Daqo New Energy - Q2 2024
August 26, 2024
Transcript
Operator (participant)
Hello, and welcome to the Daqo New Energy Q2 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Anita Xu, Investor Relations Director. Please go ahead.
Anita Xu (Investor Relations Director)
Hello, everyone. I'm Anita Xu, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the Q2 of 2024, which can be found on our website at www.dqsolar.com. So today, attending the conference call, we have our Chairman and CEO, Mr. Xiang Xu, our CFO, Mr. Ming Yang, and myself. The call today will begin with an update from Mr. Xu on market conditions and company operations, and then Mr. Yang will discuss the company's financial performance for the quarter and the year. After that, we'll open the floor to Q&A from the audience.
Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth, are forward-looking statements that are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those containing any forward-looking statement. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today, and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties.
All information provided in today's call is as of today, and we undertake no duty to update such information except as required under applicable law. Also, during the call, we'll occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. Mr. Xu will make his remarks regarding current market conditions and company performance in Chinese, which I'll translate into English after he finishes. So now I'll turn the call to our CEO.
Xiang Xu (Chairman and CEO)
Thank you, Anita.
[Foreign language] I am Xiang Xu, Daqo New Energy's CEO. Thank you all for joining today's meeting. In the first half of the year, the photovoltaic industry’s main product prices dropped rapidly. Entering the Q2, we faced even greater challenges. Each segment of the industry chain was basically in a state where sales prices were inverted with costs, which is a low-wave cash cost situation, resulting in the company’s operating performance being under pressure. Because the end-of-quarter spot prices were lower than our manufacturing costs, the net cash value of inventory was lower than the book value. According to U.S. accounting standards, we made a total inventory write-down of $108 million, which had a significant impact on the cost of sales, gross margin, operating loss, and net loss for the quarter. Despite this, we maintained a strong balance sheet with no short-term or long-term debt.
At the end of the Q2, our cash balance was $9.7 billion-$9.97 billion, and cash plus bank acceptance notes totaled $10 billion. In addition, we used idle funds to purchase a total of $14 billion in short-term bank deposits, resulting in total cash and liquid assets of approximately $25 billion at the end of the Q2. On the operations side, in May, we cumulatively commissioned the Inner Mongolia Phase 5B 100,000 metric ton high-purity project, which contributed 12% of total production this quarter. The total production of the company’s two major bases in the two quarters exceeded expectations, reaching 6.49 million-9.6 million metric tons, an increase of 2...
Two thousand six hundredths. Through continuous investment in R&D and commitment to improving product purity, in this quarter our N-type product reached 73%, even for the projects still in the ramp-up phase, N-type product also reached 74%. This gives us more confidence that we can achieve the annual—per kilogram, annual emission reduction of 100% breakthrough for N-type. In addition, our manufacturing cost further decreased in the Q2, down 3% compared to the Q1 of 2024, with average manufacturing cost at $6.19 per kilogram.
Given the current market situation and product prices, we have adjusted the target output and utilization rate of the facility and the full-year production plan. In 2024, the facility's irregular total output is 43,000 tons, 43,000 tons to 46,000 tons. Entering the Q3, we have already started to lower the capacity utilization rate, conduct maintenance and production reduction, as well as manage the actual electricity and coal prices, and reduce cash consumption.
It is expected that for the full year 2024, it will be between 210,000 tons and 220,000 tons. Entering the Q2, the photovoltaic market sentiment was sluggish, and the entire industry chain from silicon wafers—polysilicon, silicon wafers, cells, modules—faced collective pressure and downward trend. Among them, polysilicon prices continued to decline, cost prices increased, and at one point broke through the cash cost line. Polysilicon cost dropped from slightly above CNY 60 per kilogram at the beginning of April to CNY 45-55 per kilogram at the end of April. Since the end of May, it fell below CNY 40 per kilogram. Due to a significant decrease in polysilicon market activity, customer contraction led to a large amount of inventory.
Silicon material inventory relief, from April 18 to 20 days before the end of late spring, then to the end of June this year, with more than a month's unsold inventory. Under price reductions, costs, and high inventory, we began to see many polysilicon companies starting to stop production for maintenance, arrange deliveries, or make plans. According to industry statistics, domestic polysilicon monthly production fell from 19.2万吨 in April to a drop of 46%, 16.2万吨 in June.
