Polysilicon reinvestment price levels, a moving target

Share on facebook
Share on twitter
Share on linkedin
Share on reddit
Share on email

Process and product innovation as well as continuous improvement have always been at the forefront of a company’s competitive strategy. This holds – with different degree of intensities – for commodity and speciality product producers alike. But what happens if the speed of innovation is suddenly being accelerated by external factors? The transformative impact of such a regime change can currently be investigated in the polysilicon market, which has turned into a much more dynamic place in conjunction with the rise of the crystalline silicon photovoltaic industry.

Over the past decade incumbent polysilicon producers with a long-term track record have been blessed with phenomenal demand growth that turned into a double-edged sword as resulting capacity additions finally lost track with market requirements at the beginning of 2011. A prolonged and devastating overcapacity-induced price decrease followed with an average annual price decline of 30% over the past four years, leading to a total price decline of 75% (Figure 1).

Figure 1: Poly-Si spot-price composite. Source: Composite of EnergyTrend PV & PVinsights

The oligopolistic polysilicon market structure changed as new manufacturers, particularly from Asia, entered the playing field. Consequently, the number of high-volume and high-quality producers increased with some new entrants even catching up to the former elite of “top tier” manufacturers. This resulted in a greater than 10-fold increase in top-tier manufacturing capacity to an absolute amount of 320,000 MT/year in the period from 2005-15e (Figure 2), or more than 46GW of c-Si module equivalents (taking account of material needs from the semiconductor industry). Theoretically, this capacity alone could be fully utilised if PV end markets develop as expected by most market observers in 2015.

Figure 2: HQ poly-Si capacity. Source: Viridis.iQ GmbH.

Under such circumstances lower tier “reserve” capacities satisfy marginal demand in cases where facilities have been in continuous operation or idled for future usage on short response. This reserve capacity could amount to approximately 148,000 MT over the next two years, or 23.9GW of c-Si module equivalents. The exact figure and timing depends on project progress of sites that are currently under development. Roughly 50% of this lower tier reserve capacity is operational and therefore imminent shortages of polysilicon, other than “higher tier” market tightness, is not likely to occur over the next 18 months.

Polysilicon reinvestment price

Nevertheless, in markets where higher tier suppliers operate close to full utilisation, price volatility typically increases, sending various signals to active and inactive producers. Here, the reinvestment price level is of particular interest, meaning a sustainable price that is sufficient to satisfy broader industry capital return requirements on expansion projects.

Despite notable improvements in energy consumption, in particular within the TCS formation and deposition steps, as well as design and process optimisation efforts with corresponding decreases in the capital cost components, the average market prices of +/- US$20/kg over the past 30 months seem far too low to justify a broad based polysilicon expansion programme – at least for mainstream direct and hydrochlorination Siemens reactor based processes.

In order to derive the relationship between unlevered project IRRs and sustainable reinvestment ASPs, certain assumptions have to be made to apply to a steady-state-free cash flow to firm discounted cash flow model. These postulates relate to critical input factors such as cash and capital costs. Polysilicon cash-costs are highly dependent on location specific factors, with electricity and metallurgical grade silicon being the biggest cost components. Best-in-class top-quartile cash costs from large-scale industry leaders range from US$15-20/kg.

On the capital investment front, a benchmarking of 50 greenfield, brownfield and existing site expansions over the past eight years gives a pretty good macro view on capital budgets for polysilicon plants. The figures are based on communicated budgets and do not include unexpected or unaccounted cost. Figure 3 shows that the majority of polysilicon manufacturing investments were budgeted at or above US$80 per kg nameplate capacity, which will be used as a mid-point benchmark for the determination of reinvestment price levels.

Figure 3: Scatterplot of capacity vs unit invest. Source: Viridis.iQ GmbH

For modelling purposes, the allocation of investment between equipment and other fixed capital structures like building, facilities & auxiliaries have been set to 40/60 and the depreciation periods are 15 and 30 years, respectively. In addition, a 7.5% SG&A surcharge and 30% corporate tax rate are used for the determination of free cash flows. This prepares the ground for the deduction of the unlevered project IRR and ASP relationships for the polysilicon industry.

Figure 4 reveals this relationship for constant cash-costs of US$15 per kg and various unit invests of US$60/80/100 per kg. As shown, at a minimum investor hurdle of 10% (x-axis) the sustainable reinvestment price is in the mid-twenties for the US$60 per kg capital budget line and approaches thirty for the 100 USD per kg capital budget line. The same approach for the different capex scenarios at a cash-cost of US$20 per kg is revealed in Figure 5. Here the polysilicon reinvestment price range varies between the upper twenty to mid-thirty dollar levels.  

Figure 4: Unlevered project IRR vs ASP @ US$15 cash-costs. Viridis.iQ GmbH
Figure 5: Unlevered project IRR vs ASP @ US$20 cash-costs. Viridis.iQ GmbH

Figure 6 plots out the relation for the two extremes, with the continuous line representing different project IRRs and sustainable ASP combinations for the low points for cash cost and unit invest (DS 15.0; 60), while the dotted line draws the same relation for the “high” input factor combination (DS 20.0; 100). In any case, it can be observed that, even if top-quartile producers accept a 10% unlevered IRR hurdle, polysilicon prices would need to be significantly higher than current levels (by a magnitude of 25% to 50%!) in order to jump-start further expansion rounds.

