Why the pork cycle has returned to the polysilicon market
A period of weak demand until 2020 laid the ground for a polysilicon shortage that has triggered excessive capacity expansion in China. Now overcapacity provokes the next shakeout.
By Johannes Bernreuter
From 1981 through 2004, the long-term contract price for high-purity polysilicon showed an alternating pattern that was remarkably uniform: The price oscillated between peak (corresponding to shortage) and trough (oversupply), and vice versa, in regular intervals of seven to eight years.
What is the reason for this curious pattern? The main cause lies in a capital-intensive industry with long lead times: Even in China today, the engineering, construction and ramp-up of a new polysilicon plant can take two years. As a result, supply will lag behind demand, thus creating a typical pork cycle.
The polysilicon industry is like a super tanker with a long brake path: When a falling price signals that one should stop investing in additional capacity, construction of new plants is already underway and can hardly be stopped without a considerable financial loss. The logical result is overcapacity, which accelerates the drop in price. On the other hand, as long as the price decreases, there will be no incentive for investing in new capacity. Only when the price goes up again will it indicate that supply is running short and attract more investments.
Manufacturers can try to anticipate the market development and anticyclically invest in new capacities when the polysilicon price is bottoming in order to come on stream when supply gets short. The problem, however, lies in the high capital expenditure (capex). On average, the leading players in China today invest around $1.2 billion in a new plant with an annual production capacity of 100,000 metric tons. While such large amounts do not seem to be a hurdle for Chinese companies, it is still a challenge to mobilize that capital as long as prices are not rising.
The dilemma is even more severe outside China where the capex for a polysilicon plant is significantly higher. There is hardly any investor willing to bet a high sum on a western polysilicon project in view of the Chinese investment frenzy. New capacity outside China has only become a topic again because the United States have imposed an import ban on products made with forced labor in Xinjiang; moreover, the number of voices calling for less economic dependence on China is growing.
Chinese overcapacity prolongs price down-cycle to twelve years
Until 2004, polysilicon demand was dominated by the semiconductor industry with its own cyclical ups and downs. When global PV installations exploded in 2004, however, the market dynamics began to change. As the tremendous growth of the PV industry drove up the polysilicon spot price to staggering heights, it triggered so much new polysilicon production capacity that the interval between price trough and peak halved from eight to four years.
What then followed seemed to make the polysilicon pork cycle a phenomenon of the past. After the price peak in 2008 and the shakeout starting in 2010, it first looked like the next trough was reached in late 2012, repeating the new cycle length of roughly four years; however, the trough was only of interim nature.
As the protectionist policy of the Chinese Ministry of Commerce encouraged domestic manufacturers to increase their capacities, oversupply quickly returned. It took only three years from the record low of the spot price in December 2012 to a new low in January 2016, which was again outstripped by the next low in September 2016 – just eight months later.
The Chinese PV installation rally in 2017 reversed the price trend only for a few months. After the government in Beijing announced a cap on PV installations in May 2018, the polysilicon spot price went down for two more years until it reached its historical low of $6.75/kg in June 2020.
Reasons for the return of the pork cycle
Low-cost and rapid capacity expansion in China created a sustained tendency to oversupply; it was one important reason why the price down-cycle lasted twelve years from 2008 to 2020. The other was the slowing pace of global PV installations. While the average annual growth rate of the PV market was 59% between 2004 and 2011, it dropped to 20% in the period from 2012 through 2019.
The Chinese cap on PV installations did not only result in a shrinking domestic market in 2018 and 2019, it also laid the ground for the return of the pork cycle. Due to weak demand, no new polysilicon capacity was added in 2020. That came on top of a massive shakeout between 2018 and 2020. In effect, the polysilicon industry had cannibalized itself when PV demand began to accelerate after the Covid-19 shock in the first half of 2020.
The resulting price rally has triggered a wave of polysilicon projects from new entrants in China. However, the leading manufacturers responded with capacity expansions so quickly that it only took around two years from the price trough in June 2020 to the peak of $39/kg in August 2022. Yet, against all warnings of oversupply, the wave of new projects has not stopped – the pork cycle is back.
The Polysilicon Market Outlook 2027 thoroughly examines the ramifications of this development as well as many other market trends. Despite all uncertainties about supply and demand, one thing is as sure as death and taxes: The next shakeout is just around the corner. On December 20, the first polysilicon producer in Inner Mongolia already shut down its operations.
Johannes Bernreuter is Head of Bernreuter Research and author of the Polysilicon Market Outlook series (2023/2020/2016) and the Who’s Who of Solar Silicon Production series (2014/2012/2010). This srticle is an extract from Bernreuter’s new report, The Polysilicon Market Outlook 2027.