Then silicon material supply remained higher than downstream demand, because some companies reduced downstream production plans, reduced workforce, reduced startup rates. July demand dropped to about 50 gigawatts. In July, silicon material production fell further from June, but downstream demand also eased with reduced decline. Therefore, silicon material prices remained stable. We need to see downstream startup rates increase, demand for silicon material recover somewhat, to promote silicon material destocking, destock, inventory accumulation, slow the speed of silicon material inventory accumulation, and for prices to thoroughly rebound.
As a cyclical industry, although we--although we are at the bottom of the cycle this year, signs of turnaround are slightly appearing. Relying on the enterprise's own cash reserves and leading technology to cope with one aspect of the enterprise's winter, but the government has idle capacity, has idle hands, and is also actively guiding photovoltaic companies to reduce production, not blindly expand production, expand capacity in photovoltaic manufacturing, manufacturing projects, and promote the elimination of backward capacity. I also, under the guidance of the Ministry of Industry and Information Technology, the China Photovoltaic Industry Association held a high-quality development forum.
At the beginning of July, the Ministry of Industry and Information Technology solicited opinions from the association on normative conditions for the photovoltaic manufacturing industry. The draft opinions make clear requirements on the capital ratio for new photovoltaic projects, energy consumption indicators for existing and new photovoltaic segments, and so on. The entire industry, over 50 years, we have also experienced several cycles. The current low prices and pessimistic sentiment will ultimately establish a more rational market environment. The winter will eventually pass. The photovoltaic industry after adjustment will in the future also look forward, also head towards healthier, more sustainable development. Thank you.
Anita Xu (Investor Relations Director)
Hello, everyone, this is Anita. I'll now translate our CEO, Mr. Xiang Xu's remarks. The solar industry experienced significant challenges during the Q2, as market prices fell across the solar value chain to below production costs for nearly the entire industry. As end of quarter polysilicon ASP fell below our production costs, we were required, in accordance with accounting rules, to record a non-cash inventory impairment expense of $108 million, because our inventory market value fell below book value. This had a significant negative impact on our cost of revenue, gross loss, operating loss, and net loss. Nevertheless, we continue to maintain a strong balance sheet free of financial debt. By the end of the quarter, we had a cash balance of $997 million, and a combined cash and bank note receivable balance of $1.1 billion.
To take advantage of higher interest rates compared to bank savings, we purchased $1.4 billion of short-term investments and fixed term deposits through the quarter. Inclusive of short-term investment and fixed term deposits, we had adequate liquidity with a balance of quick assets in the amount of $2.5 billion. On the operational front, during the Q2, we started initial production of our 100,000 metric tons Phase 5B polysilicon project in Inner Mongolia plant, which contributed approximately 12% of our total production volume. Overall, the total production volume of our two polysilicon facilities for the quarter was 64,961 metric tons, exceeding our expectations and representing an increase of 2,683 metric tons compared to production volume for the previous quarter.
Through continued investment in R&D and dedicated to purity improvements at both facilities, our overall N-type product mix reached 73% during the quarter. Remarkably, even our Phase 5B, which was still in the ramping up stage, had 70% N-type in the products mix, strengthening our confidence in achieving a 100% N-type by the end of next year. In addition, our production costs trended down further in the Q2, decreasing by 3% from Q1 2024 to an average of 6.19 per kilogram. In light of the current market conditions and pricing, we have adjusted our target production utilization rate for the Q3 and our production plan for the full year.
We expect our Q3 2024 total polysilicon production volume to be approximately 43,000 metric tons to 46,000 metric tons, as we start up maintenance and lower our production utilization rates to support pricing and reduce our cash burn. As a result, we anticipate our full-year 2024 production volume to be in the range of 210,000 metric tons to 220,000 metric tons. During the Q2, solar market sentiments was depressed, and customers showed little interest in purchasing for products. As a result, polysilicon prices kept setting new lows, below production costs and even below cash costs.
