Michael DiRienzo
Executive Director
The Silver Institute
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Insight

Key Trends in Silver Purchasing and Sales

Wed, 10/19/2016 - 23:47

When the stocks and securities market takes a dip, the first instinct of investors is to look for a safe bet, and this usually comes in the form of gold and silver. After the UK’s recent vote to leave the European Union, universal markets floundered, and precious metals prices soared. Mexico, as the number one silver producing country in the world, and its major operators like Fresnillo and Goldcorp reaped the benefits of the market fluctuations. Despite the recent royalty tax imposed on the country’s operators by the Mexican government, Michael DiRienzo, Executive Director of The Silver Institute shares that the company’s priorities have not changed at all, and instead that Mexico plays a considerable role in its global activities. “We want a fair silver trade for all countries, although it is difficult when taxes of any kind are levied on individual countries, such as Mexico,” he shares. Nevertheless, over the last year, the silver market has seen its share of fluctuations, as DiRienzo explains. “On one hand, primary silver co-product cash costs plus CAPEX fell by 11 percent to US$11.74/oz, a drop driven by weaker local currencies, aggressively lower CAPEX, and lower fuel prices,” he claims. “The producer silver hedge book grew by 7.8 million ounces in 2015, as fresh hedging more than offset maturing contracts.” The news was not so positive for silver scrap supply, which dropped by 13 percent to 146.1 million ounces, the lowest volume recorded in over 10 years and the fourth consecutive year of declines. “Behind the decline were fewer active collectors in the market, and some holding back material awaiting higher prices,” he clarifies.

DiRienzo continues by highlighting silver’s use in a variety of manufacturing, including in the photovoltaic, ethylene oxide, and automotive industries. The largest component of physical silver demand, industrial applications, which accounted for 50 percent of total physical silver demand last year totaled 588.7 million ounces. “This drop was largely due to weaker fabrication demand in developing countries and a stagnant global economy,” he comments. “On a regional basis, modest increases in industrial demand were posted in the US and Japan, the second and third largest sources of industrial demand, respectively.” Electrical and electronics use, he says, declined by 10 percent last year to 246.7 million ounces, as a result of slower economic growth in developing countries and the continued weakness in computer sales. However, there were several highlights within the industrial segment. “Silver demand for photovoltaic applications rose 23 percent in 2015 to 77.6 million ounces, marking the second consecutive year of increases in this sector, driven by strong growth in Chinese solar panel installations,” he expounds. “Silver demand for ethylene oxide (EO) grew by an impressive 103 percent to 10.2 million ounces. The GFMS team at Thomson Reuters estimates residual volumes of 137.5 million ounces of silver in EO plants around the world at year end 2015, which is the equivalent to 16 percent of last year’s silver mine production.” Although he admits that industrial demand is projected to grow this year, he predicts this will be a slow increase.

In addition to physical investment, silver has an active over- the-counter (OTC) market, serving as a mechanism for risk and price management. OTC trade can have a meaningful impact on silver prices because of the market’s depth. In 2015, the volume of silver transferred in the London bullion market, the largest OTC market for silver worldwide, totaled approximately 36.8 billion troy ounces (1.14 million tons), with a value of $575 billion, according to data published by London Bullion Market Association. “Over the last year, there has been a 24 percent growth in silver coin and bar investment to reach 292.3 million ounces, the highest annual demand level in GFMS’ records, overtaking the previous high in 2013,” DiRienzo reveals. “Coin and bar demand accounted for 25 percent of total physical demand in 2015, the highest market share on record and up from just 5 percent a decade earlier.” With lower silver prices and the need for investors to gain access to hard assets, silver coin and medal demand amounted to 134.1 million ounces of demand last year due to unprecedented growth in several key markets, notably the US and India.