China’s media likes to label the giants in some of the country’s key industries in descriptive groups. First there were the ‘three barrels of oil’ (CNOOC, PetroChina and Sinopec). Then there was the BAT troika (Baidu, Alibaba and Tencent) in the internet sector. And now there are the ‘four kings of silicon materials’, who dominate the production of polysilicon, the key raw material for the photovoltaic cells in solar panels.
In order of production capacity they are: Tongwei, GCL Technology (which has just changed its name from GCL New Energy), Daqo New Energy and Xinte New Energy. All four are on a roll, with Tongwei and Daqo releasing record-breaking first quarter profits recently.
As we wrote in WiC574, the solar power producers and electric vehicle (EV) manufacturers share a very similar problem. There aren’t enough materials being produced at one end of the supply chain to match escalating demand at the other. Raw material prices have consequently soared.
The two upstream industries also show a very similar geographical concentration in one country: China. As Bernreuter Research highlights in its latest annual review, Chinese polysilicon firms now account for 80% of global production and are on course to top 90% within a few years. Much of it is based in the Xinjiang region.
The German-based polysilicon research firm attributes Chinese dominance to “low electricity rates for power-hungry polysilicon and ingot production, loan guarantees for private investment, cost-efficient equipment manufacturing and strategic foresight”.
But the Chinese media also wonders whether the polysilicon supply-demand imbalance could soon be resolved by the industry’s huge expansion plans. That could create another huge downturn in the sector similar to a decade ago. It’s not just existing players who are upping capacity. The China Nonferrous Metals Industry Association (CNIA) says that 16 new entrants have unveiled plans for new production capacity of 1.7 million tonnes a year. That is a larger group than the existing 13 players, who also have plans to add a further 1.8 million tonnes.
By comparison, global polysilicon output last year was 631,000 tonnes.
In 2021, the shortfall in supply was exacerbated by power constraints that saw reduced production in plants in western China. CNIA, the industry body, flagged another new factor in Shanghai’s lockdown in April, which has prompted some producers to close production lines too. It says this is pushing prices up for polysilicon again (to Rmb252 to Rmb260 per kilogramme at the end of April) and it expects another round of price increases by the end of May.
These levels represent a massive spike from the Rmb90/kg that Tongwei achieved in the first quarter of 2021. Its average selling price in the first quarter of 2022 was Rmb240/kg, leading to net profits of Rmb5.2 billion ($787 million), which were up 128% year-on-year.
Daqo recorded an even steeper increase, with net income rising 643% to Rmb4.3 billion. This makes it the second most profitable company on Shanghai’s STAR Market after SMIC.
This must be great news for Xu Xiang, president of Daqo Group and son of its founder Xu Guangfu. His determination to enter the polysilicon sector met fierce resistance from Daqo’s board in the early noughties when the company was still focused on electrical equipment.
After his father insisted on the transition, Daqo moved into polysilicon, enjoying a golden period in the run-up to the company’s listing in New York in 2010, shortly before the industry’s first major downturn.
HSBC says that a threatened delisting from the US market, because of the ongoing spat with Chinese regulators over access to financial audits, is a major overhang on the stock. The share price had dropped from $77 in late October to $41.7 at the beginning of May. In the meantime, Daqo is looking at alternative options. It was reported this week that its subsidiary Xinjiang Daqo has been given approvals by the Shanghai stock exchange to raise funds through a private placement of up to Rmb11 billion. Funds would be used to add 100,000 more tonnes of polysilicon production in Baotou in Inner Mongolia.
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