The financial crises in 2008 led to the downfall of the majority of commodities, except silver and gold, which witnessed a rise in the prices as both are considered safe havens for the investment. The financial crises and economic slowdown compelled investors to park their money in the yellow metal, driving its prices to a higher level between 2008 to 2011. Gold touched an all-time high of USD ~1900/oz. in Sep. 2011. On the other hand, silver which derives its prices mainly from the movement in gold too saw a sharp rise, with the prices peaking around USD 50/oz. in late 2011. A multiple regression analysis of the period from 2011 to 2015 for the dependency of silver prices on gold prices, dollar index and base metal commodity index depicted a rise of USD 1 in gold prices and this led to an increase of USD 1.42 for silver whereas dollar index and commodity index had coefficients of -0.187 and 0.465 respectively. The accuracy of this analysis measured 75%.
Figure 1: Silver and Gold Cash Price (Source: Bloomberg)
The prices of gold and silver metals broadly remained stable during 2012 while they witnessed a one of a kind fall between 2013-15. Moreover, the prices of silver, in particular, slid from its highs in 2011 to the lows of USD 15/oz. in 2015. This drag was primarily due to the investors’ expectations from the change in ultra-loose monetary policy from the Fed and the weakening of the Chinese economy, which is the world’s largest consumer of silver. The slowdown in the Chinese economy lowered the consumption from the industrial segment, which as a whole nearly consumes 55 to 60 percent of silver globally.
Silver is an important commodity which is consumed for the investment purposes, this also has a significant industrial use and is extensively used in jewellery and industrial fabrication. The demand for silver from photovoltaic manufacturers has been on the rise with an increase in solar power generation capacity worldwide, but, this is still a fraction of the total industrial sales. Additionally, with a sustained demand, silver has been in deficit in relation to its production over the past 10 years.
Figure 2: Silver Demand and Deficit (Source: The Silver Institute)
Figure 3: Silver Demand by Industry (Source: The Silver Institute)
Further, during the period 2007 to 2010, when the silver prices were at their highs, the demand for silver jewellery, coins, silverware roughly contributed to a 30 to 35 percent of the physical demand. A drop in the prices mainly between 2013-15 resulted in a heavy demand for the metal for investment purposes since investors decided to capitalise on the drop in silver prices. Thus, an unprecedented demand led to a sudden surge in the physical demand of silver with jewellery, coins and silverware contributing close to 50% of the total consumption in 2015. An examination of other major consumers reveals that industrial fabrication sector contributed as a main demand generator for the metal.
A persistent low price of the commodity during the past few years has impacted the producers negatively with their margins spiralling down. But, despite a drop in prices, none of the major producers have lowered their production levels. The global mined production of silver has increased from 760 million ounces in 2011 to 890 million ounces in 2015. The Pan American Silver and Tahoe Resources Inc., two of the leading silver miners increased their production by approx. 5% YoY basis since 2011.
Therefore, amidst the declining prices, the companies have relied on cost cuts to sustain their businesses. The firms such as Pan American Silver, Tahoe Resources Inc. and Endeavour Mining have lowered their all-in sustaining costs by a CAGR of 10%, 11% and 19% respectively, between 2012 and 2015. These cost cut measures helped the companies to lower the impact of price fall on their margins, which would otherwise have been similar to the drop in the prices of silver.
Figure 4: All-in Sustaining Cost/oz. Produced (Source: Televisory’s Analysis)
The increase in demand for silver during the last two years and its widening deficit, along with stabilisation in the Chinese economy augurs well for the industry. Lately, there has been an optimism in the bullion markets (gold and silver) following the US FED (Sep. 2016 policy) suggestion, that it would go a bit slower on the future interest rate hikes in the country. Cumulatively, all these factors have led to a rebound in the silver prices in the first half of 2016, with the average prices hovering around USD 14/oz. in Q1 whereas USD 17/oz. in Q2. Although there has been a moderate improvement in near-term, Televisory is of the opinion that a sustainable and long-term revival in the prices and overall industry would depend on, how the industrial demand materialises in China, other major consuming countries and from distinct sectors for silver.
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