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The Future of Silver Industrial Demand Commissioned by the Silver Institute Prepared by GFMS Ltd March 2011 2 Independent - Informed - International The Future of Silver Industrial Demand - March 2011 © GFMS Limited 2011, The Silver Institute. All rights reserved. We (and where relevant, any identified contributors or co-authors) are the owner or the licensee of all intellectual property rights in this document. This document is protected by copyright laws and treaties around the world. All such rights are reserved. No organization or individual is permitted to reproduce all or part of this document (including without limitation extracts such as tables and graphs), whether by photocopying or otherwise, without the written permission of GFMS Limited and The Silver Institute. Your reproduction of all or part of this document in breach of these terms may result in civil or criminal actions against you. While every effort has been made to ensure the accuracy of the information in this document, the content of this document is provided without any guarantees, conditions or warranties as to its accuracy, completeness or reliability. It is not to be construed as a solicitation or an offer to buy or sell precious metal, related products, commodities, securities or related financial instruments. To the extent permitted by law, we, other members of our group of companies and third parties connected to us hereby expressly exclude: • All conditions, warranties and other terms which might otherwise be implied by statute, common law or the law of equity. • Any liability for any direct, indirect or consequential loss or damage incurred by any person or organization reading or relying on this document including (without limitation) loss of income or revenue, loss of business, loss of profits or contracts, loss of anticipated savings, loss of goodwill and whether caused by tort (including negligence), breach of contract or otherwise, even if foreseeable. 3Independent - Informed - International The Future of Silver Industrial Demand - March 2011 Table of Contents 1.0 Executive Summary 5 Introduction 5 • Economic and Price Forecast 5 Industrial Demand Forecast 6 2.0 Historical Review 9 3.0 The Role of Silver in Industrial Demand 12 Introduction 12 • Technological Advantages of Silver 12 Production Stages 13 4.0 Industrial Applications Today 18 Introduction and Summary 18 • Electrical and Electronics 18 • Photo Voltaics 19 Brazing Alloys and Solders 20 • Ethylene Oxide 21 5.0 Future Industrial Demand for Silver 22 Introduction and Summary 22 • Economic Forecasts 22 • Role & Impact of Silver Prices on Industrial Demand 24 • Outlook for “Established” Uses 24 Novel & New Industrial Uses of Silver 27: Solid State Lighting, Radio Frequency Identification, Supercapacitors, Water Purification, Medical Uses, Food Packaging, Hygiene, Wood Preservatives, Batteries, Autocatalysts, Superconductors. Focus Boxes Industrial Silver Applications: Silver Related Production Stages 14 Silver Industrial Fabrication: Defining the Country of Origin 17 Nanosilver: An Introduction 27 4 Independent - Informed - International The Future of Silver Industrial Demand - March 2011 Units used: supply and demand data are given in units of metric tonnes. 1 Moz = 31.103 t (metric tonnes) 1 tonne = 32,151 troy ounces 1 tonne = 1,000,000 grammes (g) Terminology