Polysilicon prices plummeted slightly from above RMB 60 per kilogram on average in early April, to RMB 40 to RMB 55 per kilogram in late April, and further dropped below CNY 40 per kilogram near the end of May through the end of June. Overall, sales pressure intensified as industry-wide polysilicon inventory increased from approximately 18-20 days of production in early April to more than a month of production by the end of June. With prices declining for weeks to below the industry's cash costs and inventory accumulating, we began to see maintenance and production cuts across the industry. Based on industry statistics, the total polysilicon production volume in China dropped about 16% from approximately 192,000 metric tons per month in April to approximately 162,000 metric tons in June.
However, the supply of polysilicon still exceeded the wafer customer demand, which has dropped to around 50GW in June due to lower utilization rate. In July, although they're having further industry polysilicon production cuts, an uptick in demand from downstream manufacturers will be needed to drive inventory reduction and price recovery. The solar industry has gone through multiple cycles in the past, and based on our previous experience, we believe the current low price market downturn will eventually result in a healthier market, as poor profitability, losses, and cash burn will lead to many industry players exiting the business with some possible bankruptcies. This will bring the inevitable capacity rationalization, eventually solve the current overcapacity, and ultimately bring the solar PV industry back to normal profitability and better margins.
This year will be challenging for China's solar PV industry, as solar manufacturers along the value chain experience weak margins driven by oversupply, excessive inventory, and lower prices. At this point, we may have reached a cyclical bottom, but do not yet see clear signs of potential improvements. We believe that the current situation of selling below cash cost is unsustainable, and that many solar firms are facing significant cash flow challenges, leading to delays in loan repayment and order deliveries. Therefore, we're likely to see some market consolidation with higher cost manufacturers gradually phasing out capacity and exiting the business. So recently, the China Photovoltaic Industry Association has urged central and local governments, financial institutions, and companies to coordinate to accelerate industry consolidation. Chinese policymakers are also calling for the healthy expansion of the solar industry.
China's Ministry of Industry and Information Technology issued a draft in early July that sets rules for solar projects, such as meeting specific electricity consumption requirements and minimum capital ratio for new and extension projects, to ensure the high quality development of the solar PV industry and eliminate outdated capacity. On the demand side, we continue to see strong growth in new solar PV installations in China during the first half of 2024, which reached 102.48GW, representing a 13.7% year-over-year growth rate. Overall, in the long run, solar PV is expected to be one of the most competitive forms of power generation in China, and the continuous cost reductions of solar PV products and the associated reductions in solar energy generation costs are expected to create substantial additional demand for solar PV.
We believe that we're well positioned to weather the current market downturn and emerge as one of the leaders in the industry to capture future growth. So now I'll turn the call to our CFO, Mr. Ming Yang, who will discuss the company's financial performance for the quarter. Ming, please go ahead.
Ming Yang (CFO)
Thank you, Mr. Xu and Anita. Hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's Q2 2024 financial performance. Revenues were $220 million, compared to $415.3 million in the Q1 of 2024, and $637 million in the Q2 of 2023. The decrease in revenue compared to the Q1 of 2024 was primarily due to a decrease in the ASP, as well as decreased sales volume. Gross loss was $159 million, compared to our gross profit of $72 million in the Q1 of 2024, and $259 million in the Q2 of 2023.
Gross margin was negative 72%, compared to 17.4% in the Q1 of 2024, and 40.7% in the Q2 of 2023. For the Q2 of 2024, the company recorded $108 million in inventory impairment expenses, as the company's inventory's market value falls below book value. The decrease in gross margin compared to the Q1 of 2024 was also due to lower ASP, which was partially mitigated by lower production costs. SG&A expenses were $37.5 million, compared to $38.4 million in the Q1 of 2024, and $43.3 million in the Q2 of 2023.
SG&A expenses during the Q2 included $19.6 million in non-cash share-based compensation costs related to the company's share incentive plans, compared to $19.6 million in the Q1 of 2024. R&D expenses were $1.8 million, compared to $1.5 million in the Q1 of 2024, and $2.2 million in the Q2 of 2023. R&D expenses vary from period to period and reflect R&D activities that take place during the quarter. Most of our R&D activities has been around increasing our N-type percentage. As a result of the foregoing, loss from operations was $196 million, compared to income from operations of $30.5 million in the Q1 of 2024, and $214 million in the Q2 of 2023.
