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Not that Klothilde is wrong about gloomy polysilicon price outlook. But the focus on the negative profit impact for DQ is strange considering the stake is 100% FSLR and the price of polysilicon is directly related to FSLR’s profits too.

si margin = si price - si prod cost

si panel margin = panel price - si price - non-si cost

tf panel margin = panel price - tf cost = si panel margin + si price + non-si cost - tf cost

That is if the panel price follows si price to keep si panel margin constant when si price drops the si panel maker is unaffected while the si maker and the tf panel maker get equal negative margin impact. Partly TF controlled tf margin part is

non-si cost - tf cost

This part has positive tf margin contribution if tf cost is below the non-si cost of si panel production. This is the fight beween tf and si panel r&d. A non-controlled part of TF margin is

si panel margin

The last non-controlled and very variable margin part for the tf panel is simply

si price

Remember the time (last decade) when FSLR had fat panel margins and polysilicon makers too (to the tune of 60%)? And si panel makers lived on breadcrumbs. The cause was the same - high polysilicon price. This was the dominating component of FSLR’s high margin.

Edited by explo

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My breakdown of FSLR’s gross margin into three components fascinates me a bit. Let’s say that during a short period all of si production cost, TF production cost and non-si cost to produce si panel remains fixed but that panel price decline 4 cents and si price decline 2 cents. Then the si panel maker’s margin is hit by the difference of the decline between panel price and si price, i.e. 2 cents. The si maker is hit by the decline in si price, i.e. 2 cents. Worst is FSLR hit with the sum of the si panel maker and the si maker hits, i.e. 4 cents. If they can reduce their production cost with 2 cents more than si panel maker can reduce their non-si cost they get back on par with the other too. Sounds like extra structural uphill for FSLR during market weakness. Simply put they are more integrated and reap alone high panel price but is also beaten alone by lower panel prices. This PV market sensitivity might explain the stock market treatment despite many company specific positives.

Edited by explo

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I am so sorry but I haven't had the time to reply yet.

@SC:  4X not gonna happen, they will shelve it.  Banks will say sorry hon.  Your 3B cost contains wishful thinking, you are being more optimistic than DQ themselves.  There's input costs that DQ doesn't control, most importantly silicon metal cost.  We can disagree on where DQ is headed in the next quarters, but please let's join forces in getting everybody out before it hits the teens.

@explo:  It's no rocket science that FSLR will suffer due to the China fiasco but you sure make it sound like.  Luckily FSLR is insulated to some degree thanks to a) the contracted module volumes at fixed prices b) the trumponian tariffs c) the cash and hard assets on their bs.  It's like saying you have to go out into the freezing winter and FSLR is wearing three fur coats while others like JKS are in underwear.

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The primary cost reduction driver for DQ is their reduced power cost.  They will go from a current cost of RMB 0.29/kWh to 0.24 by Q1 2019 to 0.20 by Q1 2020.  That's a huge drop, with most of it coming sooner rather than later.  That will enable them to better withstand the ASP decrease.

We'll know how bad things will be pretty soon, when they release Q2 earnings and give Q3 guidance.  Q2 earnings will be good, but will be in the rearview mirror.  Q3 should be about as bad as it's going to get--ASPs are collapsing now, but the power cost reduction won't be in effect yet.  Let's see what margins they guide.  If they don't predict complete catastrophe, watch out for next year, because it only gets better from there.

Also, on your FSLR discussion, you can't have it both ways.  You can't say FSLR will benefit from fixed prices when you predict others will have to renegotiate those fixed prices.  And the Trump tariffs won't apply to JKS if it follows through with its plan to produce in the US.

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Poly dropping to $11.29/kg on PVInsights.  That's a price level where DQ earnings are essentially wiped out even factoring in their price premium.

For me the question is no longer whether they will post losses but HOW LONG they will do so.

When will poly prices bottom out and after that when will they recover enough for DQ to make some money again?  People are saying Q3 will be slow but Q4 will see some pick-up in demand.  On the other hand there's Tongwei and GCL a.o. firing up massive capacities over the next few quarters exerting further price pressure downwards.

What do people here think?

 

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21 hours ago, Klothilde said:

Poly dropping to $11.29/kg on PVInsights.  That's a price level where DQ earnings are essentially wiped out even factoring in their price premium.

For me the question is no longer whether they will post losses but HOW LONG they will do so.

