From the end of August, the price of domestic solar-grade silicon has dropped abruptly, and has continued to fluctuate in the past two months. Moreover, the price decrease of domestic silicon is more dramatic than that of imported silicon. According to data from the Solarzoom Market Center, the price of level-1 domestic silicon material fell by 14.6% in the last two months, while the import price only dropped by 5%. In our opinion, the main reason for this is that the domestic firms are decreasing their demand for spot sold silicon.
Since many domestic enterprises still keep the long-term contracts with foreign manufacturers, they will choose to purchase imported material first. As a result, both the supply volume and the price of imported silicon material are more favorable than domestic ones.
Since the lead time for delivery of the domestic silicon material is shorter, most of the spot silicon is supplied by domestic manufacturers who have very few long-term contracts. Imported silicon has an excellent quality, but due to the lead time being a lot longer, wafer manufacturers have to sign long-term orders with pre-set delivery quantities, or otherwise find themselves delaying their own manufacturing processes. Meanwhile, since the price of silicon is decreasing, wafer manufacturers are faced with losses, when silicon is priced with long-term contracts. Naturally, companies that cannot cut ASP become uncompetitive as a result, so this offers no viable option.
In order to mitigate risks, wafer manufacturers would attempt to forecast demand for their own product when making purchases, by partially using a long-term contract, and then plan for the rest of the demand to be supplemented with spot purchases. The long-term contract will be also separated into two sections: domestic and overseas sources.
Unfortunately, the risk is not really neutralized, when simply forecasted demand does not manifest itself in reality. If the actual demand volume is higher than the expected, wafer manufacturers need to purchase more from spot, but both the supply and the price will see instability. However, when the demand is lower than the anticipation, they are expected to pay for cancellation of the long-term order or keep purchasing and stockpile the inventory. The Chinese market is now in the latter condition, despite many orders having been renegotiated, or even canceled in the ongoing pattern, since last year. The remaining long-term contractual volume had to this point exceeded real demand.
Since paying a penalty has a massive impact on cash flow, firms continue to take on deliveries, but instead of stockpiling it, they attempt to improve liquidity by reselling silicon into a spot, taking less of a loss.
Currently, many domestic wafer manufacturers are reselling imported silicon domestically, and their quotation is lower than the normal spot price by 10% to 15%. In current conditions, most Chinese domestic silicon manufacturers can only remain viable with their operation if offered long-term orders, as the spot pricing is below their production costs. However, since most long-term orders are with foreign manufacturers already, the total sales volume of domestic silicon is severely reduced as a result.
Making things worse, China’s spot market receives regular dumps of silicon from other parts of the globe. Wacker Chemie AG (ETR:WCH), Germany’s premium quality silicon supplier, had already started underselling their products in apparent expectation of being added to China’s investigation of dumping from the US and South Korea. Wacker’s poly is favored by China’s solar firms, so it is no surprise it is bought over the domestic product. As much as 4,000MT was shipped from Germany in September, which is twice the amount regularly received in other months.
Moving into Q4, the Chinese domestic demand for poly is seen to increase rapidly, as European buyers have begun to stockpile modules in preparation of the outcome of the EU AD&CVD investigation. For the time being, the demand from Australia, USA and Japan plus emerging markets is experiencing a seasonal uplift. The quarterly volume is expected to reach 8GW to 9GW, which can consume as much as 35,000-40,000MT of polysilicon. Since many manufacturers have reduced production and the majority had shut down, pricing should become stabilized and inventory levels should see depletion, at least for the remainder of the year. Another contributing factor is that the domestic PV market is receiving more attention from capital investors; also, banks are willing to lend more into EPC projects, in comparison to even two months ago.
