Silicon Price Rise in China

Regarding the price increase of silicon materials, there are often two illusions in the outside world

The price increase of poly-silicon materials is the hottest phenomenon in the photovoltaic industry recently.

 

Refer Solar Power in India

On the eve of the Chinese National Day, the price of silicon materials soared rapidly, from 210,000/ton to 235,800/ton. What's more, the quotation exceeded 250,000/ton, and silicon materials were once again facing short supply.

 

 

Regarding the price increase of silicon materials, there are often two illusions in the outside world.

 

The first illusion is that the price increase of silicon materials is a new hot spot. But in fact, the price increase of silicon materials started at the beginning of the year. And it is not the first time in the history of photovoltaics. As early as 2008, the story of holding silicon as the king was staged. The high point of that round was US$400/kg.

 

The second illusion is that the price increase of silicon materials is entirely blamed on the upstream and downstream game of the industrial chain. From silicon materials to power stations, there is indeed a struggle for the right to speak in the upper, middle and lower reaches of the photovoltaic industry, and one after another. 

However, its impact on the pattern can at best be regarded as fueling the flames, far less than making waves.

 

These two illusions have caused some misunderstandings about the photovoltaic industry in the market. How did the rise in the price of silicon material come about? Can it continue to rise? Which part of the rise is made? This is the question we need to answer.

Silicon material companies buy industrial silicon powder and produce polysilicon materials.

Silicon wafer companies buy polysilicon materials and produce silicon wafers.

Solar cell companies buy silicon wafers and produce cells; component companies buy solar cells and assemble them.

Finally The terminal demand falls on the construction of the power station.

 

From the perspective of the supply and demand of silicon materials, the total demand in 2021 is about 578,000 tons, and the supply is basically barely satisfied. 

However, due to the substantial expansion of silicon wafer manufacturers, leading companies have adopted the long-term lock-in model. Many companies cannot obtain polysilicon. This has led to the unsatisfying demand for polysilicon. This situation can be seen from the expansion speed of photovoltaic power generation companies. Obviously.

 

According to the company's data, there are currently 200,300 photovoltaic power generation-related companies in China. The fierce race track has caused a frantic influx of new entrants. 

In August 2021, a total of 40,100 photovoltaic power-related companies have been added in China.

 

We all know that if the supply is insufficient, the most conventional method is to expand production and solve the problem by releasing production capacity.

 

However, things are not that simple. In the soy sauce vinegar industry, this is a simple strategy. But in the field of polysilicon, another important factor of insufficient supply is: polysilicon expansion, in fact, there is a huge production barrier.

 

The construction period of polysilicon is as long as 18 months. Calculating the ramp-up time of production capacity in the first half of the year, the normal mass production time will take almost two years. 

The excessively long production cycle makes it impossible to release demand quickly. However, the production capacity of polysilicon is relatively small, and production needs to be stopped every year for maintenance, which is also a characteristic of the industry.

 

High investment is also a factor that restricts production capacity. The investment per ton of polysilicon is as high as 800 million to 1 billion yuan, and the depreciation is very high, accounting for almost 17% of the production cost. "The sky-high depreciation price" prevents many companies from choosing to reserve capacity, and even makes many companies simply look back.

 

In addition, electricity costs account for nearly one-third of the cost, which means that only companies with regional advantages in electricity prices have the conditions to expand polysilicon production.

 

Although the top manufacturers have recently introduced substantial expansion plans, except for Tongwei (SH: 6004358), other manufacturers will basically not be able to release their production capacity until next year. In addition, there are also restrictions on the policy of dual control of energy consumption. 

So the supply cannot be raised in the short term. With high demand and insufficient supply, the price surge has naturally become a reasonable thing.

 

Observing the midstream of the industry chain, it can be found that the production capacity of silicon wafers, cells, and modules is extremely abundant, and the expansion of production capacity has been released relatively quickly. Taking silicon wafers as an example, the demand is expected to reach 167GW in 2021, but the capacity expansion plan has reached 384GW. By the end of the year, it is estimated that there will be a large amount of new capacity, even if capacity replacement and climbing are eliminated, there is already a serious surplus.

