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A Bright Outlook for the Chinese Silver Market, Benefiting Global Silver Offtake

Recently, at the 7th China International Silver Conference in Shenzhen hosted by the Silver Institute, our Taiwan-based consultant Elvis Chou, presented the key findings from the report “The Prospects for the Chinese Silver Market” (the report is free to download here). This publication, which looks at every main area of demand and their key drivers (as well as silver bullion exports), was prepared by Metals Focus for the Washington D.C.-based Silver Institute.

Before looking at some of the main highlights in the report, it is worth understanding the role China plays in the global silver market and therefore why this report was commissioned by the Silver Institute. First, since 2010 China has been a top-three mining country, averaging 110Moz (~3,440t) over 2010-17. Local silver refining output is even higher, as China boasts a large number of base metals smelters and refineries. This reflects the fact that China imports a significant amount of base metal concentrates every year and over half of global silver mine supply is derived from by-product mining of base metals.

Another reason behind this report concerns silver offtake, as China is the second largest silver fabricator. Since 2010, Chinese offtake has averaged 153Moz (38,090t), making up 18% of the global total. Importantly, China is home to considerable manufacturing capacity. This explains why the country imports large volumes of semi-fabricated silver, such as powder and paste. As a result, China is comfortably the largest consumer of silver globally.

The report also highlights key differences in the performance of the principal areas of Chinese silver demand and its implications for the outlook. In particular, there has been a marked contrast between the weakness in jewellery and silverware fabrication and also physical investment, and the healthy growth realised by industrial demand.

Looking ahead, we believe that silverware has already started to recover, albeit gradually. In addition, we are most likely approaching the low for jewellery and coin and bar demand. With regards to industrial offtake, this looks set to continue rising for the foreseeable future. As a result, Chinese total demand is forecast to continue rising over the next few years, reaching 166Moz (5,173t) by 2022.

The importance of Chinese industrial demand explains the significant coverage it receives in this report. This includes a detailed analysis of photovoltaics (PV) demand. Traditionally, the Chinese PV industry consumed silver powder and paste fabricated overseas. That said, recent years have seen domestic powder manufacturers gain market share. While some headwinds have emerged recently, such as reduced subsidies, the outlook remains positive, both with regards to PV installations in China and overseas.

The report also highlights rising silver demand in a range of electronics applications. This is another area where China is both a sizeable fabricator and also a consumer of imported silver-bearing components. As such, one reason for optimism is the expected market share gains that Chinese companies should enjoy in the coming years. In terms of key growth sectors two stand out, touch panels and LEDs, which are associated with a range of end-use applications, including automotive touch panels, lighting applications and hand-held devices.

The report addresses the use of silver in electrical applications in China. This should also continue to rise over the coming years, helped by further growth in infrastructure investment, including electricity generation capacity. The Belt and Road Initiative introduced by the Chinese authorities, which focuses on developing land and sea trade routes, is also expected to lift demand for silver-bearing components.

Another growth area cited in the report concerns brazing demand which is forecast to realise further gains in the coming years. A variety of end-uses, including railway infrastructure, the automotive sector, refrigeration and air-conditioning should provide fuel for this growth. The final area of Chinese industrial offtake, captured in our other industrial silver demand series, is also forecast to grow, helped by the addition of new ethylene oxide capacity.

Moving away from industrial demand, the Chinese jewellery market has faced several headwinds, such as changing buying patterns. Even so, the supply chain now appears to be adapting to the new environment. Taking a longer-term perspective, we therefore expect silver jewellery demand in China to eventually start to recover. In contrast to jewellery, the silverware market has already started to gradually recover. In keeping with jewellery, silverware fabricators have targeted new segments, such as daily ware, instead of simply relying on the more traditional gifting segment, which had suffered from the clampdown on corruption.

Anti-graft policies have also been the principal driver of the declines suffered by investment in silver bars and coins in recent years. This is particularly striking when comparing the weak performance of bar sales with the more benign picture seen for silver coin sales. Trading volumes on the SHFE have also been on the decline. Lower speculative appetite for silver against the backdrop of a falling price has played a part, as has lower activity from commercial participants.

Switching away from Chinese fabrication demand, the report also addresses the role played by the country’s silver bullion exports. These help absorb an important share of locally generated bullion output. These exports are also an important source of supply for key silver end-use markets including India, Japan and Thailand. This role is likely to become more importance as the ban on silver concentrate imports into China has been removed. This in turn will help Chinese smelters to attract additional inflows, thus boosting the country’s production of silver bullion.

Source: Charles De Meester writing in Precious Metals Weekly, a newsletter published by Metals Focus, www.metalsfocus.com, one of the world’s leading precious metals consultancies.


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