Forecasting silver market 2020
World Silver Survey 2020, published by the Silver Institute. This is the 30th Edition of the World Silver Survey, produced for The Silver Institute. The World Silver Survey 2020 was produced by the Metals Focus team.
The uncertainties presented by the COVID-19 crisis make the job of forecasting silver market conditions over the rest of the year incredibly challenging. The extreme markets volatility that we have seen in recent weeks is in some ways reminiscent of the 2008 global financial crisis (GFC) and the recession that followed.
The current woes that economies and financial markets are facing are of course different. Unlike the GFC’s delayed impact on the real economy, through a collapse in liquidity, the Covid-19 crisis is hurting consumption and economies in a far more direct and immediate way.
This is evident in the rising unemployment figures and growing evidence of businesses struggling over the past few weeks. On the other hand, with the hindsight of the GFC, authorities around the world have been quicker to make drastic interventions and structure these in a way to ensure they reach consumers and businesses in a more direct manner.
Looking ahead, as of early April, there are some promising signs that the curve of new infections may already be starting to turn down in some of the hardest hit European nations. This follows weeks of unprecedented restrictions on movement and economic activity. Positive as these signs may be, it is far too early to call when the crisis may end.
Having said this, it was essential to make some assumptions about the timeline of the crisis, in order to adjust many of the individual elements of our supply and demand forecasts. To do this, we took into account the experience of China and other East Asian countries, as well as some of the limited research on the properties of the virus, such as typical duration of the incubation and illness periods.
The broad assumption we have taken is that some sort of lockdown will be in place across most major markets for a period of 6-8 weeks and that this will be followed by a month of a gradual return to normality. Moreover, we have assumed that even beyond these two and a half to three month-periods, lighter social distancing programs will remain in place across a number of countries.
There are a few important caveats to the above hypothesis. First, cultural and structural factors may result in a different trajectory in Western markets to that experienced in East Asia. Second, the restrictions seen across much of the US at the moment are less aggressive than those in Europe and parts of Asia. Thirdly, the virus has yet to take hold in less developed countries and the as yet unknown impact on South Asia and Sub-Saharan Africa could prove devastating.
Finally, one cannot rule out the re-emergence of new waves of infections flaring up later in the year, resulting in restrictive measures being brought back in. All this suggests that our base case may well prove optimistic.
Based on the above, we have made adjustments to silver supply and demand from what we might have otherwise expected to see this year.
For mine supply, we looked at which countries have implemented policies resulting in mine closures and the expected duration of these closures. We combined this with company announcements to estimate a disruption percentage and applied this to our original estimates for 2020. As a result, we expect mine production will decline by 5% to 797.8Moz (24,813t).
We believe the impact on recycling will be small. Finally, our projections see a more than one-third decline in producer hedging. Overall, global supply is forecast to fall by 4% to 978.1Moz (30,424t) in 2020, its lowest since 2009. For demand, we took a view on the impact of restrictions on fabrication capacity as well as the impact of the economic slowdown on related end use sectors.
Unsurprisingly, our projections for 2020 see sizable declines across most areas of demand. Total industrial fabrication is expected to fall by 7%, with losses seen across all individual components. Jewelry and silverware are also expected to suffer losses, as a result of lower visitors to retail stores and the appetite for discretionary spending taking a hit.
Metals Focus expects these declines will be partly offset by a 16% increase in bar and coin demand. As discussed elsewhere in this report, we have seen evidence of strong interest in silver from retail investors and we expect this will continue for much of this year. As a result of this offset, our projections see global demand fall by a modest 3% to 963.4Moz (29,967t), which also represents the lowest total since 2009.
Combining the above-mentioned supply and demand figures, we expect the market will see another surplus this year. At 14.7Moz (457t), this will be 53% smaller than in 2019. Meanwhile, we expect to see another year of very strong inflows into silver exchange-traded products (ETPs), as well as net buying by institutional investors on both the futures and OTC markets.
Driving this behavior will be renewed interest in silver (and gold) on the back of macroeconomic drivers such as ultra-low interest rates, other stimulus measures and concerns about the outlook for the global economy. Meanwhile, silver should also benefit from bargain hunting, on the back of its historically low relative value compared to gold.
All this should ultimately drive silver prices upwards. During this move, we would expect silver to outperform gold. By year-end, we would not be surprised to see the white metal’s price testing the $19 mark. Having said this, as a result of its recent weakness, the full year average is still expected to fall a modest 3% y/y to $15.70.