Recently, there has been a significant development in the commodities trading sector in China with the announcement that the Guangzhou Futures Exchange (GFE) has approved the registration of polysilicon futures and optionsThis decision marks a notable step forward in the trading landscape for renewable energy materials, particularly as the GFE disseminates information related to trading contracts for these new futures.

According to the announcement, trading for polysilicon futures contracts is set to commence on December 26, 2024. This launch follows the successful introduction of industrial silicon and lithium carbonate futures on the GFE, marking the third renewable energy futures product to be launched in ChinaThe significance of polysilicon in the context of the renewable energy sector cannot be overstated, as it plays a crucial role in the manufacturing of solar panels.

Polysilicon is a silicon material that has been refined from industrial silicon through a series of physical and chemical processes to achieve a specific purity

Currently, it is predominantly used in the photovoltaic (solar) industry and the semiconductor sector, with the latter being a smaller portion of its application compared to solar energyChina has rapidly advanced to become the world's leading supplier of polysilicon, contributing over 90% to global production as of 2023.

Over a span of more than ten years, China's polysilicon production capacity has skyrocketed from 151,000 tons in 2013 to an impressive 202,000 tons in 2023, with output increasing from 83,300 tons to 1.47 million tons in the same timeframeThe sheer scale of this expansion reflects not only China's investment in the renewable energy sector but also its strategic importance in the global market, where nine out of the top ten polysilicon producers are Chinese companiesThe majority of these production facilities are situated in provinces such as Xinjiang, Qinghai, Inner Mongolia, Sichuan, and Jiangsu.

Current market data reveals that the average trading price for various types of solar-grade polysilicon is noteworthy

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The N-type re-polished material averages around 40,300 yuan per ton, while the N-type dense material sells for approximately 36,300 yuan per ton; the P-type polysilicon is lower at about 33,100 yuan per tonHowever, the market has faced turbulent times in 2023, with significant fluctuations in supply and demand dynamics leading to dramatic price declinesFor instance, the average price of dense materials plummeted nearly 80% from early 2023 when it was valued at 178,200 yuan per ton.

At present, the polysilicon industry is grappling with a mismatch in supply and demand, creating volatility in the marketAccording to analysts at TrendForce, there is an expectation that from 2025 onward, growth rates in both production capacity and output will experience a significant slowdown, leading the industry into a stagnation phaseThe Compound Annual Growth Rate (CAGR) is projected to decline to around 4%, shifting the focus in the coming years from boosting production to addressing oversupply issues.

Experts believe that by 2025, global polysilicon production capacity could reach 3.5 million tons, while demand will hover around 1.77 million tons

This suggests that many polysilicon producers might operate at low capacity, with the overall industry utilization rate potentially dropping to 50%. The future could see a rise in merger and acquisition activities as companies seek to consolidate in a challenging market, with a gradual transition from losses to marginal profits expected.

Confronted with these market uncertainties, Ma Haitan, Executive Vice Secretary General of the China Nonferrous Metals Industry Association's Silicon Branch, advised polysilicon companies to actively employ risk management tools to mitigate fluctuating market risks during a GFE training session.

Ma pointed out, "The futures market is a product of a mature market economy and provides an effective means for real enterprises to hedge against risks and stabilize their operations from drastic market fluctuationsCompanies must adapt to the evolving landscape, cultivate professional talent, become familiar with future market regulations, and effectively utilize risk management tools."

Analysts at Bank of China Futures argue that the introduction of polysilicon futures brings forth essential benefits for price discovery, industry risk management, and optimal resource allocation, and enhances China's ability to exert influence over global market pricing.

For instance, manufacturers of photovoltaic modules can use futures prices to develop more informed procurement strategies, mitigating risks associated with sudden price surges in polysilicon

Conversely, producers concerned about potential price drops can sell futures contracts proportionate to their future output, cushioning the impacts of price declines through profits realized in the futures market.

Despite the current pressure on polysilicon's cash cost lines and its low market valuation, the nascent market for polysilicon futures may lead to prices factoring in projections for long-term industry recovery and profitability once certain regulatory policies come into effectDazhong Futures highlights that overall optimism in the futures market has the potential to influence sentiments within the spot market positively.

Reactions among polysilicon companies regarding the introduction of futures have variedFor example, a representative from Daqo Energy (688303.SH), a leading polysilicon producer, indicated that they have personnel monitoring developments in futures trading while conducting their internal analyses

Another leading company's investor relations department expressed a supportive attitude towards the Guangzhou Futures Exchange's initiatives, emphasizing that the current volatility in polysilicon prices calls for a tool that could signal future price movements and ultimately stabilize operations, while also keeping an eye on future participation conditional on official announcements.

Yuan Chao, a long-time observer of the photovoltaic industry and founder of PV Guidance, noted that the willingness of polysilicon companies to engage in futures trading may require further observationHe emphasized the current relatively low frequency of trading among polysilicon and silicon wafer producers, suggesting that while major players may enter long-term agreements with downstream silicon wafer manufacturers, smaller players may show a greater propensity to participateHe warns that during the early stages of trading in polysilicon futures, maintaining quality control is crucial to avoid impacting yield rates in silicon wafer production adversely.