Unrestrained Investment Creates Looming Glut for China’s Solar Supply Chain, Analysts Say

China, by far the world’s largest producer of solar panels and components, will likely face a glut of the photovoltaic (PV) materials next year as recent capacity expansions up and down the supply chain look set to outstrip demand, according to some analysts.

Polysilicon, the main raw material used in solar PV manufacturing, will be in “severe oversupply” in 2023 as reckless investments by industry newcomers are set to double annual production capacity to about 2.5 million tons next year, analysts at Shanghai Metals Market (SMM), a market intelligence provider, wrote in a note last week.

Silicon wafers, which are made of polysilicon and used to manufacture solar cells, could also face a production surplus as surging polysilicon supplies will allow manufacturers ramp up to full capacity, the SMM analysts wrote.

China’s share of all manufacturing stages of solar panels globally exceeds 80%, which is more than double its share of global PV demand, according to the International Energy Agency’s Solar PV Global Supply Chains report published in August.

Domestic silicon wafer production capacity is expected to reach 800 gigawatts in 2023, while Chinese demand for photovoltaics will only be about 340 gigawatts, according to SMM analysts.

That would be up from an expected 600 gigawatts at the end of 2022, according to PV Magazine, which cited the Asia Europe Clean Energy (Solar) Advisory.

The anticipated oversupply is due to manufacturers ramping up production capacity as domestic and overseas demand rose rapidly throughout 2022 amid a global energy crisis spurred by Russia’s invasion of Ukraine, hastening a transition to more sustainable energy.

Prices of raw materials and components used in PV equipment have begun to drop after months of increases. Since Nov.16, the average price of polysilicon has dropped for two weeks in a row from 303 yuan ($43.3) per kilogram to 295 yuan, the first time since December last year, according to data from InfoLink Consulting LLC, a consultancy.

The prices of downstream wafers, photovoltaic cells and modules have also fallen, the Infolink data show.

“Price declines are certain as cell prices slip,” according to a report from InfoLink last week. “The dip keeps dipping, but whether the decreased prices will please the cell sector remains uncertain. Overall, manufacturers of the upstream have much less say in price negotiations.”

Although supply is increasing and prices are expected to fall, polysilicon and wafer producers would likely not slash production in the short term because they still have a large profit margin, the SMM analysts said, adding that a price war is inevitable.

The profitability of smaller wafer producers will be under greater pressure as their bargaining power is weaker than larger producers and some have out of date technology, analysts at brokerage Huafu Securities Co. Ltd. wrote in a note.

The increasing upstream supply could benefit downstream photovoltaic module producers’ profitability because of lower input costs, some analysts estimated.

In the first nine months, China exported 121.5 gigwatts of photovoltaic modules, an 89% year-on-year increase, according to Infolink data.

Exports of solar panels to Europe have surged as countries hunt for alternative energy sources to fill the gap left by Russian natural gas. But exports declined month-on-month in August and September as overseas buyers slowed down their inventories.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Flynn Murphy (flynnmurphy@caixin.com)

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