After a year of inactivity, China's biggest polysilicon plants are resuming output to meet a demand recovery anticipated when Beijing imposes a retaliatory tax on U.S. and European imports of the material key to solar panel production.
Shares of the Chinese producers that stand to benefit most, Daqo New Energy Corp (DQ.N) and GCL Poly Energy Holdings Ltd (3800.HK), have risen by 64 percent and 44 percent, respectively, in the last month.
But the rally might be nearing its end, investors said, as foreign suppliers find ways to circumvent any duties and Chinese plants compete with each other in a crowded market.
"There may be a short-term bounce in these stocks but I don't think it will be a long-term differentiator, because there is enough polysilicon supply in China," Edward Guinness, co-portfolio manager at Guinness Atkinson Asset Management, said.
China, the world's biggest energy consumer, will more than double its installed solar power capacity this year. More than 80 percent of the polysilicon consumed by its panel makers in 2012 was supplied by the United States, Europe and South Korea.
A tit-for-tat trade dispute could redraw these supply lines.
Drawing on evidence from Daqo New Energy, GCL Poly and fellow polysilicon maker LDK Solar Co Ltd LDK.N, China is investigating whether U.S., European and South Korean suppliers breached anti-subsidy rules. A ruling is expected by February.
The probe follows the introduction late last year of U.S. duties on imported solar panels made from China-made cells. The European Union is conducting a separate investigation into alleged state subsidies and "dumping" of panels.
"There's a high probability that China will impose tariffs on foreign poly makers," said Himanshu Shah, chief investment officer of Shah Capital, which owns shares in Chinese panel makers Trina Solar Ltd TSL.N and Yingli Green Energy (YGE.N).
A rush to meet orders ahead of the Chinese import duty spurred global polysilicon prices to rise in early January for the first time in 11 months.
Assuming a 50 percent Chinese duty atop current prices of around $16 per kilogram, polysilicon industry specialists Bernreuter Research forecasts prices will recover to $24 per kilogram in the next few months.
The average price for high-purity polysilicon fell 47 percent last year to a record-low $15.35 per kilogram, extending a 59 percent drop in 2011 as global supply outpaced demand, data from Bernreuter showed.
With prices falling, about 90 percent of China's polysilicon producers had suspended production, China's state news agency Xinhua reported in December.
Only the lowest-cost Chinese polysilicon makers would be equipped to grab extra market share from a decline in imports, investors said.
Shah said smaller producers would only break even at prices above $30 per kilogram, almost double the current spot price.
"I see the market getting more and more concentrated around the top five to 10 players," said Shah.
Daqo, one of these leading players, is ramping up production at one of its plants and upgrading another with a view to resuming output in May or June, should the market price at the time exceed reduced cash costs, said company spokesman Kevin He.
The company is targeting production costs of $20 per kilogram by the end of the first quarter, a level already achieved by bigger rival GCL.
But Shah said he would not be looking to buy shares in Chinese polysilicon makers as he believed tariff-related gains had been largely priced in.
'HEADWIND' FOR IMPORTERS
U.S., European and South Korean producers are still likely to shed some value, however, should Beijing proceed with import duties, investors said.
"It will definitely be an extra headwind for them ... This will potentially make these stocks less attractive to investors," said Guinness, whose asset management firm owned shares of Chinese polysilicon maker ReneSola Ltd (SOL.N) as of September.
Norwegian Renewable Energy Corp ASA (REC.OL), which has lost 74 percent of its value in the last 12 months, said on January 11 it would temporarily reduce polysilicon production in the United States. Rivals are also revisiting production plans.
Michigan-based Hemlock Semiconductor Group, a joint venture between Dow Corning Corp DOWCR.UL, Shin-Etsu Handotai SHNETB.UL and Mitsubishi Materials Corp (5711.T), said on January 14 it would cut about 400 jobs on weak demand.
"My customers are cautiously looking at what's happening in China," said Thomas Guttierez, chief executive of GT Advanced Technologies Inc GTAT.O, which makes furnaces and reactors for polysilicon producers.
Foreign suppliers hope Chinese panel makers will continue to buy their polysilicon for its high quality. An alternative method of supply would be to deliver polysilicon to Taiwan and manufacture cells there, which would then be delivered to panel plants in mainland China.
"We already have scenario plans in place in the event of a tariff," said Helena Kimball, spokeswoman for panel maker Yingli Green.
She gave no details of the planned response, but added: "We are confident in our ability to continue supplying the global market."
(Writing by Krishna N. Das; Editing by Robin Paxton)