The photovoltaic industry, often characterized by its fierce competition, is currently witnessing a significant shift as two major players, Tongwei Co., Ltd(600438.SH) and Daqo Energy (688303.SH), are taking proactive steps to reduce their productionThis move has captured the attention of industry insiders and external observers alike in the wake of an intense aftermath of competitive pressures, commonly referred to as "involution."

On December 24, Tongwei Co., Ltdannounced a scheduled reduction in production as part of its high-purity silicon project maintenance and upgrade strategyThey revealed plans to implement controlled reductions across four high-purity silicon manufacturing subsidiaries of Yongxiang Co., LtdDaqo Energy issued a similar statement on the same day, indicating a phased repair process for its production lines in Xinjiang and Inner Mongolia, also leading to controlled output reductions.

These production cutbacks stem from a mismatch in supply and demand within the photovoltaic sector

The supply-and-demand imbalance, particularly in the polysilicon segment, has not fundamentally changed, leaving many companies grappling with significant lossesSince October of this year, a series of actions have been initiated across the photovoltaic industry, directed at counteracting the "involution" phenomenonThe responses have included denunciations against low-price bidding and various production reduction strategies.

According to the China Nonferrous Metals Industry Association’s Silicon Branch, as reported by Daqo Energy officials, data reflects a decrease in polysilicon production among companies, evidencing a supportive shift toward responsible self-regulation amidst the evolving competitive landscape.

At a recent forum, Vice Chairman of the Silicon Branch, Lü Jinbiao, expressed a compelling argument: he stated that relying on high loads and low pricing in an effort to sustain cash flow would not effectively mitigate overcapacity issues

Instead, it is the heavyweights of the industry that must scale back their production levels to alter the prevailing situation of surplus supply.

To better understand the dynamics of this industry, we must first examine the four main segments of the photovoltaic manufacturing process: polysilicon, silicon wafers, solar cells, and panel assemblyPolysilicon, occupying the uppermost echelons of this manufacturing chain, acts as the vital raw material for photovoltaic technologiesTongwei and Daqo are recognized leaders in this field.

Specifically, Tongwei has established a remarkable production capacity exceeding 900,000 tons of high-purity polysilicon, spread across the provinces of Sichuan, Yunnan, and Inner Mongolia, where they have consistently maintained a top global market shareDaqo Energy has developed significant production sites in Shihezi, Xinjiang, and Baotou, Inner Mongolia, attaining a combined capacity of 305,000 tons of high-purity polysilicon.

In light of recent developments, Tongwei has cited seasonal reductions in electricity availability throughout the southwest, leading to rising power prices

They asserted that the photovoltaic market is currently experiencing a bottom-phase adjustment and committed themselves to quelling competitive excess (or "involution") to stimulate sustainable growth within the industryThis involves a systematic approach to phasing out operations at four specific high-purity polysilicon manufacturing sites, aligning operational upgrades and maintenance with the company’s broader production strategy.

Daqo Energy expressed similar sentiments, emphasizing the necessity of these controlled reductions due to the prevailing state of market oversupply that has precipitated comprehensive losses for many companiesThe rapid scale-up of polysilicon production beginning in 2023 raised supply levels to a point where prices began to plummet, plunging multiple companies into financial crisis.

In fact, during the first three quarters of 2024, leading entities such as Tongwei, Daqo Energy, GCL-Poly Energy (3800.HK), and Xinte Energy (1799.HK) reported significant losses amounting to 39.73 billion yuan, 10.99 billion yuan, 29.71 billion yuan, and 14.05 billion yuan respectively.

Tongwei's declarations regarding equipment upgrades and production reductions reveal an intent to mitigate losses associated with its high-purity polysilicon segment

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Company officials anticipate a beneficial impact on their overall production and profitability as a result of these actions.

This scenario encapsulates the broader challenges confronting the photovoltaic industryStages of supply-demand mismatch permeate throughout the entire manufacturing chain, with undercut pricing strategies exacerbating issues of profitability and sustainability.

In early December, the China Photovoltaic Industry Association convened a discussion focused on promoting high-quality and sustainable development within the sector, further addressing the necessity of curbing "involutionary" competitionReports indicate that representatives from 33 solar firms signed a self-regulatory agreement concerning reduced production initiatives and the prevention of aggressive low-pricing strategies.