Operating margin was negative 89%, compared to 7.3% in the Q1 of 2024 and 33.6% in the Q2 of 2023. Foreign exchange loss was $1.4 million, compared to $0.3 million in the Q1 of 2024, which is attributable to the volatility and fluctuation of the US dollar and Chinese yuan exchange rate during the quarter. Net loss attributable to Daqo New Energy shareholders was $120 million, compared to net income of $15.5 million in the Q1 of 2024 and $103.7 million in the Q2 of 2023.
Loss per basic ADS for the quarter was $1.81, compared to earnings per ADS of $0.24 in the Q1 of 2024 and $1.35 in the Q2 of 2023. Non-GAAP adjusted net loss attributable to Daqo New Energy shareholders, excluding non-cash share-based compensation costs, was $98.8 million, compared to adjusted net income of non-GAAP attributable to Daqo New Energy shareholders of $36 million in the Q1 of 2024 and $134.5 million in the Q2 of 2023. Adjusted loss per basic ADS was $1.50, compared to adjusted earnings per basic ADS of $0.55 in the Q1 of 2024, and $1.75 in the Q2 of 2023.
EBITDA was negative $145 million, compared to $76.9 million in the Q1 of 2024, and $230 million in the Q2 of 2023. EBITDA margin was negative 66%, compared to 18.5% in the Q1 of 2024, and 36% in the Q2 of 2023. Now, on the company's financial condition. As of June 30th 2024, the company had $1 billion in cash and cash equivalents and restricted cash, compared to $2.7 billion as of March 31st 2024, and $2.17 billion as of June 30th, 2023.
As of June 30th 2024, the notes receivable balance was $80.7 million, compared to $194 million as of March 31st 2024, and $798 million as of June 30th 2023. Notes receivables represent bank notes with maturity within six months. As of June 30th 2024, fixed term deposits within one year balance was $1.2 billion, compared to nil in previous periods. For the six months ended June 30th 2024, net cash used in operating activities was $278.6 million, compared to net cash provided by operating activities of $786 million in the same period of 2023.
For the six months ended June 30th, 2024, net cash used in investing activities was $1.7 billion, compared to $496 million in the same period of 2023. The net cash used in investing activities in the Q2 was primarily related to purchase of short-term investment and fixed term deposits, which amounted to $1.4 billion. Regarding the company's purchase of property and plant equipment, for the first six months of this year, this amounted to $292 million. We currently anticipate full year capital expenditures in the range of $550 million to $600 million, which is a further reduction from our earlier plan. Capital expenditure for the second half of 2024 is therefore expected to be in the range of $260 million to $310 million.
Capital expenditure for the year is primarily related to our Inner Mongolia polysilicon project, Phase I and Phase II. For the six months ended June 30th 2024, net cash used in finance activities was $43 million, compared to $477 million in the same period of 2023. The net cash used in finance activity in the Q2 of 2024 was primarily related to dividend payments and shares repurchased by our company's finance subsidiary. That concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Phil Shen with Roth Capital Partners. Please go ahead.
Matt Ingram (Analyst)
Hi, this is Matt Ingram on for Phil. Thank you for taking our questions. You know, looking ahead, can you give us a sense of pricing and cost structure beyond this year? Do you think that there could be some recovery in price next year? And how much more room do you have to lower the cost structure?
Ming Yang (CFO)
Hello, this is Ming, CFO of Daqo New Energy. Thank you for your question. I think in recent months, particularly in August, we've already seen some pickup and recovery of pricing. As Anita said, at the bottom, I guess, in terms of June and July, the pricing was below RMB 40per kilogram. And as of now, pricing is in the range of RMB 41-42 per kilogram. So we saw a range, somewhere in between, RMB 2-3 per kilogram in terms of price recovery. And this is primarily a result of the industry's production reduction and a slight uptick in demand from customers. So, we do not think the current pricing is sustainable.
