Silver market supply and demand trends for 2016

The following edited report was released by the Silver Institute. For more information, please visit www.silverinstitute.org.

Silver is prized for its dual role as a monetary asset as well as an important industrial metal used in a 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 demand

Silver industrial demand, the largest component of total silver off-take, 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% of total physical silver demand.

Silver’s use in photovoltaics for solar energy is projected to increase in 2016 and surpass the previous peak of 75.8 million oz. which was set in 2011, with global solar panel installations expected to grow at a high single-digit pace. Moreover, silver’s use in this application may account for more than 13% of total silver industrial demand in 2016, up from 1.4% a decade ago.

Silver demand from ethylene oxide (EO) producers could jump to over 10 million oz. this year, in a more than 25% increase over 2015. Ethylene oxide is critical in making plastics, solvents and detergents. This growth comes off a robust 2015, when demand grew by well over 40%. Most demand is expected from new and/or expanded EO plants in China. China could account for 80% of silver requirements for EO capacity in 2016.

Jewellery fabrication is expected to increase 5% in 2016, in contrast to a modest contraction last year. While the market will likely see a decline in Chinese silver jewellery demand — which accounted for 16% of the 2015 total for silver jewellery fabrication — growth in other countries should more than offset China’s lower demand.

Coin demand could be robust once again in 2016, after a record 130 million oz. demand last year. Demand will stay high this year as investors take advantage of relatively lower metal prices in the first few months. Increased interest in safe haven assets, as already seen in the year’s first weeks, will also be positive for physical silver investment demand. In 2015, coin demand made up 12% of total physical demand.

Silver exchange-traded fund (ETF) holdings fell 2.8% by the end of 2015, compared to year-end 2014. The decline in silver ETF holdings was smaller against gold’s 8% contraction. Silver ETF holdings should stay in stickier hands than those of gold’s investors, which shows that silver ETF holdings have more retail investors.

Indian silver demand in 2016 is expected to grow on the back of increased investor interest and growth in jewellery, decorative items and silverware fabrication. India, long a mainstay of global silver demand, imported a record 228 million oz. silver bullion in 2015. Imports rose after a decrease in scrap flows, calling for new supply to meet annual fabrication requirements, which is a trend that is projected to continue.

Silver supply

Global mine supply production could fall in 2016 as much as 5% year-on-year. This would represent the first reduction to global silver mine production since 2002. The lower price environment gave little incentive for producers to invest in expanding capacity at operations. Looking ahead, many analysts expect global silver mine production to fall through 2019, as primary silver production drops from mature operations.

Scrap supply, which has declined for several years, should weaken more in 2016.

This outlook is based on losses in photographic scrap, a depleted pool of near-market silverware, jewellery 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 end-of-life items.

Silver market deficit

The silver market deficit (total supply less total demand) could widen in 2016, drawing down on above-ground stocks. The larger deficit would be driven by a contraction in supply.

Silver price

The silver price could find solid ground this year. As of Jan. 26, silver prices are up 3.7% from the end of last year. This price appreciation comes on the back of more safe haven demand amid volatile and weakening equity markets worldwide.