- February 03, 2016 -
Reprinted courtesy of The Silver Institute
(Washington D.C. – January 28, 2016) Silver is prized primarily for its dual role as a monetary asset as well as an important industrial metal utilized in a wide-range of existing and growing applications. Factors driving the silver market include supply and demand fundamentals, global economic performance, geopolitical issues, interest rates, currency fluctuations and investor sentiment, among others. Against this backdrop, the Silver Institute offers the following thoughts on this year’s silver market trends.
Silver industrial demand, the largest component of total silver offtake, is set to increase its share of total demand in 2016. Silver is incorporated into a variety of industrial applications and is generally price-insensitive given the small quantities that are used in some applications and its critical contribution to these applications’ functionality. In 2015, industrial fabrication demand accounted for an estimated 54 percent of total physical silver demand.
Silver’s use in photovoltaics for solar energy is projected to rise in 2016 and surpass the previous peak of 75.8 Moz (million ounces) set in 2011, as global solar panel installations are expected to grow at a high single-digit pace. Moreover, silver’s use in this application may account for more than 13 percent of total silver industrial demand in 2016, up from 1.4 percent a decade ago.
Silver demand from ethylene oxide (EO) producers is expected to jump to over 10 Moz this year, a more than 25 percent increase over 2015. Ethylene oxide is critical in the production of plastics, solvents and detergents. This growth comes off a very robust 2015, when demand grew by well over 40 percent. The bulk of demand is expected to continue to come from new EO plants and expansions at existing ones located in China. China is expected to account for an estimated 80 percent of silver requirements for new EO capacity in 2016.
Jewelry fabrication is expected to increase by 5 percent in 2016, in contrast to a modest contraction last year. While the market will likely see a decline in Chinese silver jewelry demand, which accounted for around 16 percent of the 2015 total for silver jewelry fabrication, growth in other countries should more than offset China’s slippage in demand.
Coin demand is expected to be robust once again in 2016, following a record 130M oz of demand last year. Demand will remain elevated this year as investors take advantage of relatively lower metal prices in the first few months of the year. Increased interest in safe haven assets, as already seen in the first few weeks of the year, will also be positive for physical silver investment demand. In 2015, coin demand made up an estimated 12 percent of total physical demand.
Silver exchange-traded-funds (ETF) holdings fell by 2.8 percent by the end of 2015 compared to year-end 2014. Notably, the decline in silver ETF holdings was smaller against gold’s 8 percent contraction. Silver ETF holdings should continue to remain in stickier hands than those of gold’s investors, partly a reflection that silver ETF holdings have a larger proportion of retail investors.
Indian silver demand in 2016 is expected to grow on the back of increased investor interest and growth in jewelry, decorative items and silverware fabrication. India, long a mainstay of global silver demand, imported a record high 228 Moz of silver bullion in 2015. Imports rose largely due to a decrease in scrap flows, necessitating new supply to meet annual fabrication requirements, a trend projected to continue.
Global mine supply production is projected to fall in 2016 by as much as 5 percent year-on-year. This would represent the first reduction to global silver mine production since 2002. The lower price environment provided little incentive for producers to invest in expanding capacity at existing operations. Looking further ahead, many analysts expect global silver mine production to fall through 2019 as primary silver production from more mature operations begins to drop.
Scrap supply, which has been on the decline for several years, should further weaken in 2016. This outlook is based on additional losses in photographic scrap, a depleted pool of near-market silverware, jewelry and coins, and slowed scrap flows from industrial sources. Industrial scrap such as electronics cost more to recycle and the current price environment has weighed on the profitability of recovering silver from these end-of-life items.
The silver market deficit (total supply less total demand) is expected to widen in 2016, drawing down on above-ground stocks. The larger deficit is expected to be driven by a contraction in supply.
The silver price is expected to find solid ground this year. As of January 26th, silver prices are up 3.7 percent from the end of last year. This price appreciation is on the back of increased safe haven demand amid volatile and weakening equity markets across the globe.
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