 

Finally, let’s look at terminal demand. In the context of parity, electricity prices are fixed. If the cost of building power stations is too high, it will affect the income of power generation companies. If the profits are too low, the enthusiasm of companies to build power stations will be affected. , And this situation has become the consensus of the industry this year.

 

After sorting it out, it can be clearly found that silicon materials and power stations are two links with strong voices. When the two sources of supply and demand are coercive, it has led to a result-crowding out.

 

To understand this situation, you can use a popular analogy: both ends are big brothers, both for face and money, and the little brother who is caught in the middle will be sad.

 

In the photovoltaic industry, prices will be lowered for links with low voice in the industry chain. For example, last year, the price of photovoltaic glass soared, due to changes in the logic of the industry, the barriers were eliminated, and the cost of components occupied by it was relatively high, so the price was the first to be cut;

 

The subsequent shocks are the cells and components at the end of the smile curve, whose prices have not risen; finally, after the prices of these industrial chains are close to the cost line and cannot be lowered, the photovoltaic supply chain is out of balance.

 

In July, a small decline in silicon materials gave the unbalanced industry a respite, but as long as downstream demand strengthens, silicon materials will inevitably increase in price. 

In the industry chain, the business behavior of pursuing profit maximization in each link eventually evolved into the upstream and downstream game observed by the market.

 

After the end of the third quarter, this kind of game still shows no signs of ending: upstream raw material companies have reduced and restricted production, and the price of photovoltaic raw materials has soared. 

In addition to the main industrial chain, the price of photovoltaic auxiliary materials has also entered an upward channel.

 

Among them, the price of photovoltaic glass returned to the price increase channel, and the price of photovoltaic film was raised by 35%. 

In the fourth quarter, it may continue to rise, and the prices of photovoltaic aluminum frames and stent raw materials have risen intensively.

 

This has an obvious impact, that is, the industry is shut down and the material soars are inexplicable. In this context, major photovoltaic module companies such as Longi, Jinko, Trina, JA Solar, and Risen Energy once united to appeal to the photovoltaic industry association and other institutions to diversify the industrial chain and avoid the tide of rush to install.

 

According to data from the National Energy Administration, from January to August this year, China’s newly installed photovoltaic capacity was 22.05GW, a year-on-year increase of 45%, but there is still a certain gap compared with the industry’s expected annual increase of 55-60GW.

 

Many people in the industry believe that this year will repeat the 29.5GW increase in the fourth quarter of 2020 in the fourth quarter of the "rush to install tide", so as to achieve or even exceed industry expectations. 

However, when the prices of many raw materials have risen by a large margin, it is really difficult to achieve, and the component companies have long been overwhelmed, and this joint appeal has been made.

 

The tight supply of silicon materials is difficult to reverse in the short term. In the context of dual carbon, the pattern of tug-of-war in 2021 seems to have been concluded.

 

Supply and demand mismatch is not a bad thing

In the photovoltaic industry, the mismatch of supply and demand and the imbalance of the industrial chain are not new, and it is not a bad thing in the long run.

 

The photovoltaic industry developed rapidly in 2000 to the 2008 financial crisis which led to a decline in demand. After a short rebound, the photovoltaic industry faced the restriction of double reverse. From the recovery in 12 years to the elimination of backward production capacity in "5.31" in 2018, it ushered in the rapid growth of photovoltaics has finally realized the transition from policy support-driven industry development to market demand-driven industry development.

 

And China's photovoltaic industry has emerged and transformed into a global photovoltaic leader in this ebb and flow. 

According to statistics from the China Photovoltaic Industry Association, China's polysilicon, silicon wafers, photovoltaic cells, and photovoltaic modules accounted for 67.30%, 97.40%, 78.70% and 71.30% of the global output in 2019, respectively.

