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Trump & Industrial Silver Demand

Metals Focus – There has been much comment recently on how President Trump’s enacted and anticipated policies could impact gold prices and, by extension, silver through changing investor expectations for the dollar, the Fed funds rate and so forth. However, there has been little assessment of how the new administration might affect industrial fabrication. That sector matters, as it is by some margin the largest element of total silver demand (almost 50% of the 2016 total), and the US is the largest industrial fabricator (at just under a quarter of the global figure).

Metals Focus has just completed a research tour of North America and so this represented an ideal opportunity to explore the potential impact of policy changes in terms of tariffs, infrastructure spending, deregulation, the onshoring of manufacturing and the environment. Responses from our contacts was varied. Our general impression was that, for silver demand, most policy changes should have a limited impact, with a number of small positives likely to outweigh some minor negatives. We should stress that this broad conclusion only takes into consideration how government actions might directly, or at one step removed, impact silver, not whether we are about to see an economic collapse or renaissance in the US.

A key reason for the probably limited impact concerns environmental policy and, in particular, subsidies for the photovoltaic sector – one of silver’s main bright points in recent years. Firstly, Federal subsidies, as now enacted, are due to run until end-2019 and then only partly tapered over the following three years. In addition, there are separate state level subsidies, such as New York state’s 25% tax credit. Importantly, the consensus among our contacts is that an early lowering of incentives is unlikely. As such, we see no reason to downgrade our estimates for end-use in photovoltaics, especially as costs continue to fall.

Onshoring is also not expected to have much impact, in part as many US silver fabricators already supply end-users elsewhere, for example Mexico. As such, it would invariably be irrelevant if those end-users moved to the US. In addition, we are aware of examples of onshoring that are due to factors other than policy changes (such as China’s rising costs) and of instances where offshoring is still going ahead.

As for positives, infrastructure spending should have benefits for industrial silver. For example, a lift in road building would mean direct gains from such areas as signage and lighting. There would also be more indirect gains via silver-bearing components such as contacts and switchgear in equipment like earthmovers. Such gains would be that much greater if spending is allocated to smart-highways (requiring a huge number of sensors and signalling). Deregulation could also provide benefits, if modest and indirect, should that lead to growth in the energy and mining sectors. That would yield gains through higher end-use in extractive equipment’s silver-bearing components. Higher defence spending would be a further plus for silver demand.

Hopes have been expressed that renegotiated trade deals could make it easier for US fabricators to export to China. However, that perhaps distant possibility aside, the imposition of tariffs on imports into the US was not felt likely to have a major impact as imports are currently said to provide little competition for most areas of direct silver use. In addition, those areas where import competition is an issue are too low down the political pecking order to be a priority for shielding by the administration. Several contacts, however, did express concern that a hike in import tariffs would be a strong net negative for silver as the consequential rise in sales prices would undermine consumption.

That final negative feeds into our broader take on the US economic outlook, namely that the current enthusiasm is overdone. Moreover, one cannot rule out the tail risks of the new administration’s fuelling currency instability, trade conflicts, rising inflation and rapid rate hikes. As set out in our just released 5-yr silver forecast, we expect industrial demand to grow by a modest 1% globally in 2017 and a shade faster thereafter. However, if the above-noted problems flourish, we forecast that this would trigger losses for industrial demand, with fabrication by 2020 more than 1,000t (33 moz) lower than under our base case.

Source: Precious Metals Weekly, a publication of Metals Focus, the independent precious metals research house. This report discusses the latest developments in the precious metals space, their implications for the markets and Metals Focus’ near term views, www.MetalsFocus.com.


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