In recent years, the photovoltaic (PV) industry has found itself ensnared in a vicious cycle, where companies are continually selling more yet suffering increasing lossesAs a response to heightened competition within the sector, many firms have chosen to endure the pressures, holding on in hopes of a forthcoming recoveryHowever, for companies grappling with dwindling profits and a surge of executive departures, the strategy of retreat may prove to be the prudent course of actionIndeed, we have already observed certain firms reversing their trajectory in light of these circumstances.

On the evening of December 24, Daqo New Energy (stock code: 688303.SH) announced the initiation of phased production reductions and maintenance on select lines in its high-purity polysilicon operationsThis move, noted by industry observers, indicates a significant scaling back of production capacity by the third quarter of 2024. Analysts speculate that this strategy is aimed at increasing prices by reducing supply, assisting in restoring upstream prices above cash costs

On the day of the announcement, shares of Daqo surged by 3.82%, closing at 26.35 yuan per share.

Signs of production reductions had already appeared in the third quarter of this yearDaqo New Energy issued a statement on its official WeChat account, revealing that the current market dynamics remain unbalanced, leading to widespread losses across the industryIn alignment with the central government’s economic directives, the company intends to proactively reduce production in its facilities located in Xinjiang and Inner Mongolia, aiming to counteract the malign competition that has characterized the sectorDaqo plans to reassess production levels based on market conditions moving forward.

The company acknowledges that this production reduction will lead to a decrease in its effective production capacity in high-purity polysiliconConsequently, the sales volume of its primary products will likely decline

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Nonetheless, Daqo remains optimistic that this strategy will enhance the stability of its operations and the quality of its products, thereby lowering operational costs and reducing losses, ultimately having a manageable impact on its overall performance.

Although Daqo has not publicly elaborated on specific production reduction plans, data reveals that the company has already been substantially slashing its output since the beginning of the third quarterIn the first three quarters of the year, Daqo's production reached 170,800 tonnes, marking a year-on-year increase of 24.86%. The output for the third quarter was 43,600 tonnes, reflecting a decrease of over 30% compared to the second quarter, where production was around 62,300 tonnes and 65,000 tonnes in the first and second quarters, respectivelyThe expectation for fourth-quarter polysilicon output stands between 31,000 tonnes and 34,000 tonnes, considerably lower than the 200,000 to 210,000 tonnes originally projected for the year, compared to the ambitious targets outlined in its 2023 annual report, which estimated production capacity ranging from 280,000 to 300,000 tonnes.

A significant driving force behind Daqo's decision to methodically curb production is the persistent issue of losses that has plagued the industry.

The narrative of "producing more, losing more" has become all too familiar

Established in 2011, Daqo New Energy specializes in the research, development, production, and sale of high-purity polysiliconOver the years, the company has built an impressive production capacity with facilities in Xinjiang and Inner Mongolia, boasting an output of 305,000 tonnes per year in high-purity polysilicon, along with 1,000 tonnes of semiconductor-grade polysilicon and additional production lines.

In the first two years following its stock market debut, Daqo benefited immensely from soaring polysilicon prices, effectively elevating it to the ranks of the "big four" companies in the industryNotably, during 2022, Daqo recorded remarkable financial results, with revenues reaching 30.94 billion yuan, a 185.64% increase year-on-year, and a net profit attributable to shareholders of 19.12 billion yuan, reflecting a 234.06% year-on-year growthAt one point, the company's gross profit margin approached a staggering 75%.

However, the latter half of 2023 marked a turning point, as overcapacity began to plague the photovoltaic supply chain, causing product prices to plummet

By now, the majority of products, including Daqo's, were sold below cash costs.

In its reports, the company indicated that the average sales prices for its polysilicon products in the second and third quarters were 37.09 yuan per kilogram and 33.62 yuan per kilogram, respectively, while cash costs amounted to 40.16 yuan per kilogram and 38.93 yuan per kilogramThis resulted in a loss of 5,310 yuan for every ton of polysilicon produced.

Consequently, as prices continued to trend downward, Daqo, like many of its peers in the photovoltaic sector, found itself grappling with losses this yearThe company's net profit attributable to shareholders in the first half of the year recorded a loss of 670 million yuanAlthough losses diminished somewhat by the third quarter, Daqo still faced a significant shortfall of 430 million yuanOverall, the company generated revenues of 6.005 billion yuan in the first three quarters, down 53.37% year-on-year, with net profits declining by 121.49%.

Compounding these troubles, Daqo's gross profit margin also plummeted, dropping from 40.35% at the end of 2023 to just 4.18% by the end of the third quarter

In fact, the second quarter saw the margin fall to an alarming -23.57%. Furthermore, by the end of the third quarter, the company's inventory had surged by 55.93% to 1.552 billion yuan, resulting in substantial asset impairment costsThe third quarter alone saw Daqo recognize assets impairment losses of 582 million yuan due to falling inventory values.

Looking ahead to the fourth quarter, ominously, domestic polysilicon production capacity continues to expandProjections indicate that by the end of 2024, domestic capacity will reach approximately 3.434 million tonnes, with global capacity hitting 3.59 million tonnesThis raises concerns that many companies may find themselves facing severe financial challenges as a result.

In addition to these market challenges, Daqo New Energy has faced a leadership crisis characterized by the departure of several long-standing executivesHistorically, Daqo has maintained a stable executive team, with little turnover until 2023. However, this year, notable exits have included Vice President Tan Zhongfang, General Manager Zhou Qiangmin, Board Member Zhang Longgen, Technical Manager Zhao Yunsong, Director Wang Xiyu, and Vice President Hu Ping.

In this context, the urgent need for Daqo to make decisive changes has become apparent, as it grapples with financial losses and executive turnover

Notably, the market has responded positively to the company’s announcement of production cuts, which some view as a necessary step towards fiscal responsibility, leading to the subsequent stock price surge.

In light of the industry's broader acknowledgment of the need for reform, other firms in the sector have announced similar measures on the same day as Daqo's announcementThis collective move towards production cuts signifies a growing recognition among photovoltaic companies that the time has come to adopt self-regulatory practices for survival.

Industry experts suggest that the polysilicon market is now hovering at its lowest pricing levels, with limited downward potential remainingDespite this stabilization, many companies find themselves continuously selling at a lossThe anticipated production clear-outs have not occurred at the expected pace, prompting leading firms to seek self-rescue through disciplined production adjustments aimed at restoring prices above cash costs, thus mitigating operational losses in high-purity polysilicon business.