When will poly prices bottom out and after that when will they recover enough for DQ to make some money again?  People are saying Q3 will be slow but Q4 will see some pick-up in demand.  On the other hand there's Tongwei and GCL a.o. firing up massive capacities over the next few quarters exerting further price pressure downwards.

What do people here think?

 

I would worry more about FSLR. What kind of profit are they going to make selling outside of the U.S? Right now Multi wafers are under $0.07/W, and you can buy High efficient Multi cells for $0.135. Multi modules  costs to manufacture now is $0.23+/-. They can be selling them for $0.27 and make net profits.

 

The last I recall is that FSLR was suggesting a quarter or 2 ago they were the cost leader at $0.29ish including shipping. That is before adding in their $60M+ a quarter Operational expenses.  The company is going to have to be selling at $0.35/Watt or lose money on every non US sold module. I believe it was First Solar that a couple of pennies would not impact project decisions, however a 8-10% cost difference clearly would have issues. An 8-10% price difference in a module cost will kill their sales or their potential profits.

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5 hours ago, Klothilde said:

If this article is correct Tongwei will soon be throwing 50kt of poly with production cost of $6 - $6.5/kg on the market.

http://m.solarzoom.com/article-110522-1.html

Thanks for the article. Those numbers confirm the direction of production costs for DQ's Old and new capacity I have been expecting. That Tongwei old capacity cost is now down to $8.81 according to the article. That is a price point I expect DQ to reach in the second half if not lower as costs drop back to early 2017 levels. The new capacity price target range of $6-$6.50 confirms what I estimated  DQ new capacity production would have to be  at to get their production costs down to $7.50 from their current ~$9. Now imagine that they add 35,000MT at a production cost of $6 or less come 2020. Their production costs would drop to $6.75 or lower. Clearly able to give very nice profits under $10/KG.

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On 7/6/2018 at 12:34 PM, SCSolar said:

Now imagine that they add 35,000MT at a production cost of $6 or less come 2020. Their production costs would drop to $6.75 or lower. Clearly able to give very nice profits under $10/KG.

Is it my intuition or just common sense when I say they will postpone phase 4A indefinitely?  At current ASPs they would wreck the balance sheet if they decided to go ahead with it.  Also pretty sure the banks will say "sorry hon".

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47 minutes ago, Klothilde said:

Is it my intuition or just common sense when I say they will postpone phase 4A indefinitely?  At current ASPs they would wreck the balance sheet if they decided to go ahead with it.  Also pretty sure the banks will say sorry hon.

It's your intuition (if that's what you want to call it).  Once again, you're just plain ignoring the effect of reduced costs.

Also pretty sure you have no idea what the banks will say, hon.

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On 7/6/2018 at 4:31 PM, solarpete said:

It's your intuition (if that's what you want to call it).  Once again, you're just plain ignoring the effect of reduced costs.

Also pretty sure you have no idea what the banks will say, hon.

Well place your bets ladies and gentlemen.  The next con call will be extremely interesting.

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On 6/21/2018 at 2:59 PM, Klothilde said:

Profitability?  With Tongwei and GCL firing up 90kt of new low-cost capacity by year end?

June 2018: 20kt (GCL)
September 2018: 25kt (Tongwei)
December 2018: 20kt (GCL) + 25kt (Tongwei)

http://www.asianmetal.com/news/data/1425591/Tongwei Group's polysilicon capacity to rank top three globally

https://www.pv-tech.org/news/gcl-poly-wants-to-sell-polysilicon-subsidiary-stake-for-us2-billion

This article suggests Tongwei is firing up Baotou (25kt) in September and Leshan (25kt) in October, i.e. faster than the timeline given above.

http://guangfu.bjx.com.cn/news/20180709/911192.shtml

Are we all aware of what it means to throw an additional 50kt of ultra-low-cost polysilicon on the market right now?

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2 minutes ago, Klothilde said:

Are we all aware of what it means to throw an additional 50kt of ultra-low-cost polysilicon on the market right now?

Yes. FSLR margin compression. 

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2 hours ago, explo said:

Yes. FSLR margin compression. 

I just looked over DQ's filings.  Looks like they did a follow on not too long ago?  So that cash is funding this expansion?

Also... can it be possible that China is fighting tariffs by secretly passing funding to their solar giants?

 

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1 hour ago, sunnypease said:

I just looked over DQ's filings.  Looks like they did a follow on not too long ago?  So that cash is funding this expansion?

Also... can it be possible that China is fighting tariffs by secretly passing funding to their solar giants?

