In recent years, the silicon material sector, once benefiting from the soaring prices during a boom cycle, is now facing immense challengesLeading companies in the industry, once seemingly insulated from hardship, are grappling with significant financial losses that challenge their once-stability.

According to a report by the Energy Network of China, since May of this year, the price of silicon materials has dropped below cash costs, resulting in substantial losses for key players like GCL-Poly Energy (HK: 03800), Daqo New Energy (SH: 688303), Xinte Energy (HK: 01799), and Tongwei Co., Ltd (SH: 600438). These four giants combined have reported losses exceeding 9.2 billion yuan, marking a sharp downturn from previous years when profits seemed unending.

While it is evident that upstream silicon material enterprises have healthier asset-to-liability ratios than their downstream counterparts, with many maintaining ratios below 60%, they are not immune to the ongoing industry turbulence

Shutdowns for maintenance, layoffs, and pay cuts are becoming the normEven companies that were once proud of their so-called "quality production capacity" are now feeling the heavy weight of hidden pressures and competition largely fueled by overproduction.

The roots of this problem can be traced back to the rapid expansion seen in the photovoltaic (PV) industry over the last two years, which now manifests as worries and fears about the future among all players involvedIf losses persist as the new normal, even the strongest enterprises will struggle to endureThis situation raises critical questions about the roles of silicon materials, which are often regarded as the "bellwether" for the entire photovoltaic supply chain, especially as oversupply issues directly affect market dynamics.

With authorities and industry associations initiating discussions around capacity adjustments in the silicon materials segment, stakeholders are left wondering how long it will take for these enterprises to recover from this downturn

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Will a turning point manifest soon, or are there tougher times ahead?

Recently, in an effort to stabilize its performance, Xinte Energy made headlines by acquiring a quality thermal power asset worth 1.5 billion yuan from its parent company, seeking to remedy its financial standingMeanwhile, reports have emerged that places like Hoshine Silicon Industry Co(SH: 603260) have begun layoffs, targeting reductions of 5-10 percent of their workforceAdditionally, Daqo New Energy has laid off several employees who joined the company this year, highlighting the urgency with which these firms are addressing their unsustainable economic situations.

The trend of anxiety is palpable across the industry, reflecting a broader pattern of distressLosses have become so significant that they are nearly uniform across the boardData from quarterly financial reports show that for the second and third quarters of this year, GCL-Poly registered a loss of 2.84 billion yuan, Xinte suffered 1.764 billion yuan in losses, and Daqo saw losses reach about 1.429 billion yuan

Tongwei, previously in a position of profitability, experienced a drastic downturn with net losses reaching nearly 1 billion yuan, a stark contrast to last year’s profit of 16.424 billion yuan.

Furthermore, these leading firms are not merely suffering from operating losses; they are also indicating substantial inventory impairment losses due to falling pricesDaqo has reported asset impairment provisions totaling 1.367 billion yuan over the first three quarters, while Tongwei’s inventory impairment provisions reached 3.287 billion yuan in the same period.

The consequences of these losses and associated impairments profoundly impact the operational cash flow of these firmsOver the first three quarters of this year, Tongwei generated merely 2.988 billion yuan in net cash from operating activities, a staggering decline of 80 percent compared to the previous year’s 16.3 billion yuan

Similarly, Xinte’s operating cash flow dwindled from 3.023 billion yuan in the first half of the previous year to a negative 4.163 billion yuan this year.

Faced with these challenges, companies are adopting various strategies to mitigate pressures:

On November 19, GCL-Poly completed the placement of 1.56 billion shares at a price of 1 HKD per share, with plans in place to issue $500 million in convertible bonds to further bolster cash flow, thus securing over $700 million in financial supportMeanwhile, Tongwei indicated that it is in the process of exploring production reduction strategies, adjusting operations dynamically based on market conditions to optimize production processes economically.

xinte, in dire need of an A-share listing, announced that it would reduce its operating rate for the latter half of the year to between 25-30 percentIn a statement on November 5, the company revealed comprehensive repairs at its solar-grade silicon production bases to enhance quality and reduce costs.

As the year comes to a close, expectations of further losses in the fourth quarter loom large, suggesting that these firms will continue to face challenging conditions for the foreseeable future.

