Silver’s Industrial Usage Could Drive Prices In 2017

By Neils Christensen of Kitco News
Wednesday December 21, 2016 12:07

(Kitco News) -The silver market could continue to see strong gains in 2017 from a pick up in industrial demand as the U.S. and global economies improve, according to some analysts.

With 2016 quickly coming to a close, silver has been the second-best asset in the precious-metals space, up 16.5% since the start of the year and only behind palladium, which is up almost 21% for the year.

Looking ahead, according to some analysts, it could be silver’s industrial component that drives the market, especially as U.S. President-elect Donald Trump pushes his fiscal policies, proposing to spend $1 trillion over 10 years.

While silver has broad market fundamentals, industrial demand makes up more than half of the overall market, with most of the other demand coming from jewelry, bullion coins and exchange-traded funds.

“Clearly, any uptick in infrastructure spending resulting from the recent U.S. election could benefit silver's industrial demand side,” said analysts at CIBC, in a recently published report.

Analysts at UBS, who said that silver lacked its own narrative in 2016, mostly following gold’s lead, also see the metal’s industrial component gaining momentum next year.

“We think silver's links to economic activity via its industrial-demand component should help its relative performance to gold during periods when markets are optimistic about growth and risk,” the analysts said in a recent report.

Analysts at HSBC said in their outlook report that they see silver averaging $18.75 an ounce in 2017. Commodity analysts at Commerzbank said that they see silver ending next year around $19 and averaging around $18. 
UBS said that they see prices averaging $18.80 an ounce next year. While most analysts have lowered their forecasts for next year, prices are higher than current prices with February silver futures last trading at $15.995 an ounce.

“We believe silver prices will be better bid later in 2017. We also base our expectations on solid fundamentals, as mine supply is likely to contract while industrial and jewelry demand should increase,” the analysts at HSBC said.

One particular sector in which HSBC analysts see potential is solar power, as costs decline and energy demand increases.

“We look for a further 8moz increase in PV consumption in 2017 to 91moz. We anticipate steady increases well into the next decade and consider PV and other solar power applications an important new source of silver consumption,” they said.

Does Supply-Demand Picture Favor Higher Silver Prices?

HSBC, quoting market sources, said it is expecting to see total silver demand hit 1.159 billion ounces in 2017, up slightly from 1.148 billion ounces that are expected to be consumed this year. At the same time, total silver supplies are expected to continue to fall, reaching 1.027 billion ounces, down from 1.032 billion ounces produced this year. In total HSBC expects the silver market to see a supply deficit of 132 million ounces; this would be the fifth consecutive deficit for the silver market.

However, not all analysts are convinced that a market imbalance next year will be a major positive for the market.

While silver is expected to see further supply deficits next year, analysts at Commerzbank said that they expect a market shortfall will only have a limited impact on the prices, adding that they see only modest demand for the metal next year.

Analysts at the German bank said that they expect to see a total market deficit of around 50 million ounces. “This would be the smallest deficit since the last surplus year of 2012,” they said.

Commerzbank analysts also said that they expect to see lackluster demand in industrial usage because there is a growing trend of thrifting in the industrial sector, which means companies are finding ways to use less metal in their electrical components.

The analysts said that they expect that next year, industrial demand will fall to its lowest level since 2009.

Commerzbank said that they think the market will have to see increased investor demand in exchange-traded products and physical demand for jewelry and bullion coins to push prices back above $20 an ounce in 2017.