HSBC’s sunny silver outlook

James Steel of HSBC in New York is raising his average price forecast for silver to US$33 per oz. for 2013 and to US$31 per oz. for 2014, up from US$32 per oz. and US$28 per oz. owing to improving industrial demand and investor appetite, and a better outlook for jewellery demand.

“HSBC Economics forecasts growing industrial output in key silver-consuming countries such as South Korea, Taiwan, China and the U.S.,” he writes in a research note. “Good investment demand is also likely to support silver, based on ongoing accommodative monetary policies and economic uncertainty. Coin and bar demand is robust, and after several years of decline, jewellery demand appears to be stabilizing.”

Industrial demand for silver will likely total 482 million oz. this year, he predicts, which “represents a healthy circa 23 million oz. increase from 2012 industrial silver consumption, which we believe was circa 459 million oz., based on estimates from Thomson Reuters GFMS.” HSBC forecasts that global industrial output will grow 3.7% in 2013, up from 2.5% last year.

But it is “ongoing accommodative global monetary policies” that Steel argues will be “the single most important factor in ushering in higher prices.”

He expects silver will trade in a range of US$27 to US$37 per oz. in 2013, and anticipates that the global silver surplus will narrow to 188 million oz. silver in 2013 from 210 million oz. in 2012.

His price forecast for 2015 remains unchanged at US$28 per oz., however, and his long-term, or five-year forecast, is US$25 per oz.

Steel also predicts further growth in silver exchange-traded funds (ETFs), based on “demand for hard assets amid a climate of ongoing monetary easing, economic uncertainty and likely U.S. dollar weakness,” and argues demand for coin and small bars is also “likely to be strong.”

In terms of supply and demand, Steel points out that silver mine production has gone up every year so far this century and is up by about 35% since 2002, and will continue to grow in 2013 and 2014. But the pace of that growth will be more moderate than it has been in the past couple of years, he says. For 2013, he expects silver mine production to reach 805 million oz. — an increase of 10 million oz., or 1% over 2012.

Scrap supplies will also increase, he says, partly due to more stringent government regulations on recycling electronics. Between 2000 and 2009, recycled silver added 200 million oz. a year to the silver supply globally, he notes.

He says that government silver sales, meanwhile, will likely “remain at low levels.” (Government silver sales, including those from Russia, stood at 12 million oz. in 2011, citing official trade data. The number for 2012 is not yet available, but Steel estimates government sales probably won’t exceed 10 million oz. in 2013.)

When it comes to ETFs, they will “likely hold the equivalent of three-quarters of annual silver mine output, nearly three times annual jewellery and silverware demand this year, and more than 100% of annual industrial consumption.”

“Demand for ETF products, after years of rapid expansion, appears to be moderating, but remains positive,” he writes. “Considering the wide price swings and relatively high volatility of the past twelve months, ETF holdings have been notably stable.”

He points out that silver ETF positions could rise by 50 million oz. silver to 658 million oz. this year, which “would represent a pace of accumulation similar to that of 2012.”

Steel estimates that average costs of silver production could range anywhere from US$5 to US$8 per oz. to US$12 per oz., and sometimes as high as US$15 per oz., but at those prices, there are no impediments to production. “With prices above US$30 per oz., and the highest cost of producers operating at well below US$20 per oz., it is safe to say that production costs — though rising — present no barrier to production.”

He observes that most of the silver mined in the world is mined at low or no cost, because much of it is secured as a by-product from processing and smelting copper, gold, lead-zinc and tin ores, “making silver production more a function of base metals and gold output than of the silver price,” he says. According to his figures, “a little less than two-thirds” of silver mine production comes as a by-product of mining base metals and gold.