After six to seven years of overcapacity and low prices in the industry, the silicone industry finally ushered in a new boom in 2017.


The inflection point appeared in 2016. Under the influence of environmental protection and de-capacity policies, domestic organic silicon production in 2016 showed a negative growth of -0.16% for the first time, and output in 2017 fell by 7.08%. During this period, some excess capacity gradually withdrew.


But demand has been rising. According to the data of Prospective Industry Research Institute, since 2008, the average annual compound growth rate of organic silicon in China has reached 13.72%, and will continue to grow at a rate of more than 6% in the future.


The change in supply and demand has caused the price of silicone to soar, from 2016-2018, from


125,000 / ton rose to a maximum of 35,000 yuan / ton.


At the same time, the market structure of the entire industry has changed. The number of silicone monomer manufacturers has decreased from 15 in 2011 to only 12, and the market share of the top five companies has increased to 61%. The competitive advantage of the head company has become more apparent.


Boom cycle price up


After a long winter of industry, companies can enjoy the dividends brought by the boom cycle. At present, A-share related listed companies Xinan (600596.SH), Hesheng Silicon (603260.SH) and Xingfa Group (600141.SH) have achieved substantial growth.


Among them, Xinan (600596.SH), which is the purest target of 84% of the silicone business, is the most significant. It ranks third in the country with 340,000 tons/year of silicone monomer production, 2017 and 2018. Q3's net profit at home increased by 586.87% and 403.19%, respectively, an impressive increase.


The silicone of Xin'an has the advantage of the whole industry chain, including silicon smelting, silicon powder processing, monomer synthesis and downstream products. The self-sufficiency rate of the upstream production raw material silicon powder is over 85%, and silicon is formed downstream. Rubber, silicone oil, silicone resin, silane coupling agent four series of products, the entire industrial chain layout effectively increased the company's overall profit.


The by-product hydrochloric acid of the silicone is used to prepare glyphosate, and the glyphosate by-product methyl chloride is used in the preparation of silicone. Xin'an is also a leading company in silicone and glyphosate. It has a production capacity of 80,000 tons/year for glyphosate, accounting for 11.4% of the country. The two businesses have good synergy in the industrial chain.


In addition to a substantial increase in net profit, the company's return on assets also rose dramatically. The weighted ROEs for Q3 in 2016, 2017 and 2018 were 1.95%, 12.51%, and 23.04%, respectively. Rapid growth is not unrelated to the low base in 2015 and 2016.


It is worth noting that the company's 2018 Q3 performance has reached its peak in earnings in the past 8 years. In the fourth quarter of 2018, the price of silicones continued to drop from the highest point. Although the price center is still at a historically high level, the company's profit peaks may not be able to continue. At present, Xin'an shares only have a price-earnings ratio of 5.4 times, which also reflects the cautious and pessimistic attitude of the market on whether its net profit can maintain a high position for a long time.


Full industry chain thickening profit


Not only Xinan shares, the entire industry chain has become the mainstream trend of the development of organic silicon enterprises, the more perfect the industrial chain, the more able to improve market competitiveness. Jiangxi Xinghuo Company, Hesheng Silicon Industry (603260.SH) and Dongyue Silicone, together with Xin'an, are among the four companies with the highest level of integration in the silicone industry, and have obvious cost advantages compared to other companies.


Hesheng Silicon is not only a domestic silicone leader, but also the largest industrial silicon producer in China. The total industrial silicon production capacity is 750,000 tons. The combination of industrial silicon + organic silicon makes Hesheng Silicon Industry one of the most complete and largest production chains in the domestic silicon-based new materials industry.


Industrial silicon is an important raw material for photovoltaic materials, silicone materials and alloy materials. In the upstream silicon smelting field, the company established Xinjiang Hesheng in 2010 and built it into a world-class industrial silicon production base. The production costs of industrial silicon are mainly electricity costs and raw material costs. The company's Xinjiang base uses local low-cost coal to generate electricity, and the price is significantly lower than the national average electricity price.


Among the cost of silicone raw materials, industrial silicon costs account for 45%. Therefore, the gross profit margin of silicone products in Hesheng Silicon is higher than that of Xinan and Xingfa Group.


Hesheng Silicon entered the A-share market in 2017, with ROE (weighted) of 42% and 35% in 2017 and the first three quarters of 2018, respectively. In the whole year of 2017 and the first three quarters of 2018, the company's net profit attributable to the mother reached 1.517 billion and 2.246 billion, respectively, with a growth rate of more than 130%.


At the same time of the outbreak of the company's performance, the company's scale is also expanding. In Shandong Dongyue Organic, the revenue growth rate of silicon in the third quarter of 2018 before 2017 and 2018 was more than 50% in November. The 2018 first share specification entered the stage of listing. In the quarter, 400,000 tons of metal silicon project was put into production, and the company became the world's largest industrial silicon producer. At the same time, the company is building 200,000 tons of organic silicon monomer, which is expected to be launched by the end of 2019.


New restricted pattern remodeling


In addition to Hesheng Silicon, Xinan's 150,000 tons of organic silicon monomer project is under construction and is expected to be completed and put into production in the fourth quarter of 2019.


The two silicone projects of Hesheng and Xin'an are the only production projects in 2019. Although the organic silicon market is hot and the profitability is outstanding, the new capacity of organic silicon is limited in the future, and its new production capacity is strictly restricted by environmental protection and industrial policies.


Because the organic silicon production process requires a large amount of coal combustion and wastewater discharge, the industry has high energy consumption and high pollution properties. In recent years, the environmental protection overweight has forced many small production capacity to withdraw from the market, and also raised the threshold for new production capacity.


In addition, in terms of industrial policies, the National Development and Reform Commission's “Guidelines for the Guidance of Industrial Structure Adjustment (2011) revised in 2013” clearly stated that “the new initial scale is less than 200,000 tons/year, and the single set is less than 100,000 tons/year. The chlorosilane monomer production unit is listed as a restricted category.


On the one hand, the exit of small-scale production capacity that is not up to standard for environmental protection, on the one hand, the threshold for the scale of new construction projects has increased, the pattern of the entire organic silicon industry is gradually reshaping, market share is concentrated to leading enterprises, and market concentration is further enhanced.


After the new project is put into production, Hesheng Silicon will rank first in China with a production capacity of 530,000 tons of silicone, and Xin'an will rank second with 490,000 tons.


It is worth noting that Shandong Dongyue Silicone has submitted a prospectus in November 2018 and entered the stage of listing. The manual shows that in the first half of 2018, Dongyue organic silicon realized a net profit of 448 million yuan. After the successful listing, Dongyue Silicones is expected to achieve faster development through the capital market. The market structure of the silicone industry will usher in new changes.