Why polysilicon futures trade much lower than the spot price

On July 31, China’s market regulator threatened measures against selling polysilicon below production costs, which the Chinese price law forbids. Since then, the average spot price has soared from CNY31.5/kg (US$4.12/kg without value added tax) to CNY40/kg (US$5.30/kg without VAT), whereas the settlement price of the main polysilicon futures contract (for the following month) rose from a low of CNY34.435/kg on June 26 to a high of CNY39.195/kg on August 17, but fell to CNY32.305/kg by October 30. An analysis by the Chinese financial newspaper Futures Daily, which appeared on October 22, explains the reason for this gap. Bernreuter Research publishes an English translation of the article in a shortened version.

By Liu Jiaqi, Futures Daily (republished by Sina Finance)

Entering October, the contraction in polysilicon supply has moved from production planning to reality, but recent market movements have not responded positively. This discrepancy between the positive supply-side factors and futures price action highlights the current market divergence.

Some market observers believe that the production cuts signify a turning point in fundamentals, and futures prices should be boosted. However, market performance indicates that the market is pricing in this positive factor with far more caution than expected. To understand this divergence, it is necessary to clarify the actual progress and true nature of the supply contraction.

Production cuts intensified in the fourth quarter

According to relevant statistics, global polysilicon production in September was 121,100 tons, a slight decrease of only 0.25% compared to August. Entering the fourth quarter, production cuts have intensified significantly. October's output is projected at 107,800 tons, further decreasing to 96,700 tons in November, and possibly only 84,400 tons in December. The month-on-month declines for the three months are 10.98%, 10.30%, and 12.72% respectively, showing a downward trend in the supply curve.

In terms of the structure of the reductions, domestic production cuts in October were concentrated at Leshan GCL, Daquo’s Xinjiang and Inner Mongolia bases, Xinte Zhundong and Asia Silicon Semiconductor, covering major production areas in Southwest and Northwest China. From November onwards, production capacity from Tongwei’s Leshan and Yunnan facilities will take over. Internationally, Oman’s United Solar is likely to halt production, with its maintenance schedule extending to July 2027, equivalent to a monthly supply reduction of 1,000 to1,500 tons.

Demand remains resilient. Global silicon wafer production reached 54.73 GW in September, a 6.83% increase from August; October production is projected at 56.55 GW, continuing a slight upward trend; November production is expected to decline to 54.1 GW due to seasonal factors. Overall, total polysilicon inventory at the end of September was 557,600 tons; it is projected to fall to 553,000 tons in October and 541,900 tons in November.

The industry has moved beyond a period of continuous inventory accumulation and entered a destocking phase, signaling a marginal improvement in fundamentals. However, in terms of the scale of destocking, the total reduction over the two months is less than 16,000 tons, which is relatively mild compared to the existing inventory base of over 550,000 tons.

High inventory remains the main problem

Despite production cuts being implemented and inventories entering a depletion phase, futures prices continue to weaken. What are the underlying reasons? Currently, the market’s understanding of production cuts largely focuses on the marginal recovery of inventory levels. However, in my view, the absolute level of inventory is also a core variable in pricing.

In July of this year, the total inventory of polysilicon was 526,400 tons, and the price of the main polysilicon futures contract fell to a low of 32,000 yuan/ton. (Editor’s note: The mentioned futures prce is not confirmed by data from the Guangzhou Futures Exchange – see intro above.) This correlation between inventory and price serves as a benchmark for judging the extent of subsequent price recovery.

In August and September, the market rectified low-price competition, pushing spot prices up from their lows to 43,000 yuan/ton. The futures market fully reflected policy expectations, and both spot and futures prices strengthened simultaneously.

However, downstream buyers showed weak willingness to purchase high-priced polysilicon, and inventory rose against the trend, reaching 545,500 tons in August and further increasing to 557,600 tons in September. It is not difficult to see that the previous round of price increases stemmed from policy expectations, rather than a substantial improvement in the supply and demand fundamentals. The price recovery was merely superficial, and with the continuous rise in inventory, fundamental pressures continued to accumulate.

Calculations suggest that even if production cuts are implemented as scheduled in the fourth quarter, November inventory levels will only fall to around 540,000 tons, still higher than the 526,400 tons in July, indicating that inventory pressure has not been truly alleviated. Marginal changes dominate market sentiment, while absolute inventory levels anchor the price center. The reason why production cuts have been implemented but futures prices have weakened lies in this.

Furthermore, the pricing constraints faced by the spot and futures markets are fundamentally different: The crackdown on dumping regulates spot pricing behavior, while futures prices are not subject to this regulation according to Article 47 of the Price Law. Policy tools can constrain spot pricing, but they cannot directly intervene in the futures market. Industry self-regulation can guide corporate pricing behavior, but it cannot reverse the objective reality of weak downstream demand and high inventory levels.

Futures pricing, which is more sensitive to fundamentals, will ultimately return to the core contradiction of high inventory. The continued weakness in the futures market is essentially a process of gradually giving back the previous policy premium and restoring prices to the true supply and demand fundamentals.

Limited upside for futures prices

The average price of spot transactions may rise, and the difference in sensitivity to policy between the futures and spot markets will be more reflected in the spot market. However, whether the price can be successfully implemented ultimately depends on the downstream willingness to accept the goods.

It cannot be ignored that downstream buyers still face significant loss pressure and have low tolerance for raw material price increases. Once the price significantly exceeds their expectations, the previous situation of high prices but no sales may reappear. 43,000 yuan/ton can only serve as a reference bottom line for industry self-regulation and cannot replace a substantial improvement in the supply and demand structure.

In contrast, the futures market’s pricing remains anchored to inventory levels. Supply contraction provides momentum for destocking, while weak demand suppresses the rate of destocking. Total inventory is unlikely to decline significantly this year, and the transmission effect of policy constraints on the market is weak, potentially leading to further divergence between futures and spot prices.

Until the pace of inventory reduction accelerates significantly and a substantial turning point in fundamentals emerges, the upside potential for futures prices may remain limited. Short-term optimism is unwarranted.