Figure 6: Unlevered project IRR vs ASP w extreme points. Viridis.iQ GmbH

Downstream implications

Putting the hardly digestible finance mumbo jumbo aside, it’s time to give some thought to the implications for the PV downstream. Increases in raw material prices can likely not be passed on to the final consumer, at least not to the full extent, as the industry needs to be cautious about the economics of utility-scale power plants, which are a significant pillar of global demand.

Technological progress on the cell level with advanced design concepts that fit as upgrades into the existing capital stock usually exhibit a very strong influence on costs per watt-peak and therefore stand ready to compensate a margin squeeze from raw material price increases. However, further progress is needed and in this instance the focus should be on efficient material usage, as pure play wafer manufacturers stand to lose most. Here, kerf recycling, transition to thinner wafers and casting concepts are of principal interest.

Polysilicon manufacturers have certainly made a great leap forward in bringing capital and operating expenditures down in response to subdued ASPs. However, the scenario analysis shows that the downstream should not take comfort in ultra-low polysilicon prices, as overall industry utilisation rates (including second tier producers) are likely to lead to rising feedstock prices over the next 18 to 24 months.

26 January 2022
Join this free webinar for our analysis of the growth of N-Type technology including; new capacity expansions and production output. We'll also be looking at the global manufacturing footprint with forecasts on how much product will be made outside of China this year and which companies are driving technology change across the crystalline silicon value chain.
23 February 2022
Held annually since 2016, the Energy Storage Summit Europe is the place to be for senior stakeholders in the European storage industry. Designed to accelerate deployment of storage, we examine evolving chemistries, business models, project design, revenue stacks and use cases for storage. The 2022 edition will include exclusive content around longer duration solutions, energy strategies for wide-scale deployment of EVs and "EnTech", the event which sits at the intersection of digitisation, decentralisation and decarbonation of the power system. Come to meet TSOs, DSOs, Utilities, Developers, Investors and Lenders and leave with new contacts, partners and a wealth of information.
7 March 2022
Take your chance to join the most powerful platform in the MENA region. Middle East Energy (MEE), Intersolar, and ees, the leading energy exhibitions are joining hands to co-deliver an outstanding renewables and energy storage event at Middle East Energy 2021. Renewables and energy storage at MEE is the largest gathering of solar and renewable energy industry professionals in the Middle East & Africa, offering the most effective trade focused platform to international manufacturers and distributors looking to meet regional buyers.
8 March 2022
As Solar Finance & Investment enters its ninth year, we sit on the cusp of a new power market with solar at its heart. The 2022 edition of the event will build on our years of expertise and relationships to bring investors and lenders together with top developers. Connect with leaders in the field and use exclusive insights to drive investment and development decisions for the future. Meet new and existing project partners at the largest gathering of European solar investors and lenders.
23 March 2022
When it comes to storage, the US market exceeded a gigawatt of advanced energy storage installations (weighted towards lithium ion) at 1.46 GW, more than the previous six years in total! An exponential growth rate could see the market hit 7.5 GW p.a. by 2025. The summit will provide a wealth of content around this vital piece in the US power puzzle, with sessions dedicated to explore how companies are making money from batteries, the latest chemistries and their applications as they apply to different use-cases. We ask how investors can match ESG criteria to batteries and we will bring case studies of successful deployment and project execution onto the stage to examine how you can ensure your own projects are successful.
29 March 2022
Now in its 10th sell-out year, Large Scale Solar returns to Lisbon in 2022. We are excited to gather together face-to-face with the European solar industry as we provide unique and exclusive access to a powerful selection of the market's key stakeholders. Join this elite summit to find out how the market is maturing, which new markets are becoming more exciting, how technology is evolving and who's driving the market forward into the 2020s. Always senior, packed with developers, EPCs, utilities and investors this is the event for companies serious about European solar PV.

Read Next

January 21, 2022
Toronto-based renewables developer Amp Energy has closed on a US$350 million credit facility to advance on a global portfolio of renewables and battery energy storage assets.
January 21, 2022
India is at risk of a supply and demand mismatch for solar equipment if domestic PV manufacturers are unable to meet the quantity and quality required by project developers, Fitch Solutions has warned.
January 21, 2022
The European Commission has launched a public consultation on solar energy on the continent as it continues preparations to publish its solar strategy later this year.
January 21, 2022
US solar installer SunPower is to be hit by a cracking issue discovered in connectors associated with equipment installed in some commercial and industrial (C&I) projects, resulting in charges of around US$31 million.
PV Tech Premium
January 21, 2022
Greece is on track to accelerate solar deployment in the coming years, with the sector boosted by rising demand for renewable offtake agreements from corporations and clean energy policies from the EU, according to the general manager of Greek industrial group Mytilineos’s renewables business.
January 20, 2022
Mississippi authorities have expanded the state’s net metering programme to improve total compensation rates for solar customers and prioritise the adoption of distributed PV for low- to moderate-income (LMI) households.

Subscribe to Newsletter

Upcoming Events

Upcoming Webinars
January 26, 2022
Free Webinar
Solar Media Events
February 23, 2022
London, UK
Solar Media Events
March 8, 2022
London, UK
Solar Media Events
March 23, 2022
Austin, Texas, USA
Solar Media Events
March 29, 2022
Lisbon, Portugal