POLYSILICON MARKET ANALYSIS
Why China is beginning to dominate the polysilicon market
For more than two decades, the polysilicon market was characterized by a regular pork cycle of shortage and oversupply, induced by the fluctuating demand for semiconductors. Now that the solar industry has become a major polysilicon consumer, however, China’s polysilicon manufacturers have broken this pattern and are setting the trend, as our analysis shows.
Prelude: Early harbingers of the big polysilicon shortage
Franco Traverso’s voice sounded dramatic: “Panicked, muddled, terrible” – that’s how the Chief Executive Officer (CEO) of the Italian solar cell and panel manufacturer Helios Technology described the mood in the photovoltaic (PV) branch in 1996.
The reason for Traverso’s lamentation: Polysilicon, the highly pure feedstock for solar cells, was in short supply.
At that time, the PV branch was a far cry from the solar industry today. Although it made its first steps as early as 1974, the sector was still so small that it was able to live on scrap silicon from the semiconductor industry (polysilicon uses).
In 1996, however, manufacturers of semiconductor wafers increasingly reused scrap silicon in their own production cycle. Suddenly, the PV branch had a feedstock problem.
Nonetheless, Franco Traverso was soon able to breathe a sigh of relief. For the PV branch was lucky to benefit both from the downturn of the semiconductor sector in 1998 and from the burst of the dotcom bubble in 2000 (‘double dip’).
Why? Because polysilicon manufacturers had massively invested in additional capacities in expectation of rising demand for semiconductors. They then used the excess capacity to produce solar-grade polysilicon, instead of hyper-pure electronic-grade material, in a stripped-down production process for PV use.
The drama unfolds: Ignored warnings, fulfilled prophesies
Burnt by their experience with the semiconductor industry, polysilicon manufacturers hesitated to invest in even more capacities without a clear commitment of PV companies. Those in turn were hesitant to finance the expansion by high prepayments for long-term contracts as they were lulled by a low polysilicon price on the spot market.
When the German PV market exploded in 2004 – after the amendment of the feed-in tariff for electricity from PV systems – the scenario for a severe polysilicon shortage was perfect.
The sector has missed the boat.
No one listened to the prophets.
Peter Woditsch, ex-CEO of Deutsche Solar AG, in 2005
There was no lack of early warnings. Speaking at the European Photovoltaic Solar Energy Conference in Glasgow in May 2000, Eurosolar president and member of the German parliament, Hermann Scheer († 2010) predicted a worldwide supply bottleneck in solar panels due to a shortage of polysilicon.
Already in 1999, a study conducted on behalf of the European Commission concluded that the PV branch would face a feedstock crisis towards 2005.
“The sector has missed the boat. No one listened to the prophets,” commented Peter Woditsch, at the time CEO of wafer manufacturer Deutsche Solar AG, a subsidiary of the now bankrupt SolarWorld group, in 2005.
Many market participants had simply underestimated the rapid growth of global PV installations. When the polysilicon spot price escalated in 2005, PV companies finally had to bite the bullet of high prepayments in order to lock in long-term supply from the incumbent polysilicon manufacturers.
Scenario of the PV industry’s polysilicon demand made in 2002 versus the actual demand through 2010
The turnaround: From polysilicon shortage to oversupply
Franco Traverso took a different path. In 2007 he founded Silfab to secure supply independently of the incumbents: by building his own polysilicon plant.
And so did others. When the spot price was climbing higher and higher, new polysilicon projects were springing up like mushrooms, in particular in China. Although dozens of projects failed (notably in India, Russia, Europe and the USA), the number of polysilicon plants worldwide took off from 11 in 2004 to 61 in 2010.
Moreover, new manufacturers of upgraded metallurgical-grade silicon popped up, the first as early as 2006. Almost half of them, however, had already disappeared by the end of 2010.
It was the first sign of oversupply on the polysilicon market, foreshadowing a big shakeout: More than 40 polysilicon plants – most of them in China – were shut down between late 2010 and early 2013.
Long-term analysis: The cyclical market pattern begins to change
The alternation between extremes – shortage and oversupply – was nothing new to the polysilicon market. From 1981 through 2004, the long-term contract price for high-purity polysilicon showed an alternating pattern that was remarkably uniform: The intervals between price trough (corresponding to oversupply) and price peak (shortage), and vice versa, regularly lasted seven to eight years.
Intervals between peaks and troughs of the contract price for high-purity polysilicon from 1981 to 2008
What is the reason for this curious pattern? The main cause lies in a capital-intensive industry with long lead times: The engineering, construction and ramp-up of a new polysilicon plant can easily take three years. As a result, supply will always 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 polysilicon 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, but this is only possible to a limited degree.
