The continuous inflation of polysilicon since early 2021 has resulted in successive follow ups from the wafer and cell segments of the supply chain after the Chinese New Year. Under the global inflation background, mainstream products are starting to rise in prices, which led to an even higher level of cost for auxiliary materials, modules, as well as consumables required by terminal stations such as films and metals. Module makers are successively lowering their operating rate under the cost pressure, with a continuous diminishment in profit level, and a predicament of negotiation and bargaining has occurred between the upstream and downstream sectors.
Cost of Raw Materials Elevated Downstream Prices
An observation on this wave of price trend for the photovoltaic supply chain indicates that the essence of module inflation was a result of the rapid rise in prices for primary auxiliary materials of the industry chain after June 2020. The average quotation for mono polysilicon is now RMB 112/kg as of mid-March 2021, which has essentially returned to the same level during June 2018. Compared with June 2020, the rise of polysilicon and photovoltaic glass has exceeded 90% and 80% respectively.
The passive price adjustments of businesses in the current stage are not implemented to seek for temporal benefits, but rather a market behavior as the majority of photovoltaic businesses have sustained a certain extent of ramification from the pandemic, and endured a declination in performance during 2020. Photovoltaic businesses of the supply chain are able to achieve a simultaneous increase in quantity and prices, as well as repair profits, through this round of inflation, which is also regarded as a normal behavior for businesses in safeguarding their benefits.
Profit Level Remains Concerning under Passive Inflation in Cell Modules
According to the observation of EnergyTrend, the average cost for the polysilicon industry and the average gross margin of the product was at RMB 40-50/kg and roughly 58% respectively during 1Q21. As for the wafer sector, the gross margin was at about 29%, which was relatively considerable in terms of profitability.
The gross margin of cells is now less than 4% as the prices of auxiliary materials, such as silver paste, glass, and frame, had simultaneously increased alongside the inflation of polysilicon and wafers. On the other hand, module makers had passively risen the prices under a constrained supply of raw materials and the continuous ascension in cost when expedited on the delivery of low price orders previously signed starting from 4Q20, though an inference shows that merely vertically integrated leading businesses are able to grasp on the meager degree of profit, where most module makers are now at a loss. With the gradual release of new production capacity seen from partial sectors of the industry, several businesses have initiated a price reduction strategy to preserve the optimization on the structure that will leave enough loading space for the supply chain.
Module Exports Impeded under High Shipping Cost and Capacity
Shipping capacity and the cost of module exports continue to tighten and increase since the elevated overseas demand that started from mid-2020. As indicated by the China Containerized Freight Index (CCFI), the shipping capacity remained on a comparatively constrained status during January and February, and the shipping costs for ocean routes such as Europe, North America, and South America have consecutively risen. The tight balance in the ships from the supply end, together with the amplified container volume and the pandemic, have resulted in a congestion in harbors, as well as a reduction in the turnover efficiency in shipping containers. The shipping industry generally expects that the shortages of shipping containers will not be alleviated within the short term, and will last throughout 1H21.
The exorbitant cost of shipping has directly escalated the overall cost of photovoltaic power stations and aggravated the pressure in project funds, where the increase in shipping cost has prompted a number of developers to allocate the actual shipping cost to the end clients by altering shipping terms.
Module makers are prompted to ship with high prices under the severe shortages of raw materials in order to guarantee shipment volume, and partial projects have been postponed in shipment apart from a forced shipment for long-term orders and clients who require emphasized attention. Leading module maker Risen Energy commented that the cost pressure in modules remain obstinately high in the market environment where prices remain high and materials remain insufficient, especially with the inflation seen from the shipping cost, thus the increase in exported modules is the last resort.
Supply Structure of Raw Materials for Modules Expected to Recover in 2H21
The declining price trends in photovoltaic glass and film have started from early March 2021, and a further fallback may occur in 2Q21. Thus, the expected inflation in module prices might just be a phase phenomenon.
Looking at the polysilicon and photovoltaic glass markets, the pressure in polysilicon provision remains unabated from 2021, and the overall market is essentially maintaining on a full load operation, with a gradually improving production volume compared to the same period of 2020. As various businesses elevated efficiency after overhaul, first-tier polysilicon businesses continue to construct polysilicon bases in Inner Mongolia, Yunnan, Sichuan, and Qinghai, which has accelerated on the production capacity of various polysilicon production bases in the country, and the overall supply of polysilicon is expected to improve constantly until the end of 2021.
The overall concluded prices of photovoltaic glass have slightly fallen back, and the average price has exhibited a decelerated reduction amidst the stabilized status, whereas the tight supply of glass has somewhat mitigated as module makers and end clients negotiate on postponed shipment and the adoption of glass replacement. As China’s recent policy alleviated on the restrictions imposed on the expansion of photovoltaic roll glass, the tight supply of photovoltaic glass will be gradually resolved, and the prices of glass in 2021 are expected to be more rational than that of second half of 2020, where glass was considered as valueless.
Profit Forfeiting from the End Sector Anticipated to Mitigate Pressure in Supply Chain
The downstream sector is expected to forfeit on profit and accept the inflation from the supply chain under the actuation of the policy and market demand, and the rise in module prices will be a phased phenomenon due to the certain degree of existing flexibility. For the Chinese market, distributed projects for residential and industrial & commercial purposes are relatively less sensitive to module prices primarily owing to how large-scale ground projects are somewhat tolerable to module prices. Under the restraints of the policy, the bids and parity projects of the stock from 2019 and 2020 are anticipated to connect to the grid by the end of this year, and taking into account the advantages in funds rate for domestic businesses, a minor increase in module prices will create a relatively restricted impact the internal rate of return (IRR) of the full capital for photovoltaic power stations.
As the overseas photovoltaic markets are more lenient in accepting minor rises in module prices, and that the demand for grid connection is comparatively urgent for numerous overseas projects due to the postponement during 2020, the renegotiation from the project end is expected to alleviate the pressure in cost for the supply chain and guarantee a smooth export and provision of modules.
