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Crisis is an opportunity | PCB power restriction and shutdown risk evaluation

Latest update time：2021-10-05

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Source: This article is translated from [China Business Times] by Semiconductor Industry Observer (ID: icbank), thank you.

The Chinese government has intensified its efforts to control energy consumption. The provinces that lagged behind in August and were named by the National Development and Reform Commission have been working hard to catch up since September to meet their KPI targets, which has become the cause of China's recent power rationing chaos. The medium- and long-term goals of carbon peak and carbon neutrality, as well as the short supply of coal and the surge in thermal coal prices have led to a short-term tight supply of power generation, which has further fueled the power rationing trend in various provinces. As the industries affected are beyond market expectations, panic sentiment has intensified, adding to the risk of recent price fluctuations.

China's power cuts may not be a short-term policy

Lin Bofeng, chairman of the Industry and Commerce Association, said that the current power restriction is more serious in Jiangsu Province, where Taiwanese companies are restricted from using about 20-40% of their electricity, but new policies are expected to be announced by the end of September. Industry sources said that Kunshan City has extended the power restriction for small companies until the end of the year, and companies subject to the regulation will have to suspend operations for 15 days each month for the next three months (including the original vacation days).

China is striving for the dual carbon goals of carbon peak and carbon neutrality, and has proposed the 14th Five-Year Plan. This year happens to be the first year after the launch of the plan, and it is also the most critical year affecting the mid-term goal of carbon neutrality. The government has a smaller tolerance for policies and must implement the plan more rigorously. It can be expected that there will be active requirements before the end of the year, and the relevant impact should not be just a short-term phenomenon.

The aftermath of production restrictions: skyrocketing power generation costs

Against the backdrop of production restriction policies and imbalance between supply and demand, China's three coal futures, namely coking coal, thermal coal and coke futures, have soared recently. Among them, thermal coal has soared by more than 70% since mid-August. In 2020, coal-fired power generation accounted for 63% of China's total power generation, and more than 65% of thermal coal was used for thermal power generation. The price of thermal coal is closely related to the cost of power generation.

Due to the high coal prices, the coal inventory of China's power plants is at a historical low. The coal inventory of power plants in the eight coastal provinces only lasts ten days. At this time, the price of replenishing the inventory is too high, and the electricity price cannot make up for the coal cost. The more electricity is generated, the more losses there are. Some Chinese power plants are unwilling to generate electricity at a loss, which aggravates the power supply gap. If coal prices continue to soar and electricity charges cannot pass on costs, the power supply may be further reduced, and the degree and scope of power rationing may be forced to increase.

Market Analysis: China's dual energy consumption control has been implemented from coastal to inland provinces, involving multiple industries and fields such as steel, aluminum smelters, cement, building materials, chemicals, textiles, chemical fibers, and soybean processing plants. It has a direct and obvious effect in reducing electricity consumption and easing the tension in coal consumption. However, China's coal supply and demand relationship this year has the characteristics of excessive demand growth and obvious low inventory in various links. It is difficult to completely solve the coal supply and demand gap in the short term and cause coal prices to fall back to a lower level quickly. Therefore, it can be seen that the industries with power and production restrictions are continuing to expand, and the printed circuit boards, passive components, connectors, and components of the electronics industry have also received power outage notices one after another.

Electronics companies are not immune

Even the semiconductor industry, which the market originally expected to be exempted from the power restriction list by China as a key development support, was not spared. On September 26, ASE's Kunshan plant received an emergency notice from the local government that power would be restricted from September 26 to September 30, and the plant would have no output. This led to market expectations that the packaging and testing industry had already been restricted, and the wafer foundry might also be restricted in the future. The overall market chip supply is inevitably restricted, and the supply-demand gap that was already out of stock will be further widened, and semiconductor factories have the opportunity to increase price increases.