The only new thing after 2004 was that the price trough was followed by the next peak as early as 2008. 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.
Since then, however, a new trough has remained at bay. Low-cost, subsidized and rapid expansion in China has largely invalidated the pork cycle, thereby creating a new paradigm: a sustained tendency to oversupply, only interrupted by very brief phases of shortage.
Market shares by country: China already churns out more than 50% today
Starting from almost zero in 2004, China’s share in the global polysilicon output (including electronic grade, solar grade and upgraded metallurgical grade) already exceeded 54% in 2018.
Market shares in global polysilicon production volume from 2005 through 2018
This development was not necessarily foreseeable in 2011/2012 when 36 small and medium-scale polysilicon plants were shut down in China. The last straw the domestic industry then clutched at were punitive duties on polysilicon imports. After the Chinese Ministry of Commerce (Mofcom) announced such duties on imports from the United States and South Korea in July 2013, several idled polysilicon plants in China resumed production.
However, the duty rates for the two main polysilicon importers from South Korea were less than 3%; and although manufacturers in the United States were hit by prohibitive rates of up to 57%, they were initially able to circumvent these duties by using the loophole offered by so-called processing trade. It was exempt from any duties through August 2015. Processing trade can be conducted with imported goods (polysilicon) that are processed into products (wafers, cells, panels) destined for export from China.
After Mofcom announced in August 2014 that this loophole would be closed, several large and mid-sized polysilicon manufacturers in China expanded their plant capacities and improved their production processes. Consequently, the polysilicon market only experienced a short recovery in 2013/2014 before it headed to oversupply and falling prices again.
That explains why the contract price curve in the figure below only shows a small uptick in 2014 – after a five-year sharp decline – and then continues to fall. In 2017 the curve flattened out only because a strong PV installation rally in China fueled polysilicon demand. A sharp rebound, however, is not in sight – quite the contrary (polysilicon price trend).
Long-term contract prices for high-purity polysilicon from 1977 through 2017
Market trends: Slowing polysilicon demand, massive new capacities in China
The short-term cause of the polysilicon price slump in 2018 was, of course, the cap on PV installations in China announced by the government in Beijing on May 31. But there are two other important factors why the old cycle between oversupply and shortage – apart from seasonal fluctuations – is fading away. The first concerns demand, the second supply:
1) Demand: The long-term trends of global PV installations and polysilicon demand
In 2012 the growth rate of global PV installations dropped to 15% – one of the lowest rates since 1974; from 1997 on, it was always higher than 18%. Breaking through this 18% bottom line was a statistical signal for the onset of a new phase in the development of the global PV market: The growth corridor has shifted to a lower level.
To be sure, the price of PV systems has become so competitive in the meantime that it is beginning to open up new, unsubsidized markets that will make for decent growth rates in the future.
Nevertheless, there is the base effect: Coming from a higher installed PV base now, growth rates are naturally slowing down. It was much easier to double an annual PV installation of one gigawatt more than ten years ago than it is to double 100 gigawatts now.
The polysilicon demand from the PV industry is growing even more slowly than global PV installations since the specific silicon consumption in grams per watt (g/W) of solar cell and module power is sinking continuously.
Specific silicon consumption for solar cells in grams per watt between 2001 and 2020
Several ingredients have contributed and will further contribute to this development:
- the reduction of wafer thickness;
- the switch from traditional wire saws, which work with a slurry of silicon carbide particles wetting the wire, to diamond wire saws, which allow the use of a thinner wire and, thus, reduce kerf loss;
- steadily increasing solar cell efficiencies in general;
- the rising market share of monocrystalline cells, which achieve higher efficiencies than multicrystalline cells, in particular;
- half-cut cells, which reduce the series resistance in a solar panel, and other technologies that improve the cell-to-module power ratio.
As a result, the polysilicon consumption for each new gigawatt installed in 2020 will be only one third of what was needed for one gigawatt in 2006. Hence, demand for solar-grade polysilicon will hardly grow from the level of around 420,000 metric tons reached in 2018.
2) Supply: The cut-throat strategy of leading Chinese polysilicon manufacturers
The protectionist duties on polysilicon imports into China have already spurred a significant expansion of domestic production capacity. Only the rapid growth of Chinese PV installations through 2017 saved the sector from building up severe polysilicon oversupply.
Behind this policy is China’s aspiration to reach self-sufficiency for the feedstock of its own PV industry. In solar wafer production, the country has already achieved a dominant position worldwide, with a global market share of approx. 98% in 2019 (solar value chain). There can be no doubt about China striving for a similar share in the polysilicon segment.