 

Chins has already fought US tariffs on them.  It's not new.  US solar cell tariffs on China was introduced during Obama presidency.  US were a minority market for China cells.  China was a majority market for US polysilicon (a much more complex product to produce).  US polysilicon industry shrank. China cell industry grew. 

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2019 EPS estimate down to $4.72.  Two months ago it was $8.54.  I think all the things we've been talking about are slowly starting to sink in over at the analysts.  They earn much more than us but also need a little more time to smell the coffee.

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1 hour ago, Klothilde said:

2019 EPS estimate down to $4.72.  Two months ago it was $8.54.  I think all the things we've been talking about are slowly starting to sink in over at the analysts.  They earn much more than us but also need a little more time to smell the coffee.

Where did you see that number Klothilde.  Thanks

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1 hour ago, Klothilde said:

2019 EPS estimate down to $4.72.  Two months ago it was $8.54.  I think all the things we've been talking about are slowly starting to sink in over at the analysts.  They earn much more than us but also need a little more time to smell the coffee.

That's a pretty reasonable number.  Certainly a far cry from predicting losses.

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9 hours ago, solarpete said:

That's a pretty reasonable number.  Certainly a far cry from predicting losses.

I think some momentum traders might trade on the estimates trend. The current estimate is often understated for its direction, meaning the trend is likely to continue for a while possibly until realized (e.g. for 2019 EPS). Analysts estimates are biased towards current known state vs a speculative prediction of a future state. This allows them to make many smaller revisions as speculative predictions become increasingly confimed during change rather than one big early one, on average at least. Maybe this serves their purpose or is just natural.

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CHONGQING, China, July 13, 2018 /PRNewswire/ -- Daqo New Energy Corp. (NYSE: DQ) ("Daqo New Energy" or the "Company"), a leading manufacturer of high-purity polysilicon for the global solar PV industry, today announced updates to its previous polysilicon and wafer sales guidance for the second quarter of 2018 and reiterates its full year 2018 polysilicon production guidance.

The Company estimates that its polysilicon sales to external customers during the second quarter of 2018 will be approximately 3,800 MT to 3,900 MT, as compared to the previous guidance of approximately 5,300 MT to 5,500 MT. The Company sold approximately 2,600 MT of polysilicon during the first two weeks of July and reduced inventory to low levels.

The Company produced 5,659 MT of polysilicon during the second quarter of 2018, within the range of its previously announced guidance of 5,600 MT to 5,800 MT. The Company reiterates its full year 2018 polysilicon production guidance of 22,000 to 23,000 MT, which takes into account the impact of annual facility maintenance.    

The Company also estimates that its wafer sales volume during the second quarter of 2018 amounted to approximately 9.5 million to 10.0 million pieces, as compared to the previous guidance of approximately 15.0 million to 20.0 million pieces.     

The above updates are mainly attributable to the new solar PV policies issued by the Chinese government on May 31, 2018, which are expected to reduce solar installation quotas and feed-in tariffs in China during the second half of 2018. The policies created significant uncertainty in the domestic solar market and negatively impacted downstream demand. As a result, the Company's customers adjusted production plans and utilization levels, and due to the volatility of polysilicon average selling prices, a significant number of customer orders were not confirmed until the beginning of July. 

Mr. Longgen Zhang, Chief Executive Officer of Daqo New Energy, commented, "We remain confident in the long-term sustainable growth of polysilicon industry despite the new policies' impact on shipments in the short-term. The new policies created significant uncertainty in the market and disrupted our downstream customer's production plans. At the same time, polysilicon average selling prices saw increased volatility in June but have since stabilized over the past two weeks."

"Leveraging our strong cash position, we maintained our production schedule believing that polysilicon ASPs would eventually stabilize and delayed shipments until demand returned in early July. During the first two weeks of July, polysilicon prices stabilized and our shipments returned to normal levels. We are currently running at full production capacity with low levels of inventory, which allows us to reiterate our full year production guidance. The sudden change in policy hasn't impacted our long-term strategic plan to strengthen our leadership position in the industry by further increasing our capacity, improving our cost structure and polysilicon purity."   

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Thanks for that post!  Good information.  So they're already back to full capacity AND they reduced inventory.  Full year guidance maintained (production, but not margin/profit, which can be expected to take a hit due to the lower ASPs).

If they were now producing at a loss, I would expect production to at least be curtailed, so I take this as a sign they will still have profits, even during this downturn.

I like it!

