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GCL-Poly expansion raises oversupply fear

China's largest producer of solar panel components, GCL-Poly Energy Holdings, has embarked on an aggressive expansion programme that could worsen industry oversupply and depress prices next year, warn analysts.

Jiangsu province-based GCL said on February 18 that it would raise its output of polysilicon rods from 21,000 tonnes currently to at least 46,000 tonnes by the the end of the year, and 65,000 tonnes by the end of next year.

It also planned to raise its production of polysilicon wafers from 3.5 giga-watt (GW) generation capacity at the end of last year to 6.5 GW by the end of this year. One GW of wafer capacity can supply the solar energy needs of about 800,000 households in the United States for a year.

The two-year expansion plan would cost a total of HK$17.7 billion, GCL said. Solar panels are made mostly from polysilicon rods, some two metres long, which are cut into ingots and then sliced into wafers that are 0.2 millimetres thick. The wafers are then processed into solar cells that are assembled into the solar panels that convert sunlight energy into electricity. Most of China's solar panels are for the export market.

The domestic market has been growing by over 100 per cent annually in the past two years from a low base, although this has been held back by less favourable government incentives compared to developed markets like Europe.

China is the world's largest solar panel producer.

In a research note, brokerage and investment group CLSA said the targeted expansion of 25,000 tonnes of polysilicon by GCL exceeded its forecast that the producer would lift output by 20,000 tonnes.

'It has long been no secret that solar will enter oversupply by 2012 as Germany and Italy cool their heels [in subsidising panel installations],' wrote the brokerage's solar and clean-energy sector analyst Charles Yonts. The more aggressive expansion would push the sector further into oversupply next year, he warned.

CLSA has cut its polysilicon price projection from US$43 a kilogram to US$40 a kg, and wafer prices from 60 US cents a watt to 58 cents a watt.

After attending a recent industry trade show in Shanghai, Yonts warned: 'The sheer number of companies we've never heard of that are pushing through aggressive expansion plans deepens our fear of oversupply in 2012.'

Core Pacific-Yamaichi analyst Lee Yuk-kei also said GCL's faster-than-expected expansion will pose oversupply and price risks for the industry later this year.

However, he said price falls would be more than offset by sales volume growth especially for the biggest and most cost-competitive players like GCL.

For this year, Yonts said demand was likely to remain strong in the short term, with some producers' inventory running as low as one week.

Another positive development is that investment cost on additional capacity is lower than expected. Yonts noted GCL's estimated expansion cost of HK$17.7 billion was much lower than his expectation of HK$22.6 billion, which means producers can better withstand any slowdown in demand or faster increase in supply.

GCL's share price ended flat on Friday at HK$3.77, unchanged from its pre-announcement price last week.

Spending up

GCL-Poly Energy says the total cost, in Hong Kong dollars, of its expansion plan will be: $17.7b

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