Polysilicon cost drastically shut down the industry

On December 4th, Lu Jinbiao, deputy general manager of Zhongneng Silicon Company, a subsidiary of GCL-Poly (3800.HK), revealed that the current cost of the company's modified Siemens process is approximately $17 per kilogram. However, once the silane modification is completed, this cost is expected to drop significantly to around $9 per kg. This technological advancement could mark a major shift in the industry, as it promises lower energy consumption and reduced overall production costs. At the same time, TBEA and Grand New Energy (NYSE: DQ) are either expanding or have already completed a 10,000-ton polysilicon plant in Xinjiang, benefiting from the region’s low electricity prices. As a result, their production costs are estimated to be between $14 and $15 per kg. In contrast, the remaining 40 polysilicon companies in China currently operate at a much higher cost, ranging from $24 to $27 per kg. In early December, the Ministry of Industry and Information Technology officially released the "Regulations for Photovoltaic Manufacturing Industry" (referred to as "Conditions"), which outlines strict criteria for polysilicon enterprises. A total of 11 companies were shortlisted, signaling a significant consolidation in the sector. Industry insiders predict that after several large players expand and engage in aggressive price competition, only about 6-7 companies may remain in the next year. Those outside the list may face increasing difficulties, as they struggle to meet the minimum production requirements set by the regulations. Companies on the list are expected to ramp up production, but not all will be able to reach the required capacity. Since Zhejiang Xiecheng Silicon became the first bankrupt polysilicon company in 2012, over 80% of companies have ceased operations. Today, with the tightening of regulations and the expansion of big players, small and medium-sized firms are finding it even more challenging to survive. The "Conditions" require that the output of the previous year must reach at least 50% of the production capacity. While the top 10 domestic polysilicon giants barely met this target, many others found it difficult to comply. The 11 listed companies include Liujiu Silicon, Luoyang Zhongsi, CSG Silicon Materials, Zhongneng Silicon, Asia Silicon, Yellow River Upstream and Downstream Hydropower Development Company, Shaanxi Tianhong Silicon Materials, Ruineng Silicon Materials, Yongxiang Polysilicon, Xinte Energy (a solar energy company under TBEA), and a new energy source. Some executives expressed surprise at the final list, noting that companies like Six-Nine Silicon had been discontinued, while LDK was temporarily suspended but not included. There are still questions about whether a second list will be released. According to reports, LDK’s 21,000-ton facility is expected to resume operations soon. With the growing demand for photovoltaics in Europe, the U.S., and South Korea, some domestic polysilicon companies have started resuming production. As of the end of the third quarter, 10 companies announced the restart of operations. However, there are currently 43 polysilicon companies in China, highlighting the intense competition. The "Conditions" also specify that projects must have a minimum annual production capacity of 3,000 tons. Companies that meet these criteria will continue to benefit from policy support, including market application assistance and credit support. According to Wang Haisheng, executive general manager of Ping An Securities’ Energy Finance Department, the market outlook for the second half of the year is positive, but the situation may be less favorable in 2015. He noted that the top 10 polysilicon companies barely met the 50% production requirement, while others struggled to keep up. For companies not on the list, access to bank credits and export tax rebates is likely to become more difficult, compounding the challenges posed by high costs. Many are considering shutting down or selling off equipment as a way to exit the industry. GCL-Poly, TBEA, and New Energy are putting pressure on smaller competitors through aggressive cost-cutting measures. Lu Jinbiao emphasized that the silane method is a revolutionary technology compared to the traditional modified Siemens method, reducing costs by more than half and cutting power consumption by two-thirds. TBEA’s executive mentioned that electricity costs account for roughly 40% of total production costs, and due to their own power plants, they can bring their costs down to around $15 per kg. Similarly, New Energy has managed to reduce its production costs to $15 per kg thanks to its low electricity rate of 0.41 yuan per kWh. Wang Heng, general manager of Chengdu Henghai Chemical Technology Service Co., Ltd., warned that if the three major companies manage to bring their costs down to around $15 per kg in 2014, 90% of domestic polysilicon companies would be uncompetitive. Many firms are waiting to see how things develop, but lack the capital to invest in technological upgrades. In 2014, the price of polysilicon is expected to fall to around $15 per kg, with only 3-4 companies in China capable of reaching such a cost level. This will put immense pressure on the rest of the industry, leading to further losses and potential closures. By the third quarter of 2013, domestic polysilicon production reached 21,000 tons, a 14.3% increase from the previous quarter. Jiangsu Zhongneng accounted for 63% of the total. Imports during the same period were about 18,000 tons, bringing total domestic demand to 39,000 tons. Zhongneng Silicon aims to produce 50,000 tons in 2013, with an expected increase to 60,000 tons in 2014. TBEA plans to increase monthly output to 1,100 tons, achieving an annual output of 12,000 tons. New Energy is also expanding its capacity, expecting to reduce costs to $12 per kg upon full operation. Wang Haisheng estimates that in 2014, domestic demand will be around 140,000-150,000 tons, with the Big Three supplying 80,000 tons. Additional supply from other low-cost producers and imports will leave little room for smaller companies. After Zhejiang Xiecheng Silicon became the first bankruptcy case in 2012, 80% of polysilicon companies shut down. In Sichuan, Xinguang Silicon has been inactive for two years, and Ledian Tianwei’s survival remains uncertain. “The key is price,” said Wang Haisheng. With the expected drop in polysilicon prices to around $15 per kg, only a few companies will be able to compete, leading to continued losses for the rest. GCL-Poly sold about 4,018 tons of polysilicon in the third quarter, a 511.6% increase from the previous year. New Energy’s revenue rose 40% to $29.6 million. TBEA is also operating at full capacity. Wang Heng believes that after years of losses and intensifying price competition, more polysilicon companies will go bankrupt. Some are already selling equipment such as reduction furnaces and hydrogenation furnaces, planning to exit the industry. Lu Jinbiao predicts that many companies will leave the polysilicon sector after 2014. He expects the industry to become more concentrated, with larger enterprises taking the lead, accelerating structural adjustments.

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