Lux Populi

Late last year, the Chinese government began taking more aggressive steps to shore up the financial position of key polysilicon producers, which had been struggling due to the price collapse of polysilicon during 2009. First, on November 17, LDK Solar announced that it had sold a 15% stake in its 15,000 MT polysilicon plant in Xinyu, China. The stake went to Jiangxi International Trust and Investment, an investment arm of the provincial government, for RMB 1.5 billion ($219 million) – valuing just the polysilicon plant at $1.46 billion.

Then, two days later, GCL Silicon announced that it had sold 20% of the company to China Investment Corporation – a state-sponsored investment vehicle – through the issuance of new shares to raise about $715 million. Additionally, GCL secured investment for a joint venture company to develop solar projects, with a total investment of $500 million. The latter move resembled those of MEMC, SunPower and others who have sought to integrate downstream to ensure demand (see the October 29, 2009 LRSJ – client registration required).

These two investments are notable in that they show more drastic action by government agencies to shore up favored polysilicon manufacturers. Chinese import restrictions on polysilicon helped to buoy the price of the material just a few months ago (see the August 20, 2009 LRSJ – client registration required) – but apparently not enough. The subsequent steps demonstrate the most overt case of government support to date.

Companies in the U.S. and Europe have long complained about the stealthy industrial subsidies received by Chinese firms, arguing that Chinese imports should be restricted on these grounds, and this case gives them the strongest ammunition yet to argue for protectionism predicated on unfair government subsidies. Expect the case for protectionism to continue to heat up as prices fall and European manufacturers struggle to cut costs to remain competitive.

Further, the new funds all but guarantee capacity ramp of these two major players, and this significant amount of capacity coming online over the next few years will further depress the prices of polysilicon, and make it difficult for smaller, independent players to exist. Indeed, increasingly, polysilicon makers can be divided into three groups: incumbents (such as MEMC, Hemlock, Wacker, and REC); state-sponsored firms (GCL, LDK, and Nitol); and those tied up with major device manufacturers (Fine Silicon, Asia Silicon, Joint Solar Silicon). Though a few exceptions, such as OCI and M.Setek, will likely weather the storm, it will be tough going for players without a corporate or government sponsor with deep pockets.