We do believe that, say over the rest of the year, we should continue to see, likely, between RMB 2-4 kind of price recovery, as production continue to remain at a lower level. And while for next year, we do believe that as demand continue to improve, especially from new markets like Middle East, Latin America, Africa, and again, I think, further market development in China and Europe, for example. So we do think that pricing should recover to at least production costs or maybe normalize to higher production costs, higher than production costs. So we think maybe mid-next year is when we will see normalized pricing for polysilicon.
Matt Ingram (Analyst)
Great, thank you.
Ming Yang (CFO)
A quick follow-up on your cost structure. Sorry. We do think there continue to be opportunity to reduce cost. I think we're seeing very successful cost trends from our Inner Mongolia Phase II facility. I think you saw approximately 3% reduction of cost from Q2 to Q1, and we do expect that Q3 costs should be flat to slightly lower than Q2. We think in the second half, overall, we should see costs somewhere around $6 or even slightly lower than $6. We think this cost structure should continue through next year.
Matt Ingram (Analyst)
Really appreciate the color there. And then can you just talk about the channel inventory in the market? Do you expect that to continue to grow near term, and where do you think that peaks?
Ming Yang (CFO)
Okay, actually, channel inventory has already peaked. So inventory is actually coming down as of August, and we think this should continue to go down. You know, I think primarily as a result of continued reduction in supply. So, we think it just should probably reduce to a much more reasonable level by, say, Q4 or by the end of the year. Right. So unless we see some kind of meaningful price recovery, at least above the industry cash cost, we're very unlikely to see any improvements in production.
Matt Ingram (Analyst)
Okay, great. Thank you for the color. I'll pass it on.
Ming Yang (CFO)
Great. Thank you.
Operator (participant)
The next question comes from Alan Lau with Jefferies. Please go ahead.
Alan Lau (Analyst)
Thanks for taking my question. I would like to know about what is the breakdown on the impairment of $108 million? Because... and also the inventory level at the end of 2Q. Because it appears that the production volume is higher than sales volume for 20,000, so is 20,000 a fair assumption on the inventory level by end of 2Q? And if that is the case, then the impairment of $108 million seems huge, so would like to know the basis on that.
Ming Yang (CFO)
Okay, so, the reality is the $108 million is a reduction in not just finished goods, but also work in process inventory and raw material, which reduces our cost, you know, from our production cost, let's say, is around $6.19 per kilogram to really the current market pricing, which is below RMB 40 per kilogram. And about 60% of that is related to finished goods inventory. Okay. And then looking at our inventory at the end of the quarter, give me a minute. Let me just quickly look that up. Okay, it's approximately 28,000 metric tons.
Okay, so we built roughly 20,000 metric ton of inventory, like you said, during the quarter because of the market conditions and the weak demand. But I think starting in August, we're starting to see a reduction in inventory right now.
Alan Lau (Analyst)
Thank you. So, if 60% is finished goods, so it's basically around, I guess $60-70 million of the impairment is related to the impairment on 28 thousand tons, right? So that's still, like, around $2-3 per kilogram. So, does this seem huge? Because the production costs, the spread between the ASP and the production costs appears to be only $1 per kilogram. So would like to know, did I miss anything from this one?
Ming Yang (CFO)
Okay, I think realistically, if you look at, you know, pricing especially, what it looks, you know, where we have to reduce our inventory to, like somewhere in the range of, say, RMB 37-38 per kilogram, so that's why, let me do a quick math.
Alan Lau (Analyst)
[inaudible] at $38, but your production cost is only at around $40-something. So if the impairment-
Ming Yang (CFO)
Like RMB 45, right? RMB 45 per kilogram.
Alan Lau (Analyst)
Yeah.
Ming Yang (CFO)
So we have right on.
Alan Lau (Analyst)
Around, yes. So that's around RMB 12, and then, but if it's 28,000, then it's still at most like RMB 300 million maybe. So since the impairment amount- [ inaudible]
Ming Yang (CFO)
RMB 50 million. Well, and then there's also raw materials, right? And then work-in-process inventory that's also being reduced.
Alan Lau (Analyst)
I see, yes. So, maybe we will move on to the guidance. So, have noted that the production volume guidance on Q3 and second half has reduced significantly. So, would like to know, first of all, the thinking behind this, is this to preserve cash? And secondly, what do you see, like, the utilization rates of your peers? Do they also cut their production volume as well?
