Opinion: OCI hoists white flag against Chinese state capitalism

Polysilicon EBITDA and Operating Margins of OCI and Wacker from Q1 2018 through Q4 2019
Despite a low-cost plant in Malaysia and a better margin than that of Wacker, OCI gives up massive volume – Chart: Bernreuter Research

By Johannes Bernreuter, Head of Bernreuter Research

OCI’s decision to stop producing solar-grade polysilicon at its Korean factory in Gunsan, which comprises a capacity of 52,000 metric tons (MT), has not come out of the blue. Yet, the company’s strategy for its second polysilicon plant in Malaysia is surprising.

OCI had to fight an uphill battle not only against extremely low, subsidized electricity rates of 3 $Cents/kWh and less for competitors in western China (which other non-Chinese polysilicon manufacturers have to fight as well), but also against the rise of industrial electricity rates in South Korea to more than 10 $Cents/kWh today – an increase of 71% since 2009, according to OCI.

Nevertheless, the company’s basic chemical division, which is dominated by polysilicon, managed to achieve both better EBITDA and operating margins than the polysilicon division of German peer Wacker (see chart above) although the latter’s electricity rate is approx. 60% of that in South Korea. Except for one quarter, however, OCI’s basic chemical margins have been negative since the third quarter of 2018. As such, it is comprehensible that management wanted to get rid of this drag on profits. In contrast, Wacker seems to have more staying power.

What is less comprehensible: OCI hardly compensates for the massive loss of solar-grade capacity in Gunsan with expanding its second polysilicon plant in Malaysia. The location with a capacity of 27,000 MT has enough space for expansion and enjoys an electricity rate close to that in western China. As late as March 2019, OCI’s former CEO and now Vice Chairman, Lee Woo-hyun told reporters: “It is necessary to consider moving to Malaysia after shutting down factories in Korea.”

Instead, OCI is now planning to increase polysilicon production in Malaysia only by a meager 10%. To be sure, the company’s investment strategy has been conservative since the first shakeout in the polysilicon industry in 2011/2012. But abandoning a sizeable market volume of roughly 50,000 MT, despite a competitive electricity rate in Malaysia and no anti-dumping duties on imports from there into China, means hoisting the white flag of surrender against Chinese state capitalism.

Maybe, OCI has already seen the writing on the wall: On the very same day the Korean manufacturer announced its shutdown decision, Chinese competitor Tongwei revealed plans to increase its polysilicon production capacity from 80,000 MT currently to a staggering range of 220,000 to 290,000 MT in 2023. It was only in 2018 that Tongwei expanded its capacity from 20,000 MT to 80,000 MT. If you have ever had doubts about the ambition of the Chinese polysilicon industry, they should have been removed now.

It will become a tough play for Wacker.

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