Semiconductor industry insiders pointed out that most of China's power cuts will last until September 30. It is still unknown how long they will last and how wide the impact will be. However, if they become the norm in the future, they will inevitably have a significant impact on the industry chain. Not only will the production of upstream raw materials or any chips and components be stopped, but the entire supply chain will also be disrupted, and the end products will not be produced smoothly, which will in turn affect the demand for all electronic components. However, considering that China is actively supporting local industries and increasing the market share of local factories through various means, it is not impossible to lock in local factory competitors and cut power.

The Chinese authorities have implemented dual control over energy consumption, and Jiangsu Province is one of the provinces that has been hit by power restrictions. Taiwanese companies are based in Suzhou and Kunshan in Jiangsu Province. According to statistics, nearly 100 listed companies have announced shutdowns in response to China's power restrictions. Among them, printed circuit board (PCB) factories with production capacity concentrated in China are the most affected (China accounts for 63% of production capacity).

Taiwan PCB factories bear the brunt

According to Prismark, a PCB industry research organization, mainland China is already the world's largest PCB production base, with a market share of 55%, of which more than 30% is in Jiangsu (the global market share exceeds 15%). The market expects that the power restriction policy will have a significant impact on PCB production. Among China's current major PCB production projects, HDI and hard boards account for the highest proportion, up to 72%, and the second highest is soft boards at 24%. It is expected that the former will be more affected by power restrictions.

Since the PCB manufacturing process uses a variety of chemical agents and special raw materials, it produces a wide variety of wastewater, waste liquid and waste. In addition to containing a variety of organic pollution, it also contains a large amount of heavy metals such as copper, lead and nickel. According to research, Taiwan currently produces more than 100,000 tons of PCB waste each year. The key is that more than 60% of PCB waste is non-metallic waste. According to the market share of PCB production capacity in Taiwan and mainland China, mainland China will create nearly 500,000 tons of PCB waste each year. It is no wonder that it has become the main target of pollution discharge in mainland China. Power restriction and production restriction are also necessary means for the government to reduce pollution.

Crisis is an opportunity, and the biggest industry players will prosper

As early as December 2017, Kunshan began to limit emissions. Small PCB factories with small production scale, few emission indicators, low production efficiency and high pollution were ordered to close due to either the sharp increase in costs or the difficulty in controlling pollution. Some of them moved to the central and western regions. Now they are facing a new wave of rectification policies. The share of the PCB industry should be reshuffled again, and the surviving manufacturers will become stronger.

ITRI believes that in response to the trade war and the epidemic, Taiwan's PCB manufacturers have listed reducing the proportion of production in mainland China as a long-term development strategy. If China's power restrictions expand or become the norm in the future, Taiwanese manufacturers will inevitably accelerate the transfer of production capacity out of the mainland. It is estimated that the power restrictions in September will affect manufacturers for seven to ten working days, affecting the third quarter's revenue by about 1-1.5%. However, manufacturers usually have safety stocks on hand, and orders can still be shipped to customers from inventory or responded to by overtime later. In the end, the impact on revenue in September or October may not be as serious as market expectations. After the stock price fell ahead of the market's pessimistic expectations, once the revenue figures announced next are better than expected, it is not ruled out that there will be opportunities for a deep rebound. Investors should no longer follow the market in short-term pessimism about the PCB group.

The server PCB leader, Intel Electronics, has extended its order visibility to the first quarter of 2022. The penetration rate of Intel's new server platform Whitley has steadily increased. It is expected that the proportion of Whitley platform in server boards will increase to 50% this year, which will help improve the server board product portfolio. Intel plans to launch the next-generation server platform Eagle Stream using a seven-nanometer process in 2022 and a four-nanometer chip in 2023. The server board with Eagle Stream has more than four layers than Whitley, and the unit price is estimated to increase by 30-50%. The company is already in trial production and will launch samples as early as the first half of 2022, which will become a new driving force for future operational growth.

*Disclaimer: This article is originally written by the author. The content of the article is the author's personal opinion. Semiconductor Industry Observer reprints it only to convey a different point of view. It does not mean that Semiconductor Industry Observer agrees or supports this point of view. If you have any objections, please contact Semiconductor Industry Observer.

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