In early July, Japan set a premium price for solar energy
that was three times the rate of conventional power. This meant utility
companies would be paid three times more for electricity sourced from
solar. It's widely expected that the premium will ignite the use of
solar power -- and solar uses a lot of silver.
Silver Demand From PV Panels
As
you may know, silver is used in photovoltaic (PV) technology to
generate solar power. A typical solar panel uses a fair amount of the
metal -- roughly two-thirds of an ounce (20 grams). To put that in
perspective, a cellphone contains around 200 to 300 milligrams (a
milligram weighs about as much as a grain of sand). A laptop contains
750 milligrams to 1.25 grams.
Photovoltaic technology is
relatively young, but its use is growing rapidly each year. Just since
2000, the amount of silver consumed by solar-panel makers has risen an
average of 50% per year. Demand grew from one million ounces in 2002 to
60 million ounces in 2011. Last year demand from the PV industry
represented almost 11% of total industrial demand for the metal
(excluding jewelry). According to statistics from CPM Group, demand grew
by 11.2 million ounces, the strongest volume growth of all major
sources (jewelry and electronics). And this was before the Japanese
announcement was made.
(click image to enlarge)
The
largest end-user of solar panels is Germany, though that's changing.
Last year, Germany accounted for 27.3% of global installations, but due
to subsidy cuts, solar-panel installation capacity dropped from 7.7
gigawatts (GW) to 7.5GW. In the big picture, that decline was offset by
increases in China, France, Italy, the UK, Japan, and the U.S.
In their
2012 Yearbook,
CPM projected a slight decline in silver demand from solar panels due
to a reduction of new installation in Europe and oversupply from excess
production in China. But with the initiative from Japan, that estimate
is almost certainly low.
Japan Gives New Life To PV Industry
After
the Fukushima disaster, Japanese authorities wanted to cut the nation's
dependence on nuclear energy. Approximately 30% of Japan's power was
generated by nuclear before the catastrophe -- now the focus has shifted
to other green energy alternatives, including solar
.
The
new tariffs might work. The suggested rate of 42 JPY ($0.53) per
kilowatt hour (expected to be maintained for 20 years) is more than
twice the rate in Germany (€0.17, or $0.246). Bloomberg estimates that
this generous increase will create $9.6 billion investments in Japan
alone.
Here's what that amount of money would do to the sector:
There were approximately 1.3GW of solar capacity installed in 2011, but
experts anticipate that number to nearly double to 2.3-2.5GW for 2012,
and hit 3.0GW in 2013. According to SolarBuzz, Japan could see 28GW of
solar capacity installed by 2020 and 50GW by 2030.
That's a lot of solar panels, and -- even assuming improved efficiency -- it'll take a lot of silver.
Price Factors
During
recent years, solar panels have become significantly less expensive and
more end-user friendly. However, the fact that each panel contains a
lot of silver can make it susceptible to large price fluctuations. If
the silver price gets too high, manufacturers might seek alternatives,
of course, but they can't easily eliminate use of the metal. And if the
product gets too expensive, demand could fall. Companies are already
looking for ways to reduce the amount of silver used in PV panels, or to
replace it with another element.
At the moment, there are two
main solar panel technologies on the market. The traditional one is
"thick film," where silver is the main component. The other one is a
less-expensive "thin-film" method, which replaces silver with another
material, cadmium telluride. The development of thin-film solar panels
has picked up due to its lower price, but the technology is less
effective.
Thick film is more efficient in gathering energy from the
sun, and this type of panel still prevails on the market. CPM reports
that it accounted for roughly 91% of total installations last year, and
analysts expect thick-film panels to maintain their dominance for at
least the next several years. Further, both panel types use silver
outside of the cell for reflectivity and other functions, so the odds of
silver being eliminated from solar panels entirely are very low at this
time.
For investors, this means that at least in the near term,
the solar industry will continue to use silver-intensive technology,
thus supporting growing industrial demand for the metal.
But that's not all, folks…
New Era For Silver Usage
For
a long time, silver industrial demand was dependent almost entirely on
one industry: photography. Silver-based camera film dramatically changed
the structure of silver demand at the beginning of the 20th century. By
that time, silver had primarily been used in silverware, jewelry, and
as money. At its peak, photographic demand accounted for about 50% of
the market.
But this is the 21st century, and in spite of
substantial declines in film use, the modern world has developed many
other important uses from silver's unique properties.
Probably
the most important shift is that industrial demand for silver no longer
comes from a single field, but from numerous applications -- almost too
many to count -- virtually none of which show any signs of slowing.
