Investment demand for silver often takes center stage, but industrial demand should not be overlooked. In 2011, industrial demand was strong for the first three quarters, but then saw close to a 4 percent decline and fell sharply towards year end. A newly released report from Thomson Reuters GFMS states that the Silver Institute commissioned GFMS to conduct an investigation against a backdrop of uncertainty carried over from 2011 to 2012. The results reveal a decline and recovery cycle that will see industrial demand reach a new high in 2014.
GFMS states that not only does the industrial sector play an important role in consumption, but it is also crucial in offsetting the declining use of the white metal in photography and silverware. These two segments accounted for over one-third of silver fabrication demand in 2000, but fell to only 13 percent in 2011.
At the turn of the the millennium, industrial offtake of silver was 383.3 million ounces (Moz). Over the past decade, demand has risen on all but two occasions. The bursting of the dot-com bubble led to a pronounced drop in 2001, although a recovery phase quickly emerged the next year, notes GFMS.
Then in 2009, there was a recession-induced decline that eclipsed that of 2001. Again, recovery was seen the following year. In 2010, industrial demand hit a new record high of 499.6 Moz.
One of the questions the Silver Institute aimed to answer in commissioning the report was whether current conditions will be a repeat of 2009′s downturn. The GFMS report reveals similar conditions are at hand.
With an expected decline of 6 percent in 2012, industrial demand will fall to about 454.4 Moz, states GFMS. Recovery is expected to begin as we approach year end and should carry over into 2013. Modest growth next year should boost offtake to 484 Moz. In 2014, GFMS forecasts a further rise of about 6 percent, paving the way to a new record high of 511.6 Moz.
Drivers of rising industrial demand
One of the factors driving the forecasted improvements is demand for ethylene oxide. The production of that and other intermediaries will help the US run counter trend to other industrialized nations, which GFMS predicts will see slow growth.
The largest end use of silver is the wide-ranging electrical and electronics sector, states GFMS.
“The most rapid growth in these sectors is set to come from emerging markets such as India and China, where rapid advances in living standards mean such products have become increasingly more affordable as well as desirable.”
In absolute terms, GFMS expects China to achieve successive record highs in terms of its industrial offtake of silver over the forecast period.
Robust growth in demand from the auto sector is also expected, and will help further underpin the performance of the electrical and electronics segment.
Auto production is expected to rise, boosting silver usage due to the growing number of units. However, auto-related silver demand has already outpaced production because of the growing number of electronic accessories in each unit. GFMS expects this trend to continue as features once reserved for luxury vehicles become more standardized.
Improvements in the economic backdrop are also expected to boost silver demand from the housing and construction industries.
Considerations of the forecast
GFMS’ growth forecast takes both current and future circumstances into consideration.
Substitution and thrifting have gained importance in recent years as industrial fabricators have contended with rising — and at times volatile — silver prices, GFMS notes. There is a threat over the long term that companies will aim to reduce the amount of silver used or replace it with cheaper alternatives. But, the firm also notes that silver’s unique properties act as a limiting factor in these efforts.
The firm recognizes that the impending fiscal cliff in the US poses a risk to its view, but assumes some type of resolution will occur before the end of the year.
GFMS took into consideration this year’s global slowdown, which was impacted by recessionary conditions in Europe, a faltering recovery in the US and sluggish economic growth in key emerging markets. However, the firm expects monetary easing to boost global GDP in 2013.
GFMS futher recognizes that India’s industrial demand is price sensitive.
“Although we expect to see a record total in 2014, the sluggish economic performance, combined with elevated rupee silver prices, explain why the 2013 forecast total is only modestly higher compared with the previous peak achieved during the late 2000s,” notes GFMS.
Overall, industrial offtake in 2014 will account for 57 percent of total fabrication demand, its highest contribution in GFMS’ 25-year data series. At that rate, industrial demand will eclipse all other fabrication segments, which include coins and metals, jewelry, silverware and photography.
Securities Disclosure: I, Michelle Smith do not hold equity interests in any companies mentioned in this article.