【Haichuan Chemical Industry News】The cold winter is over, and the silicone industry is recovering from its lowest points

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Basic chemical industry: The silicone industry is seeing a recovery after hitting bottom. Recently, the price levels in the silicone industry chain have been rising gradually; the price of the intermediate DMC has increased from 12,500 yuan per ton at the end of July to 16,800 yuan per ton by November 28th, a rise of 34%. We believe that the silicone industry has reached its bottom and is now recovering, with the five-year period of decline behind it. Further improvements are expected in the future, and the price of DMC is likely to return to 20,000 yuan per ton. On the cost side, rising energy prices will raise the price level in the silicone industry. On the supply side, losses have led to the permanent shutdown of some production capacities, resulting in an increasing concentration in the industry. Meanwhile, environmental regulations have caused disruptions to certain production capacities on a regular basis, thereby significantly reducing the level of overcapacity in the industry. On the demand side, the real estate demand from the first half of the year has continued to have an impact, and demand is set to keep improving. As prices rise, the entire industry is likely to experience a wave of inventory replenishment, allowing prices to decline smoothly; as a result, industry profits will increase. We have also observed that the price gap between DMC and raw materials has widened by 1,800 yuan per ton compared to the first half of the year. On the cost side, rising energy prices are pushing up the price level in the silicone industry. Increases in the costs of coal and hydropower, along with higher transportation costs, will also contribute to an upward trend in prices within this industry. The silicone industry consumes a large amount of energy; the cost of energy accounts for over 50% of the total costs. This is especially true in the production of metallic silicon, where approximately 12,000 kWh of electricity is required per ton of metallic silicon produced. As a result, facilities for manufacturing metallic silicon are usually located in regions where hydroelectric or coal-powered electricity is inexpensive, such as Yunnan, Sichuan, and Xinjiang. With the arrival of the dry season, electricity prices in Yunnan and Sichuan have risen, which will lead to a decrease in the production of metal silicon in these regions. Meanwhile, domestic coal prices have risen significantly, and it is likely that they will remain high in 2017; we expect electricity costs in the Xinjiang region to increase as well. Moreover, as measures to address overloading in transportation become stricter, the increased transportation costs are passed on to the cost of silicone. On the supply side, the surplus is decreasing and the competitive landscape is improving. Currently, the effective production capacity for silicone monomers is around 2.5 million tons per year, with actual output at around 1.8 million tons; the operating rate has risen to over 70%. In the future, the growth rate of new production capacity will slow down significantly, while demand is expected to continue growing at around 5%, leading to an ongoing increase in the industry’s operating rate. At the same time, stricter environmental regulations represent a general trend; in particular, with the ongoing central environmental inspections, the shutdown of certain facilities will become commonplace. With the optimization of the industry’s competitive structure, the concentration ratio among the top four companies has approached 50%; only 13 companies remain capable of producing silicone intermediates, and price wars are likely to come to an end. On the demand side, the demand from the real estate sector has just started to show up and is set to continue. Approximately 23% of the demand in the silicone industry comes from real estate, which is primarily used for renovation purposes in real estate projects, and is closely related to both new and used homes. In the first half of 2016, the real estate sector experienced a surge in construction activities, and the resulting demand began to affect the silicone industry as well. Although purchase restrictions have been tightened, given the lag in demand resulting from new construction projects and the still-high volume of second-hand home transactions, we believe that the demand driven by the real estate sector will persist for more than half a year. Moreover, a slight increase in exports has also boosted demand. [From Tencent Consulting]