When something is high in demand but low in supply, we can normally expect prices to rise….
Silver has been mined for thousands of years. But for most of the 20th century it was the poor man’s precious metal, its value eclipsed by the enduring lure of gold.
The first big revolution in silver came in 1492 with the discovery of the New World, which opened up mining of the metal on a scale not previously seen. In the centuries that followed Hernán Cortés and the conquistadors’ destruction of the Aztecs, Peru, Bolivia and Mexico accounted for three-quarters of all world production and trade in the metal.
Today, more than 877m ounces of silver are mined annually and the metal is increasingly being employed in new industrial processes. A major catalyst for demand over the next decade will be in the production of solar energy.
Silver is a key component in crystalline silicon photovoltaic (PV) cells. According to IHS, demand for solar power is set to increase by 30pc to 57 gigawatts of electricity in 2015. China alone is expected to install something in the region of 17 gigawatts of solar capacity by the end of the year, creating huge potential demand for silver.
The majority of PV cells use silver paste in their construction and that industry alone is expected to account for 70m ounces of supply through to the beginning of 2016. Silver demand for the PV industry grew by about 7pc last year and that rate of growth is expected to increase over the next decade. Despite the bright long-term demand picture for silver, prices for the metal have slumped over the past three years from an average of $61 per ounce to just under $17 per ounce. A major cause of this drastic drop has been China, which is the world’s major industrial user. Like all commodities which depend on Chinese factories, silver has suffered.
Solar industry is creating demand for silver
According to the latest World Silver Survey published by the Silver Institute and ThomsonReuters: “A combination of a slowdown in Chinese growth, a move away from commodities as an asset class, a stronger US dollar, and a challenging year for most precious metals in general, led to a lower average annual silver price.”
But long-term prospects could improve should a binding agreement be reached among major nations in Paris this year on climate change.
Such a deal would result in already strong demand for PV cells increasing further as major developing economies such as India and China increase the contribution that solar makes to their overall power generation network. A bigger problem than demand could be future supply. After years of growth in supply to meet this new demand for renewable energy, silver production is expected to stall this year as part of a wider slowdown among commodities.
Silver mine production grew by just 5pc to 877.5m ounces last year, according to the ThomsonReuters survey. “This growth is attributable to stronger output from the primary silver and copper sectors, new projects that came online last year and significant production gains in Central and South America,” the report said.
Primary silver mine production grew by 8pc and accounted for 31pc of global silver mine supply. The report said that Mexico was the world’s leading silver producer, followed by Peru, China, Australia and Chile.
However, analysts fear that a lack of investment by silver miners could see production plateau over the next few years at a time when demand from the fast-growing solar power industry is expected to pick up rapidly. According to the report, total physical silver demand hit 1.07bn ounces last year, the fourth highest level recorded since 1990. This was a 4pc decline from the 2013.
“A main factor in the decrease in physical demand was a fall in coin and bar demand from 2013, which had been a record year,” said the report.
Of course, silver will always be second to gold in the eyes of precious metals investors. But like its cousin, copper, it is a commodity that will grow dramatically in importance as the world searches for new sources of renewable energy.