Silver Forecast: Deficit of 57.7 Million Ounces in 2015

The silver price has certainly taken some knocks this month, but that doesn’t mean the metal’s fundamentals are shot. In fact, in a report released Tuesday, The Silver Institute states that the silver market should see a 57.7-million-ounce deficit in 2015, largely on the back of increased physical demand. 
To explain why a deficit is in the cards this year, The Silver Institute breaks down its current silver forecast for demand. Here’s an overview of the key points covered in its report.

Silver forecast: industrial sector to drive demand

Silver demand was strong across a variety of sectors in the first half of 2015. In particular, its “role in industrial applications is looking brighter in several important areas.” According to The Silver Institute, those include:

• Renewable energy: Demand for silver from solar panel producers is expected to increase by 8 percent this year, hitting 65 million ounces. The increase will largely be driven by the US, which saw a 76-percent rise in solar panel installations in Q1 2015 compared to the year-ago period. That said, China and India also have “aggressive solar installation plans” in the works.

• Ethylene oxide: Silver demand from ethylene oxide producers is expected to rise a whopping 61 percent in 2015 as Chinese demand increases. Nevertheless, demand for the metal from this sector will still hit just 8.6 million ounces.

• Electronics: The electronics industry is expected to take in 0.4 percent more silver in 2015 than it did in 2014. The Silver Institute sees declining demand from computer and tablet producers being offset by higher demand from mobile phone makers.

Of course, one of silver’s key characteristics is that it’s used for investment as well as industrial purposes. This year, retail investor demand for silver has remained “sturdy” despite the “challenging precious metals investment market,” as per The Silver Institute.
More specifically, the organization states that during the first half of the year, global silver bullion coin sales came to 43.6 million ounces — though that’s 6 percent less than the year-ago period, it’s still the fifth-highest level of global sales for H1 ever recorded. In fact, demand was so high that it prompted suspensions in silver bullion coin sales at the US Mint, as well as Australia’s Perth Mint.
Encouragingly, The Silver Institute expects investors to continue steadily buying silver as the year continues. It notes that from the beginning of the year through to July 24, global silver ETF holdings increased by more than 4.7 million ounces. That, it believes, indicates that ETF investors “likely have a more positive longer-term view of the silver price.”

Investor takeaway

It’s clear from The Silver Institute’s report that silver demand remains healthy. And with the market poised to enter a deficit in 2015, that means supply of the metal likely won’t be able to keep up with that demand.
That of course raises the question of whether the silver price will increase as a result — after all, generally high demand in the face of low supply leads to a higher price. However, unfortunately for silver bugs, that may not end up happening.
To see why, one need only consider the fact that, according to The Silver Institute, the silver market was in deficit in both 2013 (by 111.9 million ounces) and 2014 (by 4.9 million ounces). The average annual silver price was $23.79 per ounce in the former, and $19.08 in the latter. Meanwhile, the market was in surplus in 2012 (by 41.9 million ounces), but hit its second-highest average annual price ever.
The upshot is that silver market deficits do not necessarily lead to higher silver prices. And while that might seem confusing, there is a reason for the disconnect — explaining the situation earlier this year, silver guru David Morgan commented, “producers have never met demand in the last 20 years. There’s always more demand than what’s mined. The way that it balances is there’s so much recycling.”
With that in mind, investors should not get overly hopeful that the anticipated 2015 silver deficit will lead to a higher silver price. That said, in today’s tough markets it’s certainly good to see that demand for the metal remains strong. As of 2:45 p.m. EST Tuesday, the silver price was sitting at $14.65 per ounce.
 
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.