This fact makes the forecast for silver demand more positive and
stable. When one industry drops, others may offset the decline.
Here's a smattering of uses, many of which are still in their infancy:
- Solid-state
lighting (SSL), which uses semiconductors to produce light with either
light-emitting diodes (LED) or organic light-emitting diodes (OLED),
rather than the more traditional electrical filaments. SSL is used in
traffic lights and some car headlamps.
-
- Radio frequency
identification (RFID) uses printed silver ink made from silver nitrate.
RFID chips have become so ubiquitous, it's hard to find any new product
that doesn't have at least one -- even if that's only in the security
tag affixed to the package.
-
- Supercapacitors and superconductors, autocatalysts and new types of more effective batteries.
- Medical
applications, like aseptic coverings for surgery, traumatic wounds,
antibacterial bandages and fabrics, dental amalgam, and silver salts
that help prevent infections in newborns. It's also used to treat
dermatological problems and certain types of cancer.
- Water
purification systems, washing machines, air conditioners, and
refrigeration. NASA used silver to sterilize recycled water aboard the
space shuttle.
- Food packaging and preservation. Manufacturers of
commercial ice machines are using silver-embedded hoses, clamps, pipe
fittings, and in other places where gunk can build up and harbor
bacteria. Meat processors use silver-embedded tables, grinders, tools,
and hooks. Silver is used to keep fruit, vegetables, and cut flowers
fresh while in transit.
- Public hygiene, such as antimicrobial
protection of telephone receivers, door handles, bed rails, toilet
seats, counter tops, children's toys, socks, underwear, bed linen,
towels, etc.
- Other wide-ranging consumer products used every
day: makeup, antibacterial soaps and kitchenware, hand and air
sanitizers, and facial creams and masks.
Though the total
contribution from these new silver uses is relatively modest, the Silver
Institute rather dryly forecasts that "there is a potential for a
number of these segments to boost their silver consumption." As you can
see in the chart below, its forecast for silver demand for new
industrial uses projects that the biggest increases will be in
batteries, SSL, and RFID.
The
primary uses for silver are growing, too. For example, the automobile
industry is increasing consumption, due to both increases in the number
of vehicles manufactured and the expanded use of electrical contacts. As
the number of improvements in vehicles increase, so does the amount of
silver used. For example, silver is used to control seat and mirror
adjustments, windshield wipers, and manage navigation systems.
Based on their research, the
Silver Institute forecasts that industrial usage will rise to 665.9 million troy ounces by 2015, and account for more than 60% of total fabrication demand.
What It Means For Investors
Since
half of silver demand is for industrial purposes, it can act like an
industrial metal in addition to its precious metal component. This means
it's susceptible to more forces than gold, making it more volatile, as
well as more difficult to predict its future price.
Conclusions:
- The
solar industry has great potential to become one of the more important
sources of silver demand. This will lend strong support to prices. This
industry had zero impact on silver 10 years ago; it now represents 10%
of total industrial demand.And it's not just Japan. According to a news report, 102 countries are now installing solar panels
-- from just 18 two years ago. Heavy and/or growing usage is reported
in Germany, Italy, Japan, France, Belgium, Portugal, Spain, the U.S.,
Australia, and Asia, including China and India.
- It appears
that the development of the solar industry didn't occur as a result of
natural forces, since to a large degree, it was initiated by government
subsidies that supported the industry (and indirectly, the silver
price). You may like or not like these market interventions, but as
investors, it's important to recognize these trends, regardless of
whether we agree with them. It's particularly important to keep an eye
on these subsidies, as they could vanish if cash-strapped governments
change their priorities. That won't happen overnight, however, so we
should have ample warning.
- Due to its unique properties, the
number of applications for silver continues to grow. Researchers at the
Silver Institute are upbeat about the future for silver industrial
demand. That's no surprise, but it doesn't make them wrong -- the
implication here is that only the worst type of economy would have a
negative impact on demand.
- If demand grows fast enough, it could
impact not only the price, but the availability of the metal, in spite
of rising mine production. If that happens, bullion purchase premiums
will rise as supply becomes tighter.
The bottom line on the
above is that the growing number of industrial applications for silver
represents a long-term shift in this market. Increasingly diverse usage
is not only here to stay, but will continue to grow, supporting the
price and impacting the balance of supply and demand.
For
investors, the thing to keep in mind is that while long-term prospects
for silver prices are extremely bullish, to the degree prices are driven
by this increased industrial demand, they are vulnerable to economic
correction/contraction in the short term.
Disclosure:
I 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. I
have no business relationship with any company whose stock is mentioned
in this article.
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