What has been a major hurdle on this way so far is the lower quality of Chinese polysilicon. Only a small group of domestic manufacturers is able to produce material that is good enough for monocrystalline solar cells. Hence, the country has been dependent on imports of high-quality polysilicon, mainly from Wacker (Germany) and OCI (South Korea and Malaysia).
On the other hand, China is pushing monocrystalline technology. In 2015 the National Energy Administration launched the Top Runner Program, whose efficiency thresholds for PV installations have favored monocrystalline over multicrystalline solar panels. This program has given impetus to the massive capacity expansion of the two largest Chinese manufacturers of monocrystalline solar wafers, Longi Green Energy Technology and Zhonghuan Semiconductor, which in turn is driving up the monocrystalline market share.
Against this backdrop, you have to view the fact that several leading Chinese polysilicon manufacturers announced new projects for high-quality feedstock in 2017. The new factories are mainly located in the northwestern autonomous regions of Xinjiang and Inner Mongolia, where electricity rates are very low – an important production factor for the power-consuming Siemens process.
On the other side of the coin, the electricity for the new factories comes from coal-fired power plants. The polysilicon produced – and the solar panels made out of it – thus leave a large carbon footprint. Due to the greenhouse effect, the average temperature in some parts of western China has already risen by three degrees centigrade since the 1950s. Glaciers are melting more than twice as fast as they did 40 years ago, a Greenpeace survey shows.
200,000 tons will be wiped out.
Then new capacity comes in.
Longgen Zhang, CEO of Daqo New Energy, in 2018
The new polysilicon plants, which came on stream in 2018 and 2019, alone add up to a capacity of more than 200,000 metric tons (MT). What sense does such an expansion make in a market that is already oversupplied? The answer is simple: cut-throat competition. Due to the low electricity rates, production costs of the new plants are so low that they can push higher-cost manufacturers out of the market.
Longgen Zhang, CEO of Xinjiang-based polysilicon manufacturer Daqo New Energy, made this very clear in a conference call with analysts in August 2018. He claimed that around 100,000 MT out of the total Chinese polysilicon production capacity of 300,000 MT in 2017 was at low cost. The other two thirds – 200,000 MT – “will be wiped out, then new capacity comes in,” Zhang said. By the end of 2019, “the lower-cost Chinese producers should be at around 300,000 tons,” he predicted.
Other Chinese top manufacturers are not only aiming at domestic, but also at foreign competitors with their new plants. Both GCL-Poly Energy Holdings and Tongwei have expressed their intention to replace imports.
Epilog: Monocrystalline upswing and polysilicon suppliers outside China
It will be interesting to watch how the Chinese aspirants compete against Wacker and OCI on product quality. The strongly increasing market share of monocrystalline solar panels will leave at least some room for foreign suppliers of high-quality polysilicon as well.
So far, the cut-throat competition has mainly hit Chinese manufacturers with higher production costs and lower polysilicon quality. In February 2020, however, OCI succumbed to the price pressure and closed its Korean factory (polysilicon manufacturers). The largest shakeout since the shutdown wave in 2011/2012 is running its course.
Long gone are the days when entrepreneurs like Franco Traverso tried to establish polysilicon plants all over the world. Traverso’s company Silfab soon abandoned its project in Italy, due to the high electricity rates there.
Plan B was an integrated manufacturing complex, from polysilicon to solar panels, in Northern America, where cheap hydropower is available. In the end, Silfab only implemented a solar panel factory in Mississauga near the Canadian capital, Toronto.
The last big polysilicon plant outside China was opened by incumbent manufacturer Wacker in the U.S. state of Tennessee in 2016; however, the investment decision for the plant was already made in 2010 – no Chinese duties on polysilicon imports from the United States existed at that time.
When it comes to the polysilicon market today, China is where the action is.
Published on June 29, 2020 © Bernreuter Research
About the author
Johannes Bernreuter is head of the polysilicon market research specialist Bernreuter Research. Before founding the company in 2008, Bernreuter became one of the most reputable photovoltaic journalists in Germany because of his diligent research, clear style and unbiased approach. He has earned several awards, among others the prestigious RWTH Prize for Scientific Journalism from the RWTH Aachen University, one of the eleven elite universities in Germany.
Originally an associate editor at the monthly photovoltaic magazine Photon, Bernreuter authored his first analysis of the upcoming polysilicon bottleneck and alternative production processes as early as 2001 (Publication List). After preparing two global polysilicon market surveys for Sun & Wind Energy magazine in 2005 and 2006, he founded Bernreuter Research to publish in-depth polysilicon industry reports.
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