Ming Yang (CFO)
I would say yes. So for most of our peers, I think with the exception of maybe one of the main one, I think most have reduced utilization significantly, I think in light of the current market pricing environment. I think certainly, you know, I think in the current market condition, I think we have to balance, right? I think in the most economical way, in terms of maintaining production, while at the same time minimizing cash burn and cash loss. So we do believe that, the current utilization level that we have, you know, in that we're operating in, in light of, you know, pricing remains at below cash cost, you know, is the most prudent, I think also the most effective way of minimizing the cash burn on the company.
Alan Lau (Analyst)
There is effectively around 70% of utilization, right? Will this impact the production cost or it's fine?
Ming Yang (CFO)
It's actually, I would say, overall, very minimal impact on production cost. I think only RMB 1-2. Yeah, because, let me see, almost 80% of our cost is, was, what we call variable cost, which is-
Alan Lau (Analyst)
Mm-hmm.
Ming Yang (CFO)
-electricity and energy and other consumables, like steam and graphite and the silicon metal.
Alan Lau (Analyst)
Understood. So, regarding to the fixed deposit of an investment of $1.4 billion, so, we'd like to know how long is those investment and how liquid are those? So basically, the question is related to buybacks, because, I'd like to know the liquidity of the company on that front.
Ming Yang (CFO)
Okay. Almost all the fixed investment and term loans were purchased by the Xinjiang Daqo subsidiary, right? So in terms of the U.S. ListCo and our cash balance, it's virtually all of it is in liquid savings accounts or money market funds. And then that $1.4 billion is primarily in either six months I call it six month deposits with Chinese domestic banks, or a higher interest savings product offered by the banks.
Alan Lau (Analyst)
I see. So,
Ming Yang (CFO)
Those maturities within three months.
Alan Lau (Analyst)
All within three months, right?
Ming Yang (CFO)
Yes.
Alan Lau (Analyst)
I see. So my last question is basically on the buyback. The company has launched a $100 million buyback program. I'd like to know if the company is going to continue on the buyback, and what is the planning of the buyback. Like, which price do you think it's appropriate, or do you think the current stock price is the level where you think the company will actually accelerate the buyback?
Anita Xu (Investor Relations Director)
Yeah, thank you, Alan. So in terms of the share repurchase program, we are authorized in the amount of $100 million back in July. In terms, we definitely think that our stock is undervalued, but in terms of the pace, I would say that it will be contingent upon the market conditions. And we'll see more opportunistic in terms of the repurchase.
Ming Yang (CFO)
... So we're going to look opportunities to repurchase as many shares as possible for the company, to maximize the money that we spend in terms of its effectiveness.
Alan Lau (Analyst)
I see, and yes, you have explained, so the cash is already there in the U.S. level, so probably it's going to go, still go ahead in this year, right?
Ming Yang (CFO)
That's our current assumption, yes.
Alan Lau (Analyst)
I see. I see. Thank you. So I, I'll pass on. Thank you.
Ming Yang (CFO)
Great. Thank you, Alan.
Operator (participant)
Again, if you have a question, please press Star then one. The next question comes from Rajiv Chaudhary with Sunsara Capital. Please go ahead.
Rajiv Chaudhary (President)
Good morning. My question, the first question relates to the fully loaded costs that you will incur in Q3 and Q4. If you're reducing the utilization rate, shouldn't that actually increase your fully loaded costs relative to the Q3?
Ming Yang (CFO)
I think interesting, that has to do with the cost structure of polysilicon production, right, right? So roughly, 35%-40% is electricity, and then another 35% is silicon metal, and then majority of other costs is actually mostly consumables, like graphite, the silicon seed rod, and the packaging. So if I look at what we would call, you can call it variable costs, where we don't produce, right? We don't buy silicon metal, we don't buy the consumables. So these represent actually more than 80% of the cost. Okay, the remaining 20%, approximately, 13% is depreciation, right? Which is the non-cash portion.
