Revenues redistributed across solar value chain

In his 1985 book, “Competitive Advantage,” Michael Eugene Porter introduced the concept of “value chain,” through which businesses develop unique competitive advantage, adding value to their products. A value chain consists of a group of homogeneous businesses that comprise several sectors. The sectors are closely interconnected, adding up product value. This is exactly how the PV industry works. From polysilicon and wafers in the upstream, to cells and modules in the downstream, raw materials are processed into the final product, with the value increasing throughout the process. During this process, raw material prices and supply-demand relationship in downstream sectors significantly affect the profitability of each sector.
 

Historic price trends

Polysilicon prices have been influencing the pricing strategy of downstream sectors. In early 2018, polysilicon prices sat at RMB 125/kg. On May 31 of the year, the issuance of the “Notice on Photovoltaic Power Generation” in 2018 upset PV demand. In 2019, polysilicon prices lingered at RMB 75/kg. In 2020, pressured by downstream manufacturers and rising inventory level, polysilicon’s low-price range dipped to RMB 60/kg. By then, polysilicon accounted for 10% of module production cost per watt.

In 2021, polysilicon prices stepped on an upward trend, for PV demand picked up in China and overseas markets, but capacity expansions failed to catch up, resulting in a disproportional supply-demand relationship. Doubled with rapid wafer capacity expansions, polysilicon prices kept rising. Afterward, polysilicon prices advanced higher due to China’s dual-control policy to cut emissions, Russian-Ukraine conflicts that boosted demand, earthquakes hitting Sichuan, and pandemic regulations that disrupt production and logistics. For now, polysilicon prices stand at RMB 303/kg. At this price level, polysilicon accounts for 42% of module production cost per watt.

The low point polysilicon prices quintupled to the high point. Such significant fluctuations took a toll on module price trend. It is noticeable that the closer a sector is to raw material sectors, the more directly its prices are subject to changes in raw material prices, such as the wafer sector; on the other hand, the closer a sector is to end users, the stronger correlation there will be between its prices the change of demand, such as the module sector. Located at the end of the supply chain, the module sector receives less impact from price fluctuations and forms a closer connection with end user demand. Presently, as end user acceptance is limited, module prices sustain.
 

Change to profit structure

In 2021, profits of polysilicon manufacturers increased as prices rose. Daqo and TBEA, for example, saw gross margins grow from 45% in the first quarter to 65-75% in the third quarter of the year. Daqo even had 80% of gross margin in the third quarter of this year. Overall, gross margin of the polysilicon sector stays elevated. Conversely, cell and module sectors, only passing some cost pressures on to buyers amid raw material price hikes, saw gross margins sitting around 10-20% during 2021 and 2022. Vertically integrated companies, such as Longi, which has enormous wafer production capacity, can check on costs of upstream materials, thus posting better margins.

In the second half of 2022, upstream price hikes slowed down, but cell prices decoupled from upstream price trend and surge, as supply ran short for large-format cells and high-efficiency cells. Module makers, subject to end user acceptance, failed to raise prices effectively and saw profit margin shrink, sitting as low as 6-7% for the time being. Faced with rising cell prices, module makers managed to sustain profits through long-term orders sealed at discounted prices, dual distribution, and strategic cooperation.

In the fourth quarter of this year, more polysilicon capacity expansions yield production. Prices across the supply chain are expected to decline in December. Wafer prices, caught between pressures from both up and downstream sectors, took the lead and dropped in November. As prices of all sectors dropped, profit margin of the solar value chain is expected to recover. Polysilicon supply gradually picks up, potentially exceeding demand, resulting in rapid price declines and profit margins shrinking in the second half of 2023.

Module prices will drop in line with prices of upstream sectors, but not as significantly, for it is at the end of the supply chain and closely connected with end user demand. Most module makers sealed long-term orders for next year to dilute the impact of changing production costs.For the first quarter of next year, module prices sustain at RMB 1.9-1.93/W for glass-backsheet modules rated beyond 500 W, and above USD 0.245/W, despite exchange rate fluctuations. The module sector is expected to regain some profits. In 2023, companies will adjust sales strategies and supply chain investment plans, as revenues are redistributed from polysilicon and wafer sectors, which have seen better profits and many production expansions in the recent two years, to cell and module sectors.