With maintenance and load reductions underway, it is noteworthy that inventory levels remain alarmingly high

The anxiety experienced by leading enterprises is closely linked to the current market conditionsExperts predict that silicon prices are set to decline even further into 2024, with the industry’s winter expected to last longer than anticipatedForecasts made at the start of the year suggested a potential recovery by the second to third quarter of 2024, largely based on the market dominance of the four major players maintaining price stability to secure some profitTotal anticipated silicon pricing is estimated to remain in the brackets of 60000-70000 yuan per tonHowever, the harsh reality remains that silicon material prices have plummeted by over 35 percent between January and October 2024.

Since mid-May, when silicon prices dropped below 40000 yuan, various silicon producers scaled back operations significantly, with utilization rates falling from approximately 80 percent in June to around 50-60 percent by November

Monthly production dropped from 190,000 tons in April to about 130,000 tons in the later half of the year.

Interestingly, despite production cuts, inventories have actually been on the riseBy the end of June, total silicon inventory was reported at 250,000 tons, which surged to 400,000 tons by late NovemberThe China Nonferrous Metals Industry Association's silicon industry division notes that adjustments in silicon material capacity relative to downstream capabilities are proving slow, hinting that inventory will persistently accrue at least until December.

Ultimately, the conundrum facing the silicon material sector rests on the vast discrepancy between capacity and market demandThe China Photovoltaic Industry Association has issued projections indicating a demand of 230-260 GW of new installed capacity in the following yearWith each GW of photovoltaic component requiring approximately 2500-3000 tons of silicone, only 575,000-780,000 tons of silicon is necessary to fulfill this demand.

For context, the total silicon capacity is currently tracing 2.65 million tons, with at least 800,000 tons already built but not yet operational

Analyzing data against demand figures highlights a stark oversupply situationJust the combined capabilities of the four major leaders surpass market demand altogether—Tongwei, GCL-Poly, Daqo, and Xinte report annual capacities of 650,000 tons, 420,000 tons, 305,000 tons, and 300,000 tons, respectively, totaling over 1.675 million tons.

The disturbing reality is that the majority of producers are reluctant to reduce operations even in the face of crippling excess capacity largely due to cash flow issuesAs highlighted by experts, those companies with higher operational capacities can sustain their losses longer without changing courseConversely, enterprises that choose to reduce output are either unwilling to operate at loss or are facing cash constraints that prevent them from remaining fully operational.

With the mining industry battling under these heavy loads, the urge for a self-rescue is growing more acute

This self-help is emerging within a backdrop of regulatory changes aimed at industry standards, such as the newly revised requirements for photovoltaic manufacturing formulated by the Ministry of Industry and Information Technology.

On November 6, these revisions mandated that new building and expansion projects within the photovoltaic manufacturing space must achieve electric consumption benchmarks of less than 40 Kwh/Kg and comprehensive energy consumption below 53 Kwh/Kg—standards that are feasible in shaping the sustainability of older operations.

An industry-wide self-discipline initiative was also adopted by the China Photovoltaic Industry Association, recently leading 33 industry representatives to enter into a self-regulatory agreement promoting price and production capsCompanies are now subjected to monthly pricing guides, ensuring adherence to cost threshold limitations going forward

The formalized production limit approach, set to kick off in January, is seen by many as an effort to stabilize a faltering market without which many enterprises will risk deep losses.

Preliminary information show that almost all silicon producers have been prompted into maintenance or reduced load states post-agreement, with estimated outputs anticipated to drop to 100,000 tons in DecemberGCL-Poly has already taken the lead in adjusting production, projecting its utilization rate to remain below 50 percent, signaling an effort to manage stock and prepare for future price rebounds.

While objectively the current market environment is still fraught with volatility, there are signs of improvement on both order sizes and pricing, hinting at a potential thaw in prevailing cold conditionsPrior to the signing of the self-regulatory agreement, many transactions were typically small and at significantly low prices

However, reports have suggested an uptick in bulk purchases, with multiple major players closing agreements at acceptable rates, a shift from the prevailing low price environmentThis momentum indicates the possibility of the market trending towards more normalized pricing after extended periods of shortsighted low pricing.

While speculative factors such as seasonal demand increases are contributing to these shifts, industry analysts generally concur that corrective measures along with decreasing production levels may push the silicon market toward a much-awaited turning pointIt is noted that any transition to reduced inventory levels is critical for pricing rebounds, with industry discipline expected to foster this necessity.

Ultimately, the road to price recovery remains fraught with challenges, with some of the companies previously turned off by certain operational structures and the reentrance of production lines once market conditions improve