Falling demand for solar panels has resulted in a sharp decline in the price of polysilicon, which is the principal component of multi-crystalline PV modules. LDK Solar (NYSE:LDK), one of the largest manufacturers of high purity polysilicon, has seen its margins take a hit as a result. The glut in the ploysilicon market is expected to continue in the future as many large players will see new capacity come online over the next couple of years.  LDK derives a significant portion of its value from the sale of silicon wafers to PV module manufacturers such as JA Solar (NASDAQ:JASO).
Global polysilicon supply is set to touch 500,000 tons in 2014 according to some estimates, increasing from approximately 266,000 tons this year.  Much of this is because many large producers, such as German player Wacker, announced significant capacity expansion plans in recent years when spot prices of polysilicon were much higher. LDK is expected to triple its production capacity to 55,000 tons by the end of 2013 with the completion of its new facility in Inner Mongolia.
Polysilicon prices have fallen to around $33 /KG from the peak of $475 / KG three years ago.  The industry is expected to produce 28% more polysilicon than will be consumed over the next year as prices fall to into the $20s, according to analysts. 90% of the polysilicon produced is used by the PV industry – polysilicon contributes to approximately 25% of the cost of PV modules – and its prices are tied strongly to the fortunes of the solar energy sector. As European countries began to introduce generous subsidies to boost solar electricity producers, polysilicon prices rose from $30 in 2003 to $475 in 2008.  High prices lured almost all major producers to announce new plants, which has led to the current situation as module demand has fallen sharply with cuts in clean energy subsidies.
Industry consolidation likely
Many small players are expected to cut production if the prices do not recover. Some analysts say that almost half of the Chinese production may be terminated if the drop in prices continues.  Although 90% of the commodity is sold through long term contracts that are technically immune to spot price fluctuations, buyers are pushing for contract renegotiations.
Macquarie analysts said that they expected around two thirds of the 66 polysilicon manufacturers to fall victim to the present downturn.  The slump is expected to hit Chinese players harder than others, with almost 90% of the 35 competitors seen as possibly exiting the business. We expect LDK solar to weather the storm because of its scale and its vertically integrated business model.
We have a $5 price estimate for LDK Solar, which is approximately 40% above its current market price.Notes: