A few weeks ago, the German Raw Materials Agency (DERA) published an interesting report that you should definitely know about. The focus is on the raw material silicon. In short: This is important for both computer technology and photovoltaics (PV). At the same time, the silicon market is responsible for a certain crisis in Europe and especially in Germany, which is cause for concern. But more on that later.

Why silicon is so important First of all: According to DERA, the semiconductor element silicon is melted at high temperatures of around 2,000 degrees Celsius from quartz in a mixture together with charcoal, coal and wood chips in gigantic ovens. This results in raw silicon, which can already be used in two important application areas: the production of aluminum alloys and the production of silicones. Both areas are strong growth markets.

However, the most important market is for semiconductor silicon and especially for solar silicon. Both substances require polysilicon as a starting material. Solar silicon, in turn, is at the beginning of the value chain of the photovoltaic industry, which extends from the production of silicon ingots and silicon wafers to solar cells and ultimately solar modules.

In the picture you can see the (simplified) structure of a solar cell:

Source: Solaranlage-Ratgeber (https://www.solaranlage-ratgeber.de/photovoltaik/photovoltaik-technik/photovoltaik-solarmodule)

China controls silicon and PV market Importantly: According to the DERA report, about 97% of all ingots and wafers, 78% of all solar cells and 82% of all solar modules are currently manufactured in China. With regard to the required raw materials polysilicon and silicon, China’s market shares are 82% and 75%, respectively. China thus has control over the global PV market.

At the same time, the dominance of the Chinese is growing gradually, according to DERA experts. Chinese companies are investing billions of dollars in expanding the domestic silicon sector with the backing of the Communist Party.

Massive oversupply: Silicon prices are likely to remain low As a result, there is a serious problem for Europe and Germany – both in terms of market balance. According to the study, global capacities already significantly exceed the demand for silicon. According to the study, global production capacities are expected to increase by another 66% by the end of 2027.

However, demand is only expected to increase by 37% by then. In the case of polysilicon, which is important for the semiconductor industry and especially the PV industry, capacities are expected to increase by 437% – of which 93% alone in China – while demand is expected to increase by only 107%.

The result: Prices for silicon and polysilicon are likely to remain very low on a global level. This also affects the margins of solar cells and modules. Large suppliers such as Canadian Solar or Jinko Solar have been struggling with low profit margins for years. According to DERA experts, the situation is not expected to change anytime soon.

Solar dumping from China makes Europe a beggar For Europe and Germany, this would not even be negative at first glance. After all, new solar systems could become even cheaper in the future, which would boost the energy transition. Nevertheless, the researchers at the German Raw Materials Agency are warning. The reason: the dependence on China will continue to increase. This gives the political actors in Beijing another powerful means of putting pressure on trade conflicts with the West.

According to the study, the deeper problem lies in energy costs. The production process for silicon and solar components is extremely energy-intensive. Since costs are significantly lower in China, it is not possible to produce competitively priced solar components in Germany, for example. There had actually been a growing solar industry in Germany at the beginning of the 2000s.

However, this was eliminated by Chinese competitors after a few years. Although there are now efforts to establish a significant production of PV equipment in Germany again, according to experts, this is doomed to failure without massive state subsidies.

Interesting: According to DERA, in Europe it is currently only possible to produce competitive silicon in Norway at industrial electricity prices of 2 to 3 cents per kilowatt hour. In Germany, France or Spain, this is currently not feasible due to high energy costs.

My conclusion for you It’s a dilemma. On the one hand, German and European solar power capacities are to be massively expanded in the coming years as part of the climate targets. On the other hand, Europe is also dependent on the favor of China in this energy transition issue. If you look at the new DERA report, this is not likely to change for the time being.

The People’s Republic would theoretically have the power to practically put European PV expansion on ice with a single blow. A step as grave as this would be conceivable, for example, in the event of a possible escalation of the trade conflict through Chinese military intervention in Taiwan.

Although China would also shoot itself in the foot with this, the damage to Europe would be much more serious, at least in terms of expanding solar energy and achieving climate targets.

There is no easy solution to the problem in my opinion. The industry in Europe would need very extensive start-up subsidies, which would be at least comparable to those in the USA (keyword: Inflation Reduction Act). At the same time, politics would have to establish a lever to make imports from China less lucrative.

Experts emphasize here, among other things, the so-called climate tariff, which is expected to sanction imported products with a large CO2 footprint soon. This would probably also affect many solar modules from China, in whose value chain a lot of coal is used. However, it would still have to be shown whether this would bring about significant changes. In addition, Beijing is unlikely to sit idly by and watch the sanctions.

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