Wacker Chemical and Polysilicon Industry Review

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PV demand contributes to more than 80% of the polysilicon demand, and is the key driver of the growth in polysilicon demand


Wacker Chemical stock has gained almost 50% from its recent low in May. Wacker is the leading supplier of polysilicon to the PV industry. The polysilicon division contributed around one-fourth to the company’s sales in 2012, but its share of the company’s EBITDA was more than 50%. The polysilicon division has been the key reason behind the volatility in Wacker’s stock in the last two years. As polysilicon prices crashed during that time, Wacker stock also went from its high of 170 in mid-2011 to a low of 40 by the end of 2012. As the whole PV market has recovered with prices stabilizing across the entire value chain, Wacker’s stock price has also regained some of its lost value. Polysilicon remains one of the key growth drivers for Wacker and will be critical to future growth in Wacker’s profitability. So, to analyze its stock, I had a deeper look at the dynamics of the polysilicon business.

Polysilicon demand

Polysilicon is the basic material used in the semiconductor and PV industry. PV demand contributes to more than 80% of the polysilicon demand, and is the key driver of the growth in polysilicon demand. With PV demand increasing at double-digit growth, polysilicon demand is expected to rise continuously; but, due to increasing efficiency of PV cells and wafering processes, polysilicon demand will grow at slower rate. PV demand is expected to be around 35GW this year and 45-50GW by 2015. Currently, manufacturers need around 6 grams of polysilicon per watt. This results in a demand of around 210k MT of polysilicon for the PV industry. With around 30k MT of demand from the semiconductor industry, total polysilicon demand is expected to be around 240k MT in 2013. With increasing efficiency of the PV cells and wafering process, polysilicon usage per watt is expected to go down. Assuming around 5.5 grams/W of polysilicon in 2015, 45-50GW of PV will require 248-275k MT of polysilicon. Semiconductor demand is relatively stable, and has been growing at a lower rate of around 5% in the last few years. With 5% CAGR, that will be around 37k MT in 2015. This will mean total demand of around 285-312k MT of polysilicon demand in 2015.

Polysilicon supply

Polysilicon manufacturing is an energy-intensive process, for which the Siemens process is the most commonly used. Most of the large producers, including Wacker, have modified the process in-house and own the technological know-how for its production. Following is the table of the six largest polysilicon producers in the world.

Six Largest Polysilicon Producers
Six Largest Polysilicon Producers

Adding this, we get a capacity of around 252k MT among the six largest producers. Besides these six, there are several other players – notably Hankook (5), Woongjin (5), ReneSola Ltd. (ADR)(NYSE:SOL) (10), Daqo New Energy Corp. (NYSE:DQ) (7), Sunedison Inc. (NYSE:SUNE) (9), KCC (6) and numerous Chinese players. Though most of the players have put their expansion plans on hold, Wacker has already invested for its new US plant, which will bring an additional 20k MT of capacity online by 2015. Besides this, Hanwha Chemical Corp. and Samsung Chemical are close to finishing their new plants of around 15k MT each. Also, there are several other players who have already committed to capacities, with significant investments already made. With all these new plants coming online by 2015, total productive capacity in 2015 will be around 350k MT.

Polysilicon cost and prices

Massive oversupply and price pressure from reduced subsidies led to the huge decline in polysilicon prices in the last two years. Looking into the future, increased demand is not likely to come close to supply by 2015. In recent months, with significant oversupply in polysilicon markets, spot prices have been close to the cash cost of production, which is around USD 16-18/Kg. With increasing demand and limited increase in supply, prices are expected to rise, but I do not think prices will go above 25 any time before 2015. Also, with reduced module prices, module manufacturers cannot afford to pay previously seen high prices for polysilicon. If poly prices go back to above USD 40/Kg, polysilicon cost will rise to around 25 cents/W from the current 10-12 cents/W. In such a case, end demand for PV will be reduced, increasing the gap between demand and supply. Although spot prices have fallen significantly, contract prices have been slightly higher – in the range of 20-25 – and are expected to remain in this range.

The cash cost of polysilicon production is around 16-18/Kg. With SG&A expense of around USD 2-4/Kg, the total cash cost of production is around USD 20/Kg. New polysilicon plant costs require CapEx of around USD 60-80/Kg. Using 10-year straight-line depreciation, new poly plants can produce at total cost of around USD 23-25/Kg. So, polysilicon prices will need to reach above USD 25/Kg for new investment by any of the manufacturers. FBR technology has been quoted as the technology of the future, as it has lower production cost. FBR technology can produce polysilicon at cash cost of around USD 12, but has higher CapEx, which results in total cost being close to that of polysilicon produced with the Siemen process. But FBR silicon has lower quality and gets lower prices in the market. Also, FBR technology is not as widespread as Siemens technology, and is unlikely to become the mainstream technology in the near future. So, prices are likely to reach around USD 30/Kg after 2015, once demand matches with supply, or else manufacturers will have to find ways to reduce production cost to make any new investments viable.

Polysilicon business of Wacker:

Wacker reported improvement in its polysilicon EBITDA margin in Q2, but this result included around USD 20 million of retained payments. Without the retained payments, Wacker would have had an EBITDA margin of around 20% in Q2/2013. Assuming that Wacker has been running at full utilization levels in Q2, we can estimate the ASP and cash cost for its polysilicon, and this comes to around EUR 22/Kg and EUR 17.2/Kg for the first half of 2013. ASP of EUR 22/Kg (~29 USD/Kg) is quite high compared to the spot market prices of USD 16-18/Kg . Since Wacker sells most of its polysilicon through long-term contracts, which were agreed upon some time ago, Wacker has been able to realize much higher selling prices compared to spot market prices. Though polysilicon prices are expected to rise in the near future, Wacker’s margin in the polysilicon business is unlikely to improve significantly, as its realized ASP is unlikely to go up for the following reasons:

1.       There is still oversupply in the polysilicon market, and demand will not outstrip the supply any time before 2015.

2.       Solar module manufacturers cannot afford to pay high prices for polysilicon, as they will not able to pass these on to their customers due to falling subsidy levels for solar installations in most of the countries.

3.       Most of Wacker’s customers have been renegotiating the contracts, and in the future are unlikely to pay significantly higher than spot market prices.

 

Although there is limited upside potential for ASP, Wacker will continue to improve its production cost for polysilicon. With decreasing cost and stable ASP, the profitability of its polysilicon business will increase from current levels. Wacker’s new site in Tennessee will have significantly lower cost of production compared to its current European sites, and can lower its average production cost significantly in 2015. I have assumed the ASP of around EUR 20/kg and cash cost of EUR 16.5/kg in 2015 for my calculation in the valuation.

Company valuation:

For Wacker’s other business units, I assumed historical trends to continue for revenue and cost. With these assumptions, I estimated Wacker’s EBITDA to be around EUR 550M for this year and increasing to EUR 750M by 2015. Net income will increase from EUR 45M in this year to EUR 160M by 2015. Assuming CapEx of around EUR 210M and subtracting taxes, free cash flow will be around EUR 450M in 2015. Assuming a multiple of 10 on free cash flow and subtracting for the debt and cash on the balance sheet, I get an equity valuation of around EUR 3.5B in 2015. With current valuation of around EUR 3.8B, it looks like the stock market has already priced in all the improvements in the polysilicon market and I see limited upside potential in Wacker’s performance over the next few years.

 

Companies: SOL, REC Group, SunEdison, China

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