A new and detailed bottom-up analysis of the polysilicon industry by GTM Research further supports growing consensus that polysilicon prices will continue to set record lows in 2012 as they did in 2011 as overcapacity continues. Lower silicon prices in 2012 will likely lead to even lower c-Si module prices and force higher-cost poly producers to exit the market.

A key consequence of continued low polysilicon prices at or below US$30/kg is expected to see module manufacturers saving approximately US$0.20 per watt, which could bring module prices below US$0.70 per watt, according to GTM Research.

“In 2011, in the polysilicon industry — and the solar supply chain in general — manufacturing outpaced end-use,” said GTM Research senior analyst, Brett Prior. “After a half-decade of silicon demand outstripping supply, the aggressive expansion plans finally overshot. This supply/demand imbalance will push producers to lower contract prices closer to the level of manufacturing costs at US$20 per kilogram and will force higher-cost manufacturers to exit the industry. While the solar market will continue to grow at a 10 to 20% pace in the coming years, reductions in the amount of silicon used in each module means that end demand for polysilicon will grow at a slower pace. The end result is that the current roster of over 170 polysilicon manufacturers and start-ups will likely be winnowed down to a dozen survivors by the end of decade.”

Perhaps unsurprisingly, the major producers that have significant scale and high-purity products will survive in a low-priced environment, while small-scale producers will struggle to sell at or below US$30/kg, forcing the vast majority to shutter operations and causing many to exit the sector completely.

GTM Research expects to see established players such as Hemlock Semiconductor, Wacker, GCL Solar, REC, OCI and Tokuyama to weather this extended period of pricing weakness.

The market research firm noted that many small-scale producers rely heavily on the spot market rather than the larger players, which have long-term contracts that cushion price volatility and shipment levels and represent over 80% of polysilicon sold. The rapid price decline to below cost for many small players has also meant many were unable to cut costs quickly enough. GTM noted that oversupply in the polysilicon market pushed the spot price of silicon down from US$80/kg in late March 2011 to under US$30/kg in December, representing a more than 60% price drop.

Of course the major players are not immune to the impact of spot market price declines; as GTM noted, such pricing levels will mean that contract renegotiations are inevitable. Average contract pricing was closer to US$50/kg in 3Q 2011, but the collapse in spot pricing will likely pull the contract pricing down sharply.