] Polysilicon, a highly refined form of silicon, is a key raw material used in the manufacture of solar cells. It accounts for about a quarter of solar cell manufacturing costs.

Historically, polysilicon prices have been volatile because construction of new plants add a large amount of supply to the market. A polysilicon plant typically takes about 2 years to construct and can require capital outlays of over $500 million. ^[2] Polysilicon production typically has high fixed costs and smaller variable costs.

For much of the last decade, manufacturing was dominated by European and American firms, but the situation changed around 2009 when Chinese firms rapidly expanded capacities to feed their burgeoning solar wafer production.

China Increasing Polysilicon Imports

Today, China is the world’s largest manufacturer of polysilicon, accounting for about 40% of global production. In spite of this, the country continues to import significant quantities of polysilicon as domestic production is not sufficient to feed wafer production. China accounts for about 76% of global wafer production. ^[3] The country imported about 56,000 tonnes of polysilicon over the first eight months of the year, up about 33% since last year. ^[4]

Some domestic wafer manufacturers also tend to prefer polysilicon sourced from abroad due to concerns of fluctuating quality of polysilicon manufactured in China. Yingli Solar (NYSE:YGE), for example, chooses to import about 90% of its polysilicon requirements.

Chinese firms are also finding it difficult to compete with imports on price. The prices of polysilicon imports from the United States fell sharply this year, prompting a group of Chinese polysilicon manufacturers to file a dumping complaint with the county’s Ministry of Commerce. The preliminary findings of the case are expected to be available as early as November this year.

What Chinese Firms Are Doing To Improve Profitability?

While the effects of low cost imports and a tough pricing environment continue, most large Chinese manufacturers have chosen not to shut plants, and are instead focused on maintaining capacity and improving manufacturing processes to reduce cost.

For instance, LDK Solar (NYSE:LDK), the world’s sixth largest polysilicon manufacturer, was incurring unviable production costs of around $41 per kilogram. To remedy the situation, the company chose to drastically reduce production in Q2 so that it could de-bottleneck its manufacturing operations and retrofit its production line to incorporate the hydrochlorination technology to reduce power consumption and improve efficiency. Following the modifications, the company expects production costs to reduce to about $20 per kilogram. ^[5]

The weak pricing environment is expected to continue into next year but, according to an industry analyst with HSBC Bank, polysilicon prices are expected to bottom out at around $18 per kilogram as most large producers will only be able to recover their cash costs if prices are around those levels. ^[1]

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Solar Silicon to Bottom as China Halts Factory Expansion, Businessweek [↩] [↩]
2. Congressional Research Service: US Solar Photovoltaic Manufacturing [↩]
3. Solar Buzz NPD Group [↩]
4. China’s Polysilicon Imports Rise, Prices fall, China Daily [↩]
5. LDK Solar Q2 Earnings Call, Seeking Alpha [↩]