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2017-11-24 09:05:00



FT South Korea's solar industry is heating up as tighter global supply lifts polysilicon prices higher. But with China expected to ramp up production capacity again next year analysts are questioning how long the upturn will last.

The solar industry recovery, after a five-year slump, has driven a surge in earnings for Korean polysilicon producers such as OCI, which unexpectedly posted robust third-quarter profits as prices of the raw material used to make solar products rebounded.

It comes as growing environmental concerns feed demand for solar installations worldwide, with China and the US the two biggest markets.

Prices of polysilicon have climbed since June, having fallen sharply since 2011 amid a glut of supply from China, which makes about 70 per cent of global solar panels. They have gained some 20 per cent to $16.66 a kilogramme — above the break-even point of $14-$15 for South Korean producers — buoyed by the closure of some Chinese plants for maintenance and an explosion at German chemical company Wacker Chemie's US plant.

Supply has been further strained as solar-panel makers stock up in anticipation of potential US tariffs, and by particularly robust Chinese demand amid expectations Beijing will further reduce government subsidies for solar energy production next year.

South Korea already is a world leader in renewable energy technologies, home to several top polysilicon producers as well as makers of solar cells and panels including OCI and Hanwha Q Cells. Its industry has been fuelled by a government drive to promote green energy, aimed at increasing power generation from renewables to 20 per cent of its energy mix by 2030, from 5-6 per cent this year.

OCI — the world's third-largest polysilicon maker by capacity and South Korea's biggest — this month reported a 3,373 per cent increase in operating profit to Won78.7bn ($72m) for the July-September quarter, its best performance in five years. Rival Hanwha Chemical saw third-quarter net profit jump 25 per cent to a record Won252bn.

However, the current situation "is likely [to be] shortlived," says Lee Choong-jae, analyst at KTB Securities. "It all depends on demand from China, which is likely to fall back next year."

China's solar demand has exceeded expectations this year, with installations set to reach 52GW by year-end — more than half of all global demand — driven by a desire to get in ahead of Beijing's expected move to cut feed-in tariff rates for solar systems at the beginning of next year.

The boom in China is expected to push global demand past 100GW this year, up more than 30 per cent from last year, though analysts believe demand will recede once Beijing scraps government subsidies altogether at the end of June.

Nevertheless, analysts still foresee upside for world demand. "The global shift to renewables from fossil fuels is irreversible although there could be some price fluctuations in the short term," says Lee Doo-hee, researcher at Korea Institute for Industrial Economics & Trade. 

The South Korean solar industry also has benefited from government measures to boost renewable energy production. Moody's estimates that solar and wind capacity expansion to meet Seoul's targets will require total investment of Won100tn-Won130tn over the next 12-13 years with 40-60GW of new capacity needed, up from around 5GW at end-2016. 

However, analysts note that South Korea has a small place in a fragmented world market, and with hundreds of global panel makers competing, margins are low. OCI's third-quarter operating profit margin of 8 per cent lagged behind that of rivals Wacker and China's GCL-Poly Energy Holdings.

Given the small domestic market, many South Korean solar companies rely on exports, and are likely to face headwinds with China and the US leaning towards protectionist measures.

This week, Beijing doubled anti-dumping duties for imports of solar-grade polysilicon from South Korea to as much as 113.8 per cent, effective immediately. The US is weighing imposing tariffs of 30-35 per cent on imported solar cells and panels, with President Donald Trump to make a final decision in January.

"Any punitive tariffs from the US and China will deal a blow to Korean companies heavily reliant on exports for growth," says Mr Lee.

Also of concern are plans by Chinese producers, especially lower cost ones, to push up capacity again to capitalise on rising prices and demand.

GCL, for one, has unveiled plans to build an $823m polysilicon production complex next year to add 40,000 tonnes to take annual capacity to 110,000 tonnes.

"A sustainable price recovery is unlikely, given the solar industry's persistent overcapacity problem," says Shin Hyun-joon at Hanwha Securities.

For South Korean solar companies, says Lee Chul-yong, researcher at Korea Energy Economics Institute, "the key is who can weather the problem longer before another round of consolidation comes".



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