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17 minutes ago, solarpete said:

...If they were now producing at a loss, I would expect production to at least be curtailed, so I take this as a sign they will still have profits, even during this downturn.

I like it!

Imho producing at full capacity is just an indication that your selling price is above your production cash cost and you generate cash with each additional unit you produce. However It is not necessarily an indication that you are profitable, because for that your selling price needs to be high enough so you can cover the additional expenses besides production cash cost, namely depreciation and OPEX.  I.E. theoretically you could be producing at full capacity and be still incurring big losses at the same time.

Luckily there's no need for wild speculations when it comes to DQ.  Based on how their ASP has been trending relative to poly price indeces in the past you can infer a current ASP of around $12 which has them more or less at break-even imho.

 

 

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Yes, theoretically you can be producing at full capacity and still be incurring large losses.  Theoretically, I can also take all my money and just chuck it out the window.  The question becomes, who would do such a thing?

The only reason to produce at a net loss is to maintain market share in the hopes of better days ahead.  And even then, you would certainly reduce your production to the bare minimum needed for survival.  Their press release certainly doesn't make it sound like they're fighting for survival.

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1 hour ago, solarpete said:

Yes, theoretically you can be producing at full capacity and still be incurring large losses.  Theoretically, I can also take all my money and just chuck it out the window.  The question becomes, who would do such a thing?

The only reason to produce at a net loss is to maintain market share in the hopes of better days ahead.  And even then, you would certainly reduce your production to the bare minimum needed for survival.  Their press release certainly doesn't make it sound like they're fighting for survival.

Some players will keep utilization rate high as long as they are selling above cash production cost. It is not sound, but it benefits their competitive position and it reduces their loss.

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Uh Oh, somebody else is concerned about the 90kt of additional low-cost capa coming online in H2:

"Daiwa said current polysilicon price has fallen to US$11.1/kg, almost the industry's average cash cost. However, as industry leaders including GCL Poly (03800) and Tongwei  (Shanghai code: 600438) are still commissioning lower-cost capacities (90ktpa, 17%  additional supply) in 2H, Daiwa thinks polysilicon prices may still have further downside."
https://www.etnet.com.hk/www/eng/stocks/realtime/quote_news_detail.php?section=related&code=03800&newsid=ETE280719150

This is definitely not something you can smile away you guys.

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2 hours ago, Klothilde said:

Uh Oh, somebody else is concerned about the 90kt of additional low-cost capa coming online in H2:

"Daiwa said current polysilicon price has fallen to US$11.1/kg, almost the industry's average cash cost. However, as industry leaders including GCL Poly (03800) and Tongwei  (Shanghai code: 600438) are still commissioning lower-cost capacities (90ktpa, 17%  additional supply) in 2H, Daiwa thinks polysilicon prices may still have further downside."
https://www.etnet.com.hk/www/eng/stocks/realtime/quote_news_detail.php?section=related&code=03800&newsid=ETE280719150

This is definitely not something you can smile away you guys.

I have read some articles that as the new capacity comes online, that older higher cost facilities will be/are being shutdown. Those new facilities are having production costs under $6/Kg. The older facilities at costs of $12+/Kg would clearly not be competitive. This would suggest that many companies will have write downs if they do such things in China accounting.

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2 hours ago, SCSolar said:

I have read some articles that as the new capacity comes online, that older higher cost facilities will be/are being shutdown. Those new facilities are having production costs under $6/Kg. The older facilities at costs of $12+/Kg would clearly not be competitive. This would suggest that many companies will have write downs if they do such things in China accounting.

I think there was a wave of close down of smaller CN sites (<3kT) already in previous trough. For large sites at good locations I think upgrade of the advanced equipment would make more sense, since there is a lot of cost amnd definitely work behind fixed structures at these impressive plants. Closing down old sites at non-competitive locations makes sense though.

Yes write downs have been extensively used by CN companies. Not just by retired equipment but by inferior, still operating, equipment too.

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4 minutes ago, explo said:

Yes write downs have been extensively used by CN companies. Not just by retired equipment but by inferior, still operating, equipment too.

I know U.S. listed companies are required to write down assets. Does the Chinese markets require the listed companies to write off assets as well?

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7 minutes ago, SCSolar said:

I know U.S. listed companies are required to write down assets. Does the Chinese markets require the listed companies to write off assets as well?

Ah, ok. You mean which accounting policies companies listed in HK, shanghai, and shenzhen need to follow. Not sure.

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