Recovery in sight for silver

Rising demand from solar power industry and 3 years of deficit should support prices

Silver prices could revive on falling production and rising demand from solar power equipment makers, for use in photovoltaic films.

Estimates suggest 2016 will be a fourth year of deficit, leading to a revival in silver prices that are now trading at multi-year lows. Silver prices have fallen by eight per cent in 2015 to Rs 34,290 a kg. International prices are down nine per cent to $14.3 an oz.

The Silver Institute has projected the physical silver market will see a deficit of 42.7 million oz (1,328.1 tonnes) in 2015, the third consecutive year of shortfall.

"While such deficits do not necessarily influence prices in the near term, multiple years of deficits can begin to apply upward pressure to prices in subsequent periods," says the Silver Institute, adding that 2016 may also end in a deficit. The deficit in 2013 was 108.3 million oz and in 2014, 34.8 million oz.

A major demand boost for silver is photovoltaic films. In 2015, silver supply from base metal producers as a byproduct fell to 147.2 million oz from 184.1 million oz.

Erica Rannestad, senior Analyst in the GFMS team at Thomson Reuters, says, "In 2016, we expect total silver demand to fall one per cent (to about 1.046 billion oz) and total supply to fall below 1 billion oz." In 2015, the total supply is estimated at 1.0144 billion oz and demand at 1.057 billion oz.

While 2015 is likely to end with an average silver price of $15.5 per oz, Rannestad expects 2016 to see an average price of $16.80, 17.5 per cent higher than the current $14.30. In India, this will translate to a price of Rs 40,000 a kg.

"Silver demand from the photovoltaics industry is forecast to increase 17 per cent to 74.2 million oz this year. Solar power will make up 13 per cent of total industrial demand, up from 11 per cent in 2014 and just one per cent a decade ago," Rannestad says.

  This has almost replaced the falling demand from photography. According to GFMS data, in 2001 photography consumed 213.1 million oz of silver, representing 38 per cent of industrial fabrication, but in 2015 this came down to 8 per cent (or 44.2 million oz). Given the world's emphasis on reducing emissions, the solar power industry should continue to grow rapidly. At a little over 15 per cent a year of growth, it should boost demand for physical silver by 40 million oz in three years.

The Silver Institute projects demand from ethylene oxide producers as another boost. Though much lower than the demand from solar power, it is predicted to increase 49 per cent to eight million oz in 2015.

India's silver demand has also been rising with imports scaling new records year after year. In 2014, according to GFMS, India's imports touched a record 6,843 tonnes. Notably, in the first 11 months of 2015, imports have crossed last year's level.

Domestic silver demand is largely for silverware and jewellery, but investment demand is also expected to recover. "Silver bar demand in India dropped a hefty 26 million oz this year. This decline was dominated by selling by short-term market participants. However, we can see a recovery next year in bar investments as the price strengthens," says Rannestad.

Investment trends in silver have varied sharply this year. In North America and Europe bargain buying dominated the scene and coin demand reached record levels. As a result, bar demand surged. In India, lower prices resulted in declining investment. China's weaker growth resulted in marginal growth in income and hence demand was muted.

Having said that, favourable fundamentals in terms of rising physical demand and consecutive deficits should support silver prices. The key risk is a sharp deceleration in the Chinese economy or in global investment demand.