 

Why can the photovoltaic industry return to its peak time and time again, and achieve more vigorous development?

From the perspective of industrial development history, we can be sure that the current stage of rapid growth of the photovoltaic industry, then, what is the logic behind the rapid growth?

 

The reason for this is that photovoltaics are the most important technical means to achieve carbon neutrality.

 

As we all know, in China's carbon emission industry, power generation accounts for more than 40% of carbon emissions, and thermal power, as the largest power generation unit group, accounts for more than 70% of power generation. 

According to data from the National Bureau of Statistics, the country’s electricity generation is 750 million in 2019. 

In kilowatt-hours, thermal power generates 522 million kilowatt-hours, accounting for about 70%. 

In addition, hydropower accounts for 17.3%, wind power accounts for 5.41%, nuclear power accounts for 4.64%, and photovoltaics account for less than 3%.

 

Therefore, to achieve carbon neutrality, clean energy must be replaced from the power generation side. 

According to the National Development and Reform Commission’s Energy Research Institute, by 2025, the total installed capacity of photovoltaics will reach 730 million kilowatts (730GW, equivalent to 2.9 times the end of 2020). It accounted for 24% of the country’s total installed capacity, and the annual power generation was 877 billion kilowatt-hours, accounting for 9% of the total electricity consumption of the entire society that year.

 

Since the "15th Five-Year Plan", the annual new installed capacity of photovoltaics has surpassed that of other power sources. The installed capacity in 2030 has become the first of all power types, and the photovoltaic power generation capacity in 2035 has become the first of all power types.

 

By 2035, the total installed capacity of photovoltaics will reach 3 billion kilowatts (3000GW, equivalent to 11.9 times the end of 2020), accounting for 49% of the total installed capacity in the country, and the annual power generation capacity will be 3.5 trillion kilowatt-hours, accounting for the entire society's electricity consumption that year Of 28%.

 

By 2050, photovoltaics have become China’s largest power source. The total installed capacity of photovoltaic power generation will reach 5 billion kilowatts (5,000 GW, equivalent to 19.8 times the end of 2020), accounting for 59% of the country’s total installed capacity. 

The annual power generation capacity is about 6 Trillions of kilowatt-hours, accounting for 39% of the electricity consumption of the whole society in that year.

 

Compared with the cumulative installed capacity of 253GW at the end of 2020, it will increase by 18.8 times on this basis. The compound annual growth rate is as high as 10.5% within a 30-year time frame. Its certainty and high growth are rare. This fully demonstrates China's firm determination to vigorously develop in the photovoltaic field, and also shows that the ceiling for the future development of China's photovoltaic industry may exceed the general estimate of the market.

 

Debate between the present and the future

For investment research in the photovoltaic industry, there are two time horizons worthy of vigilance. If you focus too much on the short-term, you will fall into the short-sightedness of ignoring the future. If you only look at the future without seeing the present, you will fall into the callback trap of industrial fluctuations.

 

If we take the polysilicon leader Tongwei shares as the research target, we can draw a very enlightening conclusion.

On October 9, 2021, Tongwei Co., Ltd. announced the third quarter of 2021 performance forecast. It is estimated that the net profit attributable to shareholders of listed companies in the third quarter will be 5.8 billion to 6 billion yuan, a year-on-year increase of 74.00% to 80.00%.

Deducting non-recurring gains and losses After the net profit was 5.8 billion to 6 billion yuan, a year-on-year increase of 203.00% to 214.00%.

 

Among them, the deduction of non-profit growth rate is more real, because in the third quarter of last year, the company confirmed an investment income of RMB 1,521,815,100 from the transfer of 98% equity of Chengdu Tongwei Industrial Co., Ltd., which increased the net profit of RMB 1,293,542,800.

 

Some market views believe that the implementation of new silicon material production capacity in 2022 will cause prices to fall sharply.

In theory, this view is not wrong. In the short term, it will become the fuse of market sentiment and even impact the company's stock price to a considerable extent.

