The Case For Silver Investment

By Michael DiRienzo, The Silver Institute

The Case For Silver Investment

Silver prices have risen in the first half of the year, breaking through to a high of uS$18 in late summer. What is the impetus that has pushed the investment into silver this year and where do you see prices settling as the global recovery from CovID-19 continues?

The surge in silver investment can largely be attributed to the massive monetary and fiscal easing across key economies, which has fueled a strong interest in safe-haven assets among investors. The surge in the gold:silver ratio during the March market sell-off also made the white metal appear undervalued. As the financial system is awash with liquidity, a collapse in yields has boosted the appeal for gold, and silver’s high-beta relationship with the yellow metal has further encouraged the aggressive tactical buying of silver. Silver has also benefited from a strong rebound in the base metals complex.

Despite the ongoing global economic recovery, The Silver Institute believes that the macroeconomic backdrop will remain supportive of silver investment and prices for the rest of 2020 and well into 2021. Many industries are still operating well below capacity, and unemployment rates are likely to remain elevated for many months to come. A resurgence in COVID-19 and partial shutdowns in Europe have also weighed on the economic outlook for the region. Against this backdrop, ultra-loose monetary and fiscal policies will continue, keeping real yields in negative territory for most major world currencies. The expansion of the monetary base also re-kindles inflationary concerns, which have already been creeping higher in recent times. All of these factors will further support the case for silver investment.

There have been significant mine disruptions this year due to shutdowns and limited workforce numbers across the globe. Can you talk a bit about the supply and demand trends you have seen for silver in the first half of 2020? What has been the impact of the CovID-19 pandemic so far?

The impact of COVID-19 on silver supply has varied around the globe, depending on the severity of the outbreak and specific national and regional responses. Whether mining was deemed an “essential industry” and thus exempt from lockdown restrictions helped to determine the level of impact. As silver mining is concentrated in Latin America, a region that has been critically impacted by the pandemic, silver mine supply disruption was more severe than that of other mines and metals.

Mines in several major silver-producing countries, such as Mexico and Peru, were forced to temporarily close due to COVID-19 lockdowns that were implemented in mid-March. These restrictions remained in place during much of Q2, 2020, with Mexico being the final major silver-producing nation to lift restrictions at the end of May.

drop in production with eight out of the ten major silver producers showing a 22% drop in production for Q2. In contrast, Fresnillo maintained production levels while implementing safety measures and monitoring procedures at their sites. This, in addition to some heap leaching operations continuing production, helped to mitigate the loss in production.

Our current outlook for mined silver production in 2020 is 781.6Moz — which is a 71Moz reduction from our forecast at the start of the year as a result of the COVID-19 disruptions. Chinese production was impacted in Q1 and we have subsequently seen a V-shaped recovery — this trend has continued globally with most mines now back at near full capacity. The mining industry in general has robust Health Safety Environment and Community (HSEC) protocols, and the existing infrastructure has been leveraged to implement COVID-19 risk-mitigating work practices. Although outbreaks at individual sites will likely necessitate future closures, we anticipate production levels to improve in Q3 and Q4.

Do you see the silver and the general mining industry starting to stabilize now? What will be the lasting impact on the industry?

COVID-19 has seriously challenged existing working methods. Companies have adapted shift patterns and production methods in order to maintain health and safety protocols and to help keep production levels stable. Although the risk of company or regional lockdown remains, we expect that severe disruption will be limited to this year.

The pandemic has resulted in some miners reassessing their risk appetite and implementing cash preservation measures. The deferral of sustaining and development capital, which has pushed back some timelines for development projects, is key. Projects that are currently under construction are continuing, however some schedules have been impacted as deliveries of critical equipment from suppliers have been delayed.

The increased silver price and, more broadly, the precious metals complex has mitigated much of the lasting impact on the industry. In any scenario where production is impacted, costs will suffer, and the pandemic has had a material impact. In other circumstances, this would bring margin pressure on the top of the cost curve. However, across primary and by-product producers, increased metals prices have largely mitigated the impact.

Most of the world’s silver supply is actually a by-product from gold and copper operations. With the gold price climbing steadily upwards, more projects have become economically viable, and now there are several projects where silver is a by-product that have recently been announced. These should go some way in mitigating the impact of capital deferral on production.

The uses of silver in the industrial complex are becoming increasingly widespread. Can you speak a bit about this and about silver’s growing role in solar technology?

Silver is key for producing metallisation paste in solar cells. By the end of 2019, global cumulative installed capacity had exceeded 600GW, including record-high additions of 116GW in 2018. It has resulted in silver offtake in PV applications reaching 3,000t per annum. With escalating electricity demand and global commitments to deliver renewable energy targets, silver demand is looking promising, with healthy capacity growth forecast over the next few years.

Looking at some of the key PV markets in China, newly added capacity of 30-40GW can be expected over the medium term. In Europe, the outlook is bright with total installed capacity expected to reach 255GW by 2023. In the US, steady growth can be expected on the back of healthy demand in both the utility and residential sectors. In India, installations are expected to start rising against a near-term target of 100GW by 2022. Other regions, such as the Middle East, Latin America, South-East Asia and Africa, are also set to see installations rise, which will continue to drive overall renewables growth over the next few years.

With the accelerated development and deployment of smart grid in utility-scale PV, silver is expected to extend its role to its surrounding facilities.

What can you tell us about silver’s role in 5G technologies?

5G is not just an incremental improvement over 4G — it is the next major evolution of mobile communication technology. It will massively improve download speeds and reduce latency, but more importantly, it will facilitate significant technological progress in a whole range of sectors, such as the Internet of Things (IOT) and autonomous driving. The electronic components that enable 5G technology will rely heavily on silver to ensure that the global 5G platform performs seamlessly. In a future 5G-connected world, silver will be a necessary component in almost all aspects of this technology, resulting in yet another end-use for silver in an already vast and versatile demand portfolio.

At present, 5G deployment is still in its early stages and, as such, 5G-related silver demand currently constitutes approximately 7.5 million ounces (Moz). With the rollout of 5G in the coming years, however, silver’s role in the electronic applications used in 5G is forecast to rise significantly to approximately 16 Moz by 2025 and as much as 23 Moz by 2030, which would represent a 206 percent increase over today. For comparison purposes: in 2010, silver’s use in the once-emerging photovoltaic industry was approximately 40 Moz, and by 2018 it stood at 80.5 Moz.

To better understand silver’s use in the next generation of 5G technology, you can see The Silver Institute’s Market Trend Report, Silver’s Role in a Future 5G Connected World, which we released in March this year.

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