Global Solar Shake-Up: Tongwei and Daqo Cut Polysilicon Output Amid Oversupply, Rising Costs

Major Polysilicon Manufacturers Tongwei and Daqo Energy Announce Significant Production Cuts Amid Industry Shifts

December 25, 2024 – In a strategic move that has sent ripples through the global renewable energy sector, two of the world's leading polysilicon manufacturers, Tongwei and Daqo Energy, announced substantial production cuts on the evening of December 24th. These adjustments come in response to a confluence of market dynamics, rising energy costs, and evolving regulatory landscapes, highlighting the shifting tides within the photovoltaic (PV) industry.

Production Reductions by Industry Giants

Tongwei, a dominant player in the polysilicon market, declared a reduction in production across four of its high-purity polysilicon plants located in Yunnan and Sichuan provinces. The company attributed this decision to an industry downturn coupled with increased power costs experienced during the dry season. Similarly, Daqo Energy announced production cuts at its facilities in Xinjiang and Inner Mongolia, collectively impacting a capacity exceeding 120,000 tons—Tongwei alone accounts for over 90,000 tons, while Daqo contributes approximately 30,500 tons.

Industry Context and Market Dynamics

The PV sector has demonstrated robust expansion, with January-November 2023 witnessing an impressive 206.30GW of new installations, marking a 26% year-over-year increase. This growth has been supported by recent regulatory developments, including new industry regulations released by the Ministry of Industry in November 2023. Additionally, the Climate Policy Industry Association (CPIA) has raised its domestic installation forecast for 2023 to between 230-260GW.

Despite this expansion, the industry faces challenges such as a supply-demand imbalance and widespread financial losses. Polysilicon prices have plummeted to historic lows, exacerbating profitability issues across the sector. However, the market outlook remains optimistic, buoyed by strong domestic and international demand, policy support for supply-side regulation, emerging market growth potential, declining energy storage product prices, and a downward trend in international interest rates.

Root Causes Behind Production Cuts

The production reductions by Tongwei and Daqo Energy are multifaceted, influenced by economic, regulatory, and geopolitical factors:

1. Market and Supply Dynamics

Oversupply and Price Drops: An oversupply in the polysilicon market has driven prices to historic lows. Despite strong demand for solar installations, production capacity has outpaced market needs, leading to industry-wide losses. By cutting production, Tongwei and Daqo aim to stabilize prices and improve profit margins.
Strategic Inventory Management: Reducing output helps these companies manage inventory levels effectively, avoiding the accumulation of unsold polysilicon during periods of low pricing and positioning themselves for potential future price rebounds.

2. Energy Cost Pressures

Rising Regional Power Costs: Both companies cited increased power costs as a key factor. The dry season in Yunnan and Sichuan reduces hydroelectric power availability, pushing energy prices higher. Additionally, operations in Xinjiang and Inner Mongolia face unique logistical and regulatory cost pressures.
Energy-Intensive Production: Polysilicon manufacturing requires substantial energy, making higher electricity prices a significant cost concern. Scaling back production during high-cost periods serves as a cost-containment measure.

3. Regulatory and Policy Factors

New Industry Regulations: The Ministry of Industry’s November 2023 regulations encourage better market discipline. Production cuts may reflect compliance with these measures or anticipation of regulatory actions aimed at stabilizing the sector.
Policy Support for Consolidation: Government backing for the PV industry likely favors controlled supply reductions to ensure sustainable growth and mitigate sector-wide losses.

4. Geopolitical Dynamics and US Sanctions

Impact of US Sanctions: Polysilicon production in regions like Xinjiang has faced international scrutiny and bans, particularly from the US, due to alleged labor violations. These restrictions limit export potential, worsening the oversupply issue.
Strategic Production Shifts: Reducing production helps balance supply amidst restricted access to Western markets, encouraging a focus on domestic consumption or trade with non-aligned countries.

5. Stock Market and Investor Sentiment

Positive Market Reaction: Photovoltaic stocks saw a collective rise following the production cut announcements, indicating market confidence in these measures as a step toward industry stabilization.
Investor Confidence: By signaling supply discipline, Tongwei and Daqo demonstrate proactive management, fostering investor trust amidst challenging market conditions.

6. Broader Market and Demand Trends

Strong Demand Indicators: The long-term market outlook remains strong, driven by robust domestic solar installation growth, expanding international markets, supportive renewable energy policies, and declining energy storage costs.
Supply-Demand Alignment: Strategic production cuts help align supply with current demand, paving the way for sustainable future growth.

Significance of Production Cuts

The decision by Tongwei and Daqo Energy to reduce polysilicon production is significant given their substantial roles in the global market. Tongwei, the world's largest polysilicon manufacturer, boasts an effective production capacity of around 345,000 metric tons, surpassing its official capacity of 260,000 MT. Daqo New Energy, with a recent production decline from 64,961 MT to 43,592 MT, underscores the scale of these cuts.

Impact on Western Customers:

Supply Constraints: Reduced output may tighten the global polysilicon supply, potentially leading to shortages for PV manufacturers reliant on these sources.
Price Volatility: A decrease in supply could drive up polysilicon prices, affecting downstream manufacturers' cost structures and possibly increasing solar module prices.
Supply Chain Vulnerability: Western manufacturers heavily dependent on Chinese polysilicon might face increased vulnerability, emphasizing the need for supply chain diversification.

Analysis and Predictions

The production cuts by Tongwei and Daqo Energy mark a pivotal moment in the renewable energy sector, reflecting a strategic recalibration in response to cyclical challenges and long-term opportunities.

1. Market Dynamics

Immediate Impact: Polysilicon prices, currently at historic lows, are expected to experience upward pressure, aiding in the stabilization of industry-wide losses.
Demand-Supply Rebalancing: The cuts aim to resolve oversupply issues while maintaining strong global demand driven by renewable energy targets.

2. Key Stakeholders

Producers: These firms are asserting market control to stabilize prices and protect profitability, potentially leading to market consolidation.
Downstream Solar Industry: PV manufacturers may face rising input costs, prompting efforts to diversify polysilicon sources or invest in alternative supply chains.
End-Users and Governments: Western markets might encounter higher costs and project delays, while governments may subsidize domestic production or explore alternative materials.

3. Broader Trends

Energy Transition: Price volatility could drive innovation in non-silicon-based photovoltaic technologies and strategic stockpiling of critical materials.
Geopolitical Dynamics: Further US-China decoupling pressures could lead to tariffs or increased investments in domestic polysilicon capacity in Western nations.

4. Investment Implications

Polysilicon Producers: Likely to see a short-term rally in stock prices due to stabilized market conditions, though long-term growth remains contingent on managing geopolitical and regulatory risks.
Solar Module and Installation Companies: May experience temporary margin pressures but could benefit from consolidation opportunities.
Alternative Technologies: Increased investment in alternative PV materials and energy storage systems presents opportunities for early adopters.

Conclusion

The production cuts by Tongwei and Daqo Energy are a strategic response to immediate market challenges, including oversupply and rising energy costs, while aligning with regulatory and geopolitical imperatives. This move underscores the companies' commitment to stabilizing the polysilicon market and positions them for sustainable long-term growth. As the renewable energy sector continues to evolve, these adjustments highlight the delicate balance between managing short-term disruptions and capitalizing on robust long-term demand driven by global energy transition goals.

For stakeholders across the solar supply chain, from producers to end-users, these developments emphasize the importance of strategic planning and supply chain diversification to navigate the evolving landscape of the global photovoltaic industry.