Silver's Long-Term Future As An Industrial Metal Tends To Be Underestimated

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Includes: AGQ, DBS, DSLV, DULL, PSLV, SHNY, SIVR, SLV, SLVO, USLV, USV, ZSL
by: Zoltan Ban
Summary

In the past few years we have seen a period of industrial thrift when it comes to silver use, due in large part because of the last price spike.

While this trend gave rise to the notion that silver is likely to see weak demand from industrial applications, in reality this period made its use economically viable.

The period where thrift in use outpaced demand for industrial products such as solar panels is most likely over.  The opposite is likely to be the case going forward.

There have been many worries recently in regards to Silver's outlook in terms of its future as an industrial metal. News that solar panels for instance will not use nearly as much of it as previously thought, given technological innovations put a damper on expectations from what is now silver's main source of industrial demand. There have been some suggestions that the solar industry may be able to go silver-free altogether, although at the moment that looks very unlikely to happen. I think that it is especially unlikely to happen, precisely because silver is increasingly making up a smaller portion of the overall cost of a solar panel. In effect, the very innovations that are cutting its use are also making it more viable.

It is said that a solar panel may only need about a fifth of the silver content it needed just a decade ago, thanks to innovative solutions meant to cut back on the cost of the silver content. This certainly makes sense, because silver is by no means one of the cheapest industrial metals out there. But we should not lose sight of the longer-term prospects of silver demand stemming from this industrial application, and simply assume that silver use thrift will continue to outpace demand for solar panels. As I pointed out in an article I wrote a year ago called "Not Enough Silver To Power The World Even If Solar Power Efficiency Were To Quadruple", even if we were to assume a further cut into silver use per unit of energy produced from solar to one quarter of current volumes, there would still not be enough silver in the ground and above ground to meet the world's energy demand through only solar power. In fact, even assuming that recoverable silver under ground is still far more plentiful than current reserves estimates would suggest, it would still not be enough.

Of course, we cannot assume that the world needs to be powered solely by solar panels. On the other hand, we cannot assume that all the silver above ground as well as still remaining bellow ground will exclusively be allocated to solar panel production either. Silver remains a popular ornamental metal, and it also has a number of other industrial applications, such as in brazing, medical instruments, water purification, electronic products and so on. And as I pointed out over a year ago, the yearly silver demand for new solar panels as old ones are decommissioned or gradually lose output would almost equal current yearly mined output if the world were to run exclusively on solar. The purpose of pointing out these hypothesis is of course meant to highlight the fact that even when factoring in recent as well as future improvements in solar power efficiency & silver content declines, there is still a lot of silver demand growth that will likely stem from more and more demand for renewable energy sources, such as solar.

Source: Bullionvault.

As we can see silver demand coming from solar panels experienced a significant drop after 2011, mostly stemming from the price spike that silver experienced along with gold. Naturally, industries responded by reducing reliance on silver, cutting the amount of silver needed per solar panel to a fifth of previous levels. But we should keep in mind that this is what in effect qualifies as a one-time event. For instance, a similar price spike in silver prices might not have a similar effect on industry going forward as it did the last time around. Given that a standard solar panel currently takes about 20 grams of silver, which is only a fifth of how much was needed back in 2011, an increase in the price of silver to $50 from current prices would increase the production cost of a solar panel by about $20, whereas the cost increase in 2011 would have been about $100 dollars per panel as a result of a similar silver price increase. In effect, the innovation that was supposed to kill a very important portion of silver's industrial demand, in fact made it economically viable.

While the likes of Natcore produced some hope in regards to solar panels being viable without silver, replacing it with copper or aluminum, it seems none of those initiatives have gone very far to date. Such R&D work was carried out in response to the price spike in silver prices that happened half a decade ago. The fact that such initiatives had very little success is in my view indicative of the fact that odds of silver being outright replaced in the solar power industry are rather low.

I also think that given the magnitude of efficiency gains in terms of how much silver is needed per panel produced, the likelihood that we will see further dramatic cuts in silver use per panel is greatly diminished going forward. Some improvements are sure to continue to happen, but the overall long-term pace of those improvements might not come close to outpacing the growth in solar panel installation in coming years & decades, as it did in the past few years.

Source: IEA.

As we can see, while in previous periods solar power did not dominate renewable growth in electricity generation, in the current 2017-2022 period, it is set to play a dominant role. Chances are that solar panels installed in 2022 will not use significantly less silver compared with panels installed last year. In other words, the silver content has already been stretched quite thin. This therefore means that while there is a chance that I may be wrong, we are likely to see significantly higher silver demand from solar power generation in coming years.

We should also keep in mind that we are now getting closer to the point in time where we will start to see increasing demand for solar power generation capacity replacement. Solar panel efficiency degradation tends to be about .5%-1% per year. That may not sound like much, but as we get more and more installed capacity, the volume of solar panels that need to be installed, just to keep output steady is set to become more and more significant with every year that passes. In addition to the decline in efficiency, eventually panels may get damaged, or simply be considered to have too low of an output to justify using up the space, therefore replacement may eventually be considered. We are probably getting close to the point where solar panels installed in the 1990's or even earlier are likely to need replacement. It may be a very small volume right now, which is why few people have even bothered to factor it in, but it is an issue that is just on the horizon.

Silver supply outlook.

There is no doubt as far as I am concerned that silver demand is likely to be rather healthy in coming years & decades. Aside from brighter prospects from the solar power industry, there is the brazing industry, which should also improve in the longer term as many countries around the world industrialize. There is the electronic device demand, which may seem like it may not count for much, given the small amounts of silver that goes into most gadgets, but it precisely the small proportion of silver in the overall cost that makes it unlikely for silver to be replaced, as is increasingly the case with solar panels. Jewelry demand is a cultural factor, as are other ornaments, therefore it can be very volatile & unpredictable, but it is also one of the main demand factors. One thing that could really make a big difference is investor demand. It goes without saying that as industrial demand for silver will increase going forward, so will the desire to hoard the metal, given its supply limits.

As far as supply goes, I personally think that at current price levels prospects of mined supply increasing significantly are low. In the past few years, mined silver supply has stagnated.

Source: Statista.

As we can see from the yearly statistics, the last price spike did help to create a significant jump in mined silver supplies in 2012, followed by further gains in the next two years. For the past three years however production has been trending down. I expect that it will continue to be the case in coming years, unless a significant increase in silver prices will occur. We should keep in mind the fact that silver production occurs mostly as a bi-product of other metals mining. It is important to remember that, because it in effect means that a price increase can only affect about a third of silver mining activities. I doubt that many companies involved in copper mining would start mining more copper, just to have more silver to sell as a bi-product.

Due to a number of factors converging in the past few years, which created some slack in demand, the production decline of the last few years has not been much of an issue. I doubt that this will continue to be the case going forward, given that those trends seem to have largely played themselves out. While the dramatic decline in the amount of silver used in a solar panel may have been the trend that affected silver demand in the industry, as it largely outpaced the growth in solar panel demand, I expect the opposite will occur going forward. While I am not certain about the short-term timing, I do believe that for the longer term silver prices will be mostly pushed up due to growing industrial demand. All the industry efforts to cut silver use mostly amount to a short-term period of weak demand, while for the longer term, they effectively ensured that silver remains a viable choice for a wide variety of applications, even if the price of silver will go higher.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own physical silver.