The following report on chemical industry is provided by Woori Investment & Securities. -Ed.
In China, prices of poly-silicon, wafers, solar cells, and modules are up more than 10% from their lows in early February. Meanwhile, related Chinese manufacturers were taking in orders for 2H10 in April after securing orders for 2Q10, showing the strength of the solar power market in China. Most Chinese companies we met with were very optimistic about 2010 earnings.
Cell and module production capacity is expanding rapidly in China, as: 1) Chinese companies enjoy top-notch cost competitiveness thanks to the labor-intensive nature of the industry; and 2) demand growth is accelerating in China. Meanwhile, Chinese player GCL, which entered the solar farm business just recently, observed that domestic projects were growing rapidly.
Meanwhile, the domestic sales portion (module) was also rising rapidly for many producers. Recent capacity expansion for solar cells and modules, and the resulting growth in output, is outpacing the growth of China’s poly-si production capacity, implying tight supply of poly-si near term.
Most companies we met with attributed the recent strength of China’s solar power market to a surge in demand in anticipation of Germany reducing its solar subsidies, and expressed concern that demand might decline in 2H10. However, we note that demand is rising rapidly in the US, France, Czech Republic, Japan, and China itself, supporting the view that the rapid growth of the global solar power market since mid-2009 is being driven by consistently rising demand, not just a temporary “speculative” surge.
Following our visit, we conclude the China’s solar power market will grow sharply. Although still in the initial stages, we believe government subsidies will expand going forward. In fact, China’s government already provided its support for the solar power industry when it implemented a pilot program (70MW) in Apr 2009. It also announced the “Golden Sun Project” (642MW), which will be built over two years from 4Q09. Accordingly, the Chinese companies we visited expect to see further government support in future.
While cost-competitive GCL is maintaining high utilization rates for its polysilicon plants, other players are operating at less than 30% of capacity. Moreover, we note that even GCL is less competitive than Korea’s OCI, which boasts: 1) superb cost competitiveness thanks to inhouse- developed chemical technology; 2) stable plant operation; 3) proprietary technology; and 4) economies of scale.
△ China’s Solar Power Industry Booming
We visited solar energy businesses in China, such as Suntech, Eging PV, China Sunergy, GCL, Trinasolar, and Solarfun, over Apr 25~30. Most of these companies are listed on US or Hong Kong stock exchanges, rank higher than 10th in China, and are top players in the global market. Thanks to our company visits, we were able to catch a glimpse of the future of the solar power industry.
For most of the companies we visited, polysilicon, wafer, cell, and module prices have been rising in China since end-2009. In particular, prices rebounded sharply after bottoming in February, and as of April, wafer, module, and system installation prices were up more than 12% vs Dec 2009, while polysilicon prices had risen only 10%. Meanwhile, Korea’s poly-si export prices are showing signs of rebounding, presumably due to the impact of higher prices in China. Of note, GCL forecasts that the poly-si spot price will fall to US$45 (vs US$52~54 recently) by end-2010, but the company admits that this is pessimistic considering the recently tight market, and that actual poly-si prices are likely to exceed its forecast.
According to reports from Samsung Economic Research Institute, China’s four major solar cell makers (Suntech, Yingli, JA Solar, Trina Solar) alone commanded 37% of the global solar power market in 2009, an increase of 16%p y-y. And China overall (including small players) took 49% (4.6GW) of global solar cell production in 2009, backed by the market share growth of the four major solar cell makers. During our visit, we confirmed that production capacities for solar cells and modules were expanding very rapidly. We expect China’s global market share to grow further in 2010 and 2011.
Most companies we met with attributed the recent strength of China’s solar power market to a surge in demand in anticipation of Germany reducing its solar subsidies, and expressed concern that demand might decline in 2H10. However, we note that demand is rising rapidly in the US, France, Czech Republic, Japan, and China itself, supporting the view that the rapid growth of the global solar power market since mid-2009 is being driven by consistently rising demand, not just a temporary “speculative” surge. For example, Solarfun’s (China) sales contribution from Germany has already dropped to 57% in 4Q09 (from 60% in 3Q09 and 83% in 2Q09), as other countries are picking up the slack. Meanwhile, the companies we visited were very optimistic about demand growth in China and predicted that the US would emerge as the largest solar-cell market within three years. Overall, we see no reason for pessimism concerning the solar cell market for 2H onwards.
