India has seen several years of high silver imports with the total import in the past three calendar years crossing 20,000 tonnes. However, the prices have started rising now, which could impact imports. Cameron Alexander, manager (precious metals demand), Asia-GFMS at Thomson Reuters, tells Rajesh Bhayani that for India, silver imports will be lower this year. Edited excerpts:
What do you think about the price outlook for 2016 and going forward?
Prices are forecast to average $15.91 an ounce (oz), a 1.5 per cent increase over the previous year. Prices this year have increased by 28 per cent from $14 at the beginning of the year, though it has given back eight per cent of these gains as of last week. These declines are a result of short-term profit taking and are expected to continue to trend higher through the fourth quarter. In the fourth quarter, silver prices could well average 14 per cent higher than the $14.77 an oz average in the fourth quarter of 2015. The main factors expected to drive prices in 2016 are buying of futures, options and exchange-traded products (ETPs) in response to safe haven activity in gold and strengthening supply and demand fundamentals.
The silver market is forecast to realise an 84 Moz (million ounces) deficit in 2016, which is smaller than the 130 Moz deficit in the 2015. The revival of ETP demand, however, is expected to result in a net balance of 112 Moz, which is nearly flat from last year’s balance. Much of the decline in retail investment in 2016 will be offset by a 28 Moz increase in silver ETP holdings. In 2016 through the end of April, ETP holdings were up 32 Moz and, hence, have reversed the losses of 2015. While some profit-taking is expected, the bulk of the purchases made year-to-date are expected to be retained. Looking ahead, we forecast annual average prices to rise to annual averages of $17.5 and $17.7 in 2017 and 2018, respectively.
How is the Indian import trend in 2016? Will it continue like 2015? As there is no excise on silver jewellery, will it help increase demand?
Silver imports in the first four months were 1,509 tonnes against 2,625 tonnes for the same period last year. Higher prices have seen destocking by domestic fabricators and investors at the higher price level. The spot price in India has been trading at a discount. Our estimate this year is silver imports will be approximately 5,000 tonnes against last year’s 7,954 tonnes, with volumes picking up by September.
It would have been a Herculean task for excise officials and manufacturers if there was to be an excise duty applied to silver jewellery given the various stages of work in manufacturing payals. It is probably good there isn’t one for silver. Nevertheless, it might not have hampered the demand in any case. Another serious challenge would be the mandatory hallmarking for silver jewellery and articles.
The fall in metals production due to cuts might eventually get restored and silver production as a by-products might also increase. Will the silver market continue to remain in deficit after that?
Silver demand for coins, bars, jewellery, photovoltaics, and ethylene oxide hit record levels last year, culminating in a record high 1.2 billion oz of total physical demand. This three per cent growth in total demand was curbed, however, by a cumulative 23 Moz fall in electronics, brazing alloys and solders, and photography. Weaker economic and industrial activity, particularly in developing countries, and structural industry-specific shifts caused these declines. That said, what is notable is the rapid expansion in the photovoltaic industry. The increase in physical demand far outweighed the rise in mine production, resulting in the market’s third largest deficit on record, of 130 Moz, in 2015. This deficit marked the third consecutive year of a net shortfall of new supply over demand. Last year’s deficit was also 60 per cent larger than that of the previous year. This year, we estimate the market to be in deficit of 56 Moz and in 2018 of 123 Moz, which will be the highest since 2013.
Mines supply hit a fresh record high last year, as miners increased throughput to offset weaker prices. The total cash costs of silver net of by-product credits fell for the third consecutive year in 2015, by three per cent to $6.66 an oz.
Can the growth of the solar sector (silver is used in solar cell manufacturing) add to the demand pressure to the extent that it would take prices to historic high?
The 18 per cent drop in silver’s annual average price ($15.68/oz) resulted in record high physical demand on the back of bargain buying of physical silver investment products and the continued rapid expansion of the photovoltaics industry. This can be particularly attributed to a surge in demand from China - the world’s largest solar cell producer. On the other hand, the government has decided to lower the funding to the industry from 2016 to eliminate less efficient energy suppliers and encourage companies pursuing sustained growth.
What is the production forecast for mines for the near term?
Having reached a new peak in 2015, silver supply from mines is expected to see a two per cent fall this year. In 2017 and 2018, the decline is forecast to be three and four per cent, respectively. This outlook comes as a consequence of producers having reduced capital spending to protect their margins. Copper mines are the only sector expected to contribute a higher volume of silver during 2016. This exception to the general silver production trend is attributable to a number of recently commissioned copper operations ramping up to full capacity during this year. The lead/zinc sector suffered the most substantial losses during 2015, and this broad trend is expected to continue for next three years.