But it needs to be clear that silicon materials are still the most tight link in many industrial chains. 

The effective supply of silicon materials in 2022 is 800,000 tons, and the demand is 799,000 tons. Supply and demand are still tight.

 

In terms of silicon material supply, based on a 105% capacity utilization rate, it is estimated that the effective silicon material supply will be 800,000 tons in 22 years, including 705,000 tons domestically and 95,000 tons overseas. According to the silicon consumption of 2.92g/W, it can support 274GW of modules.

 

In terms of demand, the global installed demand in 2022 will be 205GW. According to the 1:1.2 capacity ratio, the corresponding module demand will be 246GW.

Considering the announced new expansion and climbing capacity of silicon wafers in 2022, about 27.5GW, the corresponding silicon demand will be 273.5GW (equivalent to 79.9). 10,000 tons), so the supply and demand of silicon materials will remain tight in 2022.

 

Through the calculation of supply and demand in the next few years, it is estimated that in 2025, the global demand for polysilicon will be 1.262 million tons, and the demand for silicon during the 14th Five-Year Plan period will be 20.5%.

 

Through the above analysis, it can be concluded that the industry's supply and demand are tight and there is a higher growth trend in the future. The manufacturing law of "demand-expansion-satisfy demand" tells us that we must focus on the company's production expansion plan.

 

In fact, since last year, only Tongwei took the lead in proposing an expansion plan. 

With the gradual tightening of silicon materials, other companies have successively proposed corresponding expansion plans. 

Tongwei disclosed a 14 billion yuan on 6/30 this year. It plans to build a high-purity crystalline silicon project with an annual output of 200,000 tons.

 

If you think carefully about the first level, you will find that the tight production capacity will lead to the expansion of the manufacturer, and the full expansion is prone to overcapacity. Then the question is: Is Tongwei's move properly?

 

Silicon materials are facing tight production capacity in the next two years, and production barriers are extremely deep. It is difficult for companies without resource advantages and financial strength to compete with each other. Tongwei shares have the advantages of capital and location, and the first impression is a squeeze. The best policy.

Everyone knows that if there are deep barriers in a certain industry, there will be barriers to entry. Under the premise of demand release, the development prospects of the industry will be more clear, and the production barriers of polysilicon are in addition to those mentioned above. 

The analysis from the cost structure is also relatively clear. From the figure below, we can clearly see that most of the cost of silicon materials comes from electricity and raw materials.

 

It can be seen from the figure that the advantage of electricity is one of the barriers, while the figure below clearly shows that leading silicon companies are generally distributed in areas with lower electricity prices, and their own power plants have reduced costs significantly. In the context of power rationing, it is difficult for other companies to replicate.

For another big part of the cost, the raw material industrial silicon has a relatively abundant production capacity and will not cause excessive constraints on the industry under normal circumstances.

 

In 2020, the total global industrial silicon production capacity will be 6.23 million tons, and China’s production capacity will be 4.82 million tons, ranking first in the world, accounting for 77.4% of global production capacity.

In 2020, the total global production will be 3.03 million tons, of which China will reach 2.1 million tons, accounting for nearly 70%.

 

In addition to the barriers to electricity, the gradual decline in costs also laid the foundation for the future development of the industry.

 

As we all know, the expansion of production scale in the manufacturing industry will further reduce costs, including the decline in power consumption and the decline in investment costs, which reduces the weighted average production cost of Tongwei's new and old production capacity to 38,700 yuan/ton, of which 36,300 new production capacity Yuan/ton, the old production capacity is 49,000/ton.

From the cost side, it is obvious that the source of the substantial increase in corporate profits. 

At least in 2022, even if the price of silicon materials declines, Tongwei's abundant production capacity will be matched to the increased demand, which makes the performance growth possible. .

 

In addition, the capacity barriers mentioned above will further aggravate the head effect. Silicon CR5 will reach 77.1% and 80.6% by the end of 21/22, which is significantly higher than the concentration level of 68.8% in 20 years.