Surplus supply of polysilicon pressures pricing—but not all polysilicon prices are equal

EL SEGUNDO, USA: An ongoing surplus in the production of polysilicon—the key raw material in the photovoltaic (PV) industry—will lead to excess supply, leading to further erosion in its pricing, according to an IHS iSuppli PV Perspectives Market Brief and the IHS iSuppli Polysilicon Price Index.

Polysilicon prices on both the spot market and in contract negotiations are set to decline in the coming months, according to the IHS.

However, according to our research, polysilicon prices can vary depending not only on contract type but also on purity level, supplier’s location and contract terms employed. For example, contract pricing for 9N/9N+ pure polysilicon is set to decline to $32.20 in June, down from $33.40 in February. Meanwhile, spot market pricing for 9N/9N+ pure is predicted to decrease to $24.40 in June, down from $27.90 in February.Source: IHS iSuppli, USA.

“Following major declines in 2011, the PV industry is in for another round of major price erosion in 2012, as polysilicon production runs far ahead of demand,” said Dr. Henning Wicht, director and principal analyst for photovoltaics at IHS. “Spot market pricing for polysilicon plunged by 65 percent in 2011, marking the largest correction the market has experienced since early 2009. This year is expected to bring another 56 percent reduction. All this will have an impact on pricing for solar modules and systems as well, adding to the woes of the industry in what is already expected to be a challenging year. These developments are likely to lead to long-term changes in the way polysilicon is bought and sold in the PV industry.”

Silicon surplus
Total polysilicon production capacity is projected to amount to 328,000 metric tons in 2012, up 15 percent from 285,000 last year. In comparison, demand this year for polysilicon is expected to reach only 196,000 metric tons, down about 4 percent from 205,000 in 2011.

This means that production capacity will outstrip demand this year just like the last, with excess production actually widening to a whopping 132,000 metric tons in 2012, up from 80,000 metric tons in 2011. Supply will exceed demand by 67 percent in 2012, up from 39 percent in 2011.

Poly want some silicon?
As the principal raw material for the solar industry in the production of solar-power panels, polysilicon contributes about 20 to 30 percent to the cost of a solar module, or 6 to 15 percent of PV system costs. Sourcing good-quality polysilicon at a low price is one of the most important ways that PV companies can achieve differentiation.

The decline in spot prices is affecting the majority of supply contracts that use so-called long-term contract agreements (LTA), which have dominated the industry until recently.

PV buyers typically agree to LTA contracts for three to five years based on a fixed price, allowing buyers to secure long-term supply and protection against any upward price increases, especially in times of shortage. Customers originally agreed this year to pay anywhere from $40 to $50 per kilogram under these agreements, but such prices were soon overrun by competitors buying at a much cheaper cost on the spot market. Many fixed-agreements then changed, and although prices retreated to about $30 per kilogram, they continued to be approximately 10 percent higher than the spot-price level.

Long-term contracts vs. spot market: battle royale
LTA contracts are not about to disappear, given that buyers prefer to have a steady supply of polysilicon bearing consistent quality. Polysilicon is not fully commoditized, and different impurity levels can lead to lower solar module efficiencies, making quality control still an important part of the purchasing process.

Just the same, buyers will be more likely to accept LTA contracts in the future only if LTA pricing remains flexible and can be adjusted to market conditions. This way, buyers can avoid getting burned from paying for much higher prices than they could have obtained at the spot market.

One way to adjust LTA prices is to link price changes to the spot market through a method that IHS has introduced. IHS differentiates by LTA and spot price, the quality of material being produced, and other variables such as region of production, size of transaction and trading terms. Data is collected via a survey among buyers and suppliers, with the information showing weighted averages covering at least 45 percent of market-wide transacted volumes by month.

Based on information from IHS, spot prices this year for polysilicon are expected to decline further and reach $22 per kilogram by the end of 2012, down from $50 at the end of 2011. But the imbalance will start correcting next year, when supply will not grow faster than demand, paving the way for spot prices to stabilize at $23 per kilogram by the end of 2013.

Source: IHS iSuppli, USA.