Industry professionals noted the active participation of major corporations, including Tongwei and Daqo, in the meeting

As Daqo reaffirmed, the issuance of their production reduction announcement aligns with their endorsement of these self-regulatory efforts.

The Silicon Branch confirmed that as it stands, nearly all operating polysilicon manufacturers are engaged in repair or load-reduction activitiesThe announcements from Tongwei and Daqo signify a crucial transition for these leading producers toward a sustained low-operational phase.

The urgency for a transformation in the polysilicon supply-demand landscape cannot be overstatedHistorically, the expansion of polysilicon production capacity in China has transitioned from a rapid acceleration to a screeching haltLü Jinbiao indicated that growth ramped up significantly starting in 2021, but by the latter half of 2023, expansions ceased entirely, with existing projects gradually coming online, while others face unanticipated challenges in execution.

As per Lü's estimates, the total production capacity of the polysilicon industry, encompassing 20 enterprises, is projected at 2.056 million tons by early 2024, with an additional 660,000 tons anticipated to emerge throughout the year

By 2025, the capacity could climatically reach up to 3.5 million tons, although this projection remains riddled with uncertainties regarding timelines for component production.

Significantly, according to optimistic forecasts from Bloomberg New Energy Finance, the amount of polysilicon required to cater to anticipated photovoltaic installations by 2025 could reach 1.77 million tons if inventory levels are factored inHowever, with production capacity reaching 2.65 million tons, the operating rates across the industry would fall below 60%—an indication of systemic inefficiency within the supply chain.

Through the identification of new policies that aim to regulate supply and demand firmly, the central government has attempted to delineate between newer and outdated production capacitiesIn November 2024, initiatives were outlined to elevate technological standards, impose stringent quality control measures, enhance capital ratios, and bolster intellectual property rights protection

These reforms target reducing excessive production and guiding legacy facilities—amounting to around 200,000 tons—to phase out their operations.

However, the prevailing sentiment within the industry underlines that it is the leading entities' actions in scaling back their outputs that will fundamentally influence the consequent direction of supply and demand relations.

“This current phase of adjustments will necessitate an industry-wide reduction in operational loads, predominantly led by the major corporations, which has already begun,” Lü Jinbiao expressedHe emphasized that aggressive cash flow tactics through high productive activities at lower prices will ultimately fail to resolve overcapacity and that only by retrenching production can the larger market dynamics shift.

A source within the industry elaborated that traditional polysilicon manufacturers also aim to compel less competitive players and newcomers to exit the market

Nonetheless, the swift clearing of such excess production appears increasingly dauntingFor key players to openly announce production reductions under duress reflects the severity of their ongoing cash flow challenges and the untenable nature they now face.

The Silicon Branch conveyed that announcements from Tongwei and Daqo regarding scaled-back production levels send a strong and clear message to the market, creating optimistic ripples aimed at alleviating pressures on supply-demand imbalances and redirecting focus towards rational pricing strategies.

Moreover, the Silicon Branch underscored the recent upward trajectory in N-type polysilicon pricing, with new orders indicating a corrective trendMany transactions currently center on smaller deals or those facilitated by intermediaries, with some transactions showcasing price increases primarily due to favorable external influences, including the futures trading of polysilicon and the operational adjustments by all producers aiming for reduced output

Such factors have cultivated a prevailing optimism among both upstream and downstream players regarding future price movements, leading to quick consensus on transactional volumes and pricing.

However, regarding the implications of these reductions on future pricing trajectories, Daqo representatives clarified that the timeline and patterns of potential price rebounds remain indeterminateAnalysts, such as Fang Wenzhen from Longzhong Information, anticipate that in 2025 the pressures of supply-demand imbalance will still be substantial, albeit that the market may reach a state of equilibrium intermittently throughout the yearPredictions suggest price fluctuations primarily along a range between 35,000 and 65,000 yuan per ton, settling around an average of 40,000 to 50,000 yuan per ton.

A rebound in pricing could significantly enhance revenue recovery prospects for polysilicon firms