Chinese Polysilicon Makers Come Back to Uncertain Future

Enterprises may wake up to a market of painfully low prices and shrinking demand

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Multiple Chinese polysilicon manufacturers are resuming production as market price maintains its increase in 2013 and the Chinese government takes action to raise barriers against foreign competitors in June. The future still looks unpromising, though, for the companies in a market where profit margins teeter on being non-existent and recent government policy changes on solar feed-in tariff are set to demotivate the country’s solar PV industry. 

Plans for Resuming Production

Plans are actively in the works for major Chinese polysilicon manufacturers with output capacity above 3,000 tons to resume operation by as early as the end of April, while small and mid-range operations around the country eagerly await the Ministry of Commerce's preliminary ruling on the alleged dumping practice of major exporters of low-price polysilicon to China, including the EU, South Korea, and the US, set to take place in June. The scheduled ruling has been postponed from April to coincide with the EU's preliminary determination of its investigation into the dumping practice of China's solar PV enterprises in the EU market.

According to Yan Dazhou, vice general manager of China Silicon Corporation Ltd., which is backed by the state-owned Metallurgical Corporation of China Ltd. (MCC) (SHA:601618), his company originally plans to partially resume polysilicon production at the end of April with a target output of 6,000 tons. Meanwhile, other major manufacturers, among whom are Sichuan Renesola Ltd. - China branch of ReneSola Ltd. (ADR) (NYSE:SOL) , and LDK Solar Co., Ltd (ADR) (NYSE:LDK), both have plans to restart production by the end of April or early May. 

China Silicon Corporation's production system has already started warming up since March. Sichuan Renesola shares this plan and expects the annual output volume to reach 10,000 tons if first- and second-phase production lines both resume full operation. LDK's recent recruitment plan of 1,200 personnel is also a telltale sign of the domestic polysilicon industry's reawakening, as the company's President and CEO Tong Xingxue explains, an increase in the price of polysilicon will in turn bring growth to downstream enterprises such as LDK. 

This widespread comeback comes after nearly two years of shutdowns and halted operations among the vast majority of China's polysilicon manufacturers. According to data from China Photovoltaic Industry Alliance, at the end of 2010, there were altogether 57 polysilicon manufacturers with active output in China, but in 2012, nearly 90% of them have had to terminate production due to low market price and anomalous competition from foreign rivals. Among them was China Silicon Corporation Ltd. Production in the country's number-two polysilicon manufacturer in terms of annual capacity (10,300 tons), came to a complete halt in September 2012. The country's number-one manufacturer, GCL-Poly Energy Holdings Ltd. (HKG:3800), whose annual capacity in 2012 reached 65,000 tons, did not stop operation, but has been suffering a loss totaling 3.5 billion RMB in 2012. 

At present, only three or four domestic enterprises are still in active production. 

Polysilicon Price Increase in 2013

A significant increase in the market price of polysilicon since 2013 has given confidence to recent plans of production resumption. Market price of polysilicon has jumped to 142,600 RMB/ton in March 2013 from 115,000 RMB/ton at the end of December 2012, a significant increase of 24%, widening potential profit margins and giving stronger incentive for investment into the industry. 

China's Ruling on Foreign Dumping

The other significant reason behind this round of widespread production resumption is China's upcoming ruling on the dumping practice of all major polysilicon exporters to China, which includes the US, EU, and South Korea. The move is expected to impose hefty anti-dumping and anti-subsidy tariffs upon polysilicon imports from the listed countries, effectively giving Chinese polysilicon makers a leg up in the domestic market now dominated by foreign manufacturers. 

At the moment, foreign manufacturers dominate the Chinese polysilicon market by a far cry thanks to their cheaper costs. According to data from the Chinese Customs, a total of 7,991 tons of polysilicon was imported to China in February, an increase of 17.7% from January and a year-on-year increase of 4.9%, making February the month with the second highest import volume since 2011, only after September of 2012. February's data shows that polysilicon import from South Korea, the US and Germany altogether account for 87.5% of the month's total import volume, with South Korea at 1,422 tons (17.8% of total import volume), the US at 2,860 tons (35.8% of total import volume) and Germany at 2,713 tons (33.9% of total import volume) and unit import price at 19.87 USD/kg, 12.57USD/kg, and 21.6 USD/kg respectively. By comparison, the average price of domestically produced polysilicon now stands at over 30USD/kg, more than 10 USD/kg more expensive than its foreign counterparts. 

It is widely expected and hoped for by the Chinese polysilicon manufacturers that related domestic enterprises will benefit from the introduction of anti-dumping and anti-subsidy tariffs on their foreign competitors. As the general manager of one mid-range enterprise confesses: "Once the preliminary determination is delivered, imported polysilicon's presence in the market will decrease significantly thanks to the tariffs, and there will be a way out for the domestic industry."

Uncertainty Ahead

But it is not optimism all around. Industry insiders have given out warnings that Chinese polysilicon manufacturers are still highly likely to face a harsh reality of slim, if not negative, profit margins, given the status quo of polysilicon’s extremely low market price heralded by their foreign competition. There is also further anxiety surrounding the Chinese government's recent solar PV feed-in tariff policy change, which is expected to demotivate the downstream power companies, and in turn cuts short demand for silicon in the upstream. 

In February, the unit import price of polysilicon dropped to 17.7 USD/kg, a steep decrease of 37.1% from the same period a year ago, and a 30.2% drop from the 2012 price average. A senior executive at GCL-Poly Energy Holdings maintains that profits will still remain elusive after production resumes in June despite the ruling: "The cost of foreign-made polysilicon is usually between 20 to 30 USD/kg but it is sold to the Chinese market at lower than 20 USD/kg. At this price, even if (domestic) production is resumed, we will be selling at a cost." 

Furthermore, at the beginning of this year, China's National Development and Reform Commission issued the "Notice On Improving the Photovoltaic Feed-In Tariff Scheme," introducing a change in PV feed-in tariff that is set to dampen enthusiasm of the PV industry. Previously, the PV feed-in tariff was generally set above 1 RMB per kilowatt-hour (kWh). The "Notice" introduces a distinction in price policy between distributed power generation and large-scale ground-based power generation, where in the latter's case, four price ranges are introduced between 0.75 - 1 RMB/kWh on the basis of a region's lighting condition. The move introduces procedural complications and further shrinks profit margins for the country's power industry. A potential subsequent decrease in their output capacity will undoubtedly send ripples upstream and cut down demand for silicon, further exacerbating the domestic silicon industry. 

Adding to the concern is the EU's impending sanction of China's alleged dumping practice in the European market in the solar cell sector. Given that the EU market currently absorbs 70% of China's solar cell production, its upcoming preliminary determination on Chinese dumping, which is almost surely going to be a positive one, will inhibit the growth of China's solar PV industry. By extension, the upstream polysilicon manufacturers will fall victim to that as well. 

The Case for Small and Medium Enterprises

Small and medium silicon manufacturers in China have had to postpone their plan to reopen production as a result of the Ministry of Commerce's decision to put off the delivery of the ruling till June. Most of them are at the moment adopting a wait-and-see attitude on the situation, because in proportion to the scale of their enterprises, their losses from stopping production again after a faulty resumption are going to be greater than not starting the production at all. 

The upcoming June's verdicts from both China and the EU will bring drastic changes to the landscape of the polysilicon industry in China. While hope remains that the relevant Chinese enterprises will find their feet when their strong foreign competitors are deterred, their eventual fate still largely depends on future strategies of the foreign enterprises and the EU, as well as how the domestic industry responds to the recent changes in solar PV feed-in tariff and potential excess capacity in the near future.