Only a handful of Chinese producers of polysilicon, the key raw material in solar power panel components, are expected to survive the industry's consolidation, as low prices and central government policies favour the biggest players.
The industry is going through an overhaul as small-scale producers, typically using outdated technology, are being squeezed out of the market by a price war.
Ray Lian Rui, a Shanghai-based analyst for the industry consultancy Solarbuzz, said: 'Next year will be a year of consolidation. It's primarily driven by market forces.'
He said many loss-making small players had mothballed their factories after polysilicon prices halved. Most of these were not expected to restart production.
Domestic producers only supply about half the mainland's US$5 billion solar power polysilicon market, even though domestic polysilicon output last year, at 43,000 tonnes, was less than half the industry's capacity.
The problem, analysts said, was that a large number of high-cost new market entrants had yet to start production or were producing using only a small part of their capacity.
The solar industry has a long supply chain, in which polysilicon is processed into ingots, sliced into wafers, made into cells and assembled into modules and panels to generate electricity from sunlight.
The global production capacity for solar wafers more than tripled last year, which, together with weakening demand in Europe, the world's biggest market, saw wafer and module prices halved.
This in turn has resulted in spot-market polysilicon prices plunging by more than half to around US$32 a kilogram, from US$72 a year ago.
Luo Lu, a solar sector analyst in Beijing with the renewable energy industry information provider Bloomberg New Energy Finance, said: 'Among the around 30 polysilicon makers, only those with chemicals distillation expertise are expected to endure.
'Those without the technology will have to invest in the necessary upgrades to remain viable, but it is hard to raise the cash to do so in this environment.'
Beijing wants the industry to be dominated by perhaps two makers by 2015, with annual capacity of at least 50,000 tonnes, and another three with a capacity of more than 10,000 tonnes.
The industry leader, the Hong Kong-listed GCL-Poly Energy Holdings, plans to raise annual capacity to 65,000 tonnes by mid-2012, from 25,000 tonnes at the end of June. The company, based in Jiangsu province, produced 17,600 tonnes last year.
The company, with production costs around US$20 a kilogram, is the only maker still comfortably profitable at current prices, Luo said.
The second-largest player, the New York-listed LDK Solar, said earlier this month that it planned to raise its annual capacity to 55,000 tonnes from 17,000 tonnes and cut production costs by a quarter to about US$30 a kilogram.
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