China’s subsidies for renewable energies are just getting started and demand is still relatively low (2009 solar power capacity 260MW). Local companies believe the solar power market will gradually expand as the Chinese government adopts more renewable energy-friendly policies. They conservatively estimate China’s 2010 solar power capacity at 300~500MW. Meanwhile, GCL (China) had a rather optimistic view, expecting China’s 2010 solar power capacity would substantially exceed 500MW. We believe GCL’s view is more realistic.
According to Solarfun, the Chinese government had announced plans for the supporting renewable energy industry before 2008, but announced no details. However, the House and City Construction Ministry kicked off a pilot solar-cell project (70MW) in Apr 2009 and the Ministries of Finance and Energy announced a “Golden Sun” project (642MW) in October~November, which will be implemented over the next two years, starting from 4Q09. Changes in government policy contributed to the rapid increase in solar power capacity since 2H09.
△Poly-si Supply/Demand to Balance, Despite Growth in China
Back in Sep 2009, we talked to Korea’s poly-si producers and others planning to enter the poly-si business, including Woongjin Poly Silicon, Hankook Silicon, and KCC, and these companies were optimistic about poly-si supply/demand. However, we had maintained our negative stance given the following: 1) poly-si price stayed weak in 2H09, continuing the decline from the peak in 1H08 (if demand had recovered, prices would have stopped falling or rebounded); and 2) we are concerned about China’s poly-si supply glut. At that time, according to Woori Beijing Research Center, the glut was severe in China and expected to continue (although such concerns later turned out to be overblown).
More recently, we visited OCI in early March and learned the following. First, as poly-si demand has risen rapidly, supply-demand tightened for high-purity poly-si. In fact, utilization rate approached 100%, and product was shipped as soon as it was produced. In addition, the decline in poly-si prices has ended amid tight supply. Second, OCI’s cost competitiveness improved rapidly following the operation of plant number two. Unit cost fell to the lower US$30/kg range in 4Q09, from over US$40/kg in 1H09, confirming its world-leading competitiveness.
At OCI’s Apr 21 1Q earnings announcement, we learned the following: 1) poly-si prices remained flat for the previous two to three months, with spot prices in the lower-US$50/kg range; and 2) orders increased from Japan as well as Europe. OCI expected spot prices to rise on strong demand, and its positive outlook was in line with the Woori Beijing Research Center forecast. According to Woori Beijing, poly-si orders grew at LDK, China’s largest poly-si producer, with plant utilization approaching 100%. High-quality wafer prices rose more than 20% compared to early 2010 (up 8% from March). In addition, Korea’s poly-si export prices increased, albeit slightly.
According to OCI’s 4Q09 IR meeting, held Mar 19, global poly-si capacity increased 91,700 tons y-y to 170,500 tons as of end-2009. The company estimates capacity for 2010 at 211,400 tons (40,900 tons being added). Meanwhile, we estimate poly-si demand at less than 80,000 tons, including demand from the semiconductor industry. Given a severe supply glut and global demand growth of less than 30,000 tons, how/why did prices stay relatively flat?
To answer this, we visited China over Apr 25~30, as China is at the center of concern about supply glut and its global solar power market share is increasing rapidly. During our oneweek trip, we found out that the supply of poly-si is not excessive due to limited utilization rates at companies with weak cost competitiveness at the current price range (the low-US$50 range). We believe market leaders will reduce ASPs in 2011 on enhanced cost competitiveness, forcing many uncompetitive players out of the market, resulting in an oligopoly. We cautiously recommend investors consider premiums for cost-competitive market leaders, including OCI.
By J.J. Kim(jj.kim@wooriwm.com)
Brian Jin (kingwei@wooriwm.com)
Anthony Kim (anthony.kim@wooriwm.com)
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