Polysilicon, the raw material used to make most solar panels, is forecast to fall another 9 per cent from its lowest in a decade as a supply glut narrows margins throughout the industry.
The average spot price of the material will finish this year at about $22.10 a kilogram, according to the median of seven analysts surveyed by Bloomberg News. The price, which four years ago topped $475, tumbled about 70 per cent in the 12 months to $24.27 on April 16, the lowest since at least 2002.
The drop hurts most for poly manufacturers led by Hemlock Semiconductor and Wacker Chemie AG. It may ease pressure on margins at panel makers such as Suntech Power Holdings and LDK Solar, which were unprofitable last year. The result is expanding a shakeout that bankrupted at least eight companies including Solyndra LLC last year.
“We see massive oversupply in polysilicon,” Jesse Pichel, an analyst for Jefferies Group, said by e-mail. “Poly prices will continue to fall,” he said, estimating that the spot price may drop into “the teens.”
The findings underscore the difficulty of increasing the scale of the renewable energy industry as officials from more than 20 industrial nations gather in London this week for a Clean Energy Ministerial meeting aiming to map out measures that would help wean the world off fossil fuels.
Market impact
Wacker shares lost two-thirds of their value in the past year, and GCL-Poly fell 55 per cent. Renewable Energy of Norway last night said it would shut one of its factories and cut 460 jobs as a result. Hemlock is jointly owned by Dow Corning, Shin-Etsu Handotai and Mitsubishi Materials Corp. The Bloomberg Large Solar index tracking 17 companies in the industry fell 75 per cent in the past year as polysilicon prices led the cost of solar cells lower.
“While we’re currently feeling the impact of the softening in the industry, we believe the industry will continue to grow at tremendous rates in the near and long-term,” Jarrod Erpelding, a spokesman for Hemlock, said by e-mail. “The silicon market will continue to grow with the demand of the solar industry.”
Polysilicon makers including GCL-Poly Energy Holdings and OCI Company almost doubled capacity in the past two years to feed a surge in solar installations, creating a glut after output exceeded demand for the first time, according to data compiled by Bloomberg New Energy Finance.
Falling demand
Global demand for panels is forecast to fall this year, according to a Bloomberg survey published in March. It would be the first time since the modern solar industry began in 2004 with a program of incentives from Germany and a setback for an industry that’s grown 61 per cent a year on average since 1999.
Germany and Italy, the top two markets for solar power, are trimming subsidies after above-market rates for renewable energy sparked a boom in installations.
The poly price decline has now taken spot prices near production costs for even large manufacturers, according to Jenny Chase, who leads a team of solar analysts at London-based New Energy Finance. The top five manufacturers are Hemlock, which is based in a Michigan town by the same name, Wacker from Munich, Renewable Energy Corp ASA of Norway, GCL-Poly of China and OCI of South Korea.
“The latest price drops will be the trend over the rest of the year as companies sell at cash cost just to stay in the market,” Chase said. “A few Chinese manufacturers are refusing to drop out and their output puts downward pressure on prices.”
Stress on manufacturers
A drop to about $22 puts stress on even the biggest companies, which have production costs from $15 to $25 a kilogram, Chase said.
“The marginal cost to manufacture polysilicon will remain pretty much the same,” Jerry Stokes, president of the European unit for Suntech, which buys the material to make into solar cells, said in an interview. “Unless there’s a significant breakthrough, we’re already near the bottom on poly prices.”
Dozens of smaller producers entered the market in the last three years, mainly in China, seeking to benefit from a boom. These are particularly vulnerable to lower spot prices because they rely on the market to sell the material. Most of the larger companies have lower costs and long-term contracts.
Most manufacturers have reduced output, and some smaller ones such as PV Crystalox Solar suspended production entirely. About two-thirds of all producers may go bankrupt in the shakeout, according to a research note from Macquarie Bank on November 8.
Spot prices
The spot price of polysilicon will fall to as low as $18 per kilogram as inventories pile up and distressed companies sell their stocks, according to the Bloomberg survey, which projects a recovery at the end of the year. The cost hasn’t been below $30 since 2002, according to New Energy Finance data.
“A lot of distressed material seems to be influencing the spot price now,” Sean McLoughlin, analyst for HSBC Holdings plc said by phone. Many more bankruptcies are needed for prices to stabilize, he said.
Lower prices are less harmful to large producers such as OCI and GCL-Poly, which will expand to take market share, according to Jefferies. Renesola, one of the few listed makers in China, reported a minus 28.1 per cent operating margin.
Fewer than 10 Chinese makers are still producing, and only the two biggest would be close to covering cash costs at such a level, Chase said without naming the smaller companies that are most vulnerable.
Slimming margins
Polysilicon accounts for a quarter of the cost of solar panels. Suntech and LDK have warned their margins will be lower this year than last, when they were both unprofitable. Each $3 per kilo drop in polysilicon prices cuts solar prices about 2 per cent, according to New Energy Finance.
Prices for polysilicon sold under long-term contracts averaged $51 a kilogram last year, New Energy Finance data shows. Instead of renewing multi-year contracts, buyers now want to keep their commitments to no more than three months, according to Katharina Cholewa, analyst for WestLB AG.
“All long-term contracts have now been broken or renegotiated to reflect the new spot prices,” said McLoughlin, the HSBC analyst. “Contracts are still at about $30, depending on quality.”
Production capacity for the material will rise about 3 percent this year to almost 386,000 tons, New Energy Finance estimates. Supply will exceed demand by 67 percent in 2012, up from 39 percent in 2011, IHS said in a research note.
The survey included analysts from Bank of America Corp, HSBC, Jefferies, WestLB, IHS, TrendForce Corp and New Energy Finance.
GCL-Poly, China’s largest producer of the material, expects a supply glut to last at least two more years. Competition on quality and production costs will intensify and drive smaller producers out of the industry, Wang Gaoxiang, a GCL vice president, said on March 22.
Wacker declined to comment, noting it’s in a quiet period before earnings due May 4. Hemlock wasn’t immediately available for comment.
“We have seen industries in which players make losses for quite a long period of time,” said Cholewa of WestLB AG. “The pain will continue for a long time.”
