Silicon's 300% surge throws another price shock at world economy

Silicon, which makes up 28 per cent of the earth's crust by weight, is one of mankind's most diverse building blocks. PHOTO: UNSPLASH

SINGAPORE (BLOOMBERG) - A metal made from the second-most abundant element on earth has become scarce, threatening everything from car parts to computer chips and throwing up another hurdle for the world economy.

The shortage in silicon metal, sparked by a production cut in China, has sent prices up 300 per cent in less than two months. It is the latest in a litany of disruptions, from snarled supply chains to a power crunch, that is creating a destructive mix for companies and consumers.

The silicon issue also captures how the global energy crisis is cascading through economies in multiple ways. The slashing of output in China, far and away the world's biggest silicon producer, is the result of efforts to reduce power consumption.

For many industries, it is impossible to avoid the fallout.

Silicon, which makes up 28 per cent of the earth's crust by weight, is one of mankind's most diverse building blocks. It is used in everything from computer chips and concrete, to glass and car parts. It can be purified into the ultra-conductive material that helps convert sunlight into electricity in solar panels. And it is the raw material for silicone - a water- and heat-resistant compound used widely in medical implants, caulk, deodorants, oven mitts and more.

The knock-on consequences are particularly alarming for automakers, where silicon is alloyed with aluminium to make engine blocks and other parts, as well as chemical manufacturers who turn the metal into silicone-based products.

"If you have silicon supply constraints, then you've got a problem," Mr Keith Wildie, head of trading at aluminium alloy-maker Romco Metals, said by phone from London. "There is still some supply out there, but it's trading at a clearing price that is obviously very high."

Summer spike

Silicon metal is made by heating common sand and coke in a furnace. For most of this century, the price of it has ranged between about 8,000 yuan (S$1,690) and 17,000 yuan a tonne. Then producers in Yunnan province were ordered to cut production by 90 per cent below August levels from last month through December amid electricity curbs spurred by low hydropower resources and energy efficiency goals. Prices have since shot up as high as 67,300 yuan.

Yunnan is China's second-biggest producer, accounting for more than 20 per cent of output. Sichuan, which is also facing power curbs, is third with about 13 per cent. The top producer, Xinjiang, has not had major power issues yet.

Along with higher prices for oil, and metals such as aluminium and copper, the silicon shortage is feeding a squeeze that is already taken hold across supply chains, from producers and shippers to trucking firms and retailers. Their choice is either suck it up and take the margin hit, or pass the cost on to customers.

Either way, the damaging twin effect on inflation and growth has raised concern about stagflation forces taking hold globally.

Solar costs

The shortage is already bubbling up in the solar industry. Using caustic chemicals and intense heat, silicon metal can be refined and purified into polysilicon, the main ingredient in photovoltaic panels.

The price of solar-grade polysilicon jumped 13 per cent to US$32.62 a kg on Wednesday (Sept 29), the highest since 2011, in the wake of the supply cuts. The material is up more than 400 per cent since the start of June last year as soaring solar demand pushed processing plants to capacity.

The impact on the price of solar panels, however, is apt to be limited. Polysilicon makers are enjoying high margins this year, putting them in position to absorb higher feedstock prices better than other industries, BloombergNEF analysts said in a report on Thursday.

Lasting shortage

Silicon also plays a key role in aluminium alloys, acting as a softening agent. It makes the metal less brittle when producers shape it into different products needed in everything from cars to appliances.

Prices are expected to remain elevated around current levels through next summer, until more production comes online in the second half of the year, Shanghai Metals Market senior analyst Yang Xiaoting said in an interview. Demand is growing from sectors like solar power and electronic equipment.

"Even if there were no energy consumption curbs, there would be a shortage of industrial silicon," she said.

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