So yes, right, depreciation will, you know, the depreciation, the overall depreciation expense will be aggregated over a smaller volume, you know, but I think the overall impact is not that much, right? Because it's not a huge portion of our cost, and well, in terms of the rest is labor. Labor, let me see, is roughly 6% of our cost, and then we're reducing labor cost by between 10% to 20%. You know, we're optimizing our staff, staffing level, for example, so I think the overall impact is actually not that significant. As we maintain production, right? Because we're reducing production by what? Maybe 30%-35%, something like that, relative to the previous levels. Yeah.
Rajiv Chaudhary (President)
A second question is related to the difference between production and sales. So, you will produce two hundred and ten to two hundred and fifteen, two hundred and twenty thousand tons. But, the sales are likely to be higher than that, right? I mean, if you expect inventories to get back to normal by the end of the year, then, sales are likely to be, I don't know, two forty to two fifty thousand. Is that the right way to look, think about it?
Ming Yang (CFO)
I can only say we. Well, that's, you're talking about the full year, right? But I think realistically, in the first half, we did build inventory, so volume was less than production.
Rajiv Chaudhary (President)
Right.
Ming Yang (CFO)
We expect the second half, we will see more sales than production. Right?
Rajiv Chaudhary (President)
Right.
Ming Yang (CFO)
But depends-
Rajiv Chaudhary (President)
Right.
Ming Yang (CFO)
Again, it's early, right? It's only August, so it really depends on how much more sales we can achieve relative to production. Yeah.
Rajiv Chaudhary (President)
I see. But for the year as a whole, you expect sales to be greater than production, right?
Ming Yang (CFO)
It's difficult to tell, to be honest. Difficult to tell. It's really up to Q4 performance.
Rajiv Chaudhary (President)
I see. Okay. And can you give us any specific examples of companies that are of competitors who are actually closing shop as distinct from just reducing their output right now?
Ming Yang (CFO)
Well, I think one well-known case that happened recently is a company called Runyang, which I think they have a nameplate of over 100,000 metric ton. And that company was in financial crisis, where they had problems repaying their bank loans, and they have major issues repaying their suppliers and even paying interest. So our understanding is they're being consolidated by Tongwei. And Tongwei is doing due diligence on them right now. Yeah, so I think they have significantly reduced production. And then we know of two other cases where... We're not gonna say the company's name, but one, a new entrant actually built a 50,000 metric ton facility, actually never even started. That facility remains idle. It's complete and idle. And then there's another-...
Peer competitor, I think they've claimed they've built approximately 100-200,000 metric ton capacity, but our understanding is, the volume that they're selling to the market is actually fairly trivial. Yeah, so those are the cases that we know of right now.
Rajiv Chaudhary (President)
When you look at the year as a whole, I mean, 2024 as a whole, do you think that with the sales that you will do, which will be, let's say, around your total production levels, that you would have gained or lost market share in 2024?
Ming Yang (CFO)
I think, at least based on the latest industry production, so even though we reduced utilization, I think we're still maintaining market share. I think based on our current production level, we're roughly, I'd say 15%.
Rajiv Chaudhary (President)
And, and, but-
Ming Yang (CFO)
15% of the market.
Rajiv Chaudhary (President)
But your total output would be about 10% higher than last year. Or I should say, maybe your total sales will be about 10% higher than last year, right? So, do you think that that is roughly the growth rate of the market this year, 10%?
Ming Yang (CFO)
I think it really depends on, especially Q4, because if you look at our production and sales volume in the first half, especially for Q1, it's still relatively healthy. It's really Q2, it came down. And then at this point, we're expecting our Q3 sales volume and shipment to be above Q2, and then Q4 is looking, at least for now, at a positive trend. So I would say, if I look at industry statistics, I think it's still expecting roughly 20% kind of improvement.
Rajiv Chaudhary (President)
Okay.
Ming Yang (CFO)
Maybe more than 20%.
Rajiv Chaudhary (President)
Thank you.
Ming Yang (CFO)
Yeah. Okay, thank you.
Rajiv Chaudhary (President)
Okay, thank you.
Operator (participant)
This concludes our question-and-answer session. I would like to turn the conference back over to Anita Xu for any closing remarks.
Anita Xu (Investor Relations Director)
Thank you everyone, again, for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you and have an awesome day. Goodbye.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.