Silver Bulls Best Friend Is Solar Demand Squeezing Global Supplies

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by Tyler Durden
Wednesday, Jul 05, 2023 - 06:40 PM

The bullish case for silver continues to revolve around increasing demand for the precious metal in the solar power industry and worsening supply deficits as limited mine production is coming online in the near term. 

Several months ago, we published a note titled, "Solar Energy Production Could Require Most Of The Global Silver Reserves By 2050." Last month we cited a report that said, "The growing demand for silver in the solar power industry will likely put a significant squeeze on supply in the coming years, and the current price of silver does not reflect the likely shortages." 

Even though solar is still a small part of total silver demand, it's increasing fast. A report from The Silver Institute, an industry association, found silver demand from the solar industry will be around 14% this year, up from 5% in 2014. Much of the demand is from Chinese solar manufacturing plants as the world races to decarbonize power grids in the name of 'climate change.' 

Gregor Gregersen, founder of Singapore-based dealer Silver Bullion, told Bloomberg that solar is a "great example of how inelastic demand for silver is." He said the days of the solar industry using small amounts of silver are over, and demand is about to surge. 

Bloomberg explains how high-tech solar panels in the next few years will use a lot more silver:

The standard passivated emitter and rear contact cell will likely be overtaken in the next two to three years by tunnel oxide passivated contact and heterojunction structures, according to BloombergNEF. While PERC cells need about 10 milligrams of silver per watt, TOPCon cells require 13 milligrams and heterojunction 22 milligrams.

And the increase in silver demand via the solar industry comes as there's already a squeeze on the supply of silver. We noted last month, "While silver demand set records in every category in 2022, supply was flat with mine output falling by 0.6%. This resulted in a 237.7 million ounce market deficit in 2022." 

Data from The Silver Institute shows silver production is set to increase by 2% this year while industrial consumption rises by 4%. The problem, which Bloomberg explains, is ramping up production comes with many challenges:

The trouble for silver buyers is that cranking up supply is far from easy, given the rarity of primary mines. About 80% of supply of the metal comes from lead, zinc, copper and gold projects, with silver a by-product.

And in an environment where miners are already reluctant to commit to large new projects, lower margins in silver compared with other precious and industrial metals mean positive price signals aren't enough to crank up output. Even newly approved projects could be a decade away from production.

With the decarbonization of power grids underway and likely a multi-decade project, a study from the University of New South Wales expects the solar industry could exhaust between 85–98% of global silver reserves by 2050. 

On Wednesday morning, spot silver prices were around $22.85 an ounce. There's a possibility that prices could slip further on a rising dollar or fears about a hard economic landing. 

But in the long run, silver prices will have to be repriced higher as decarbonization efforts are increased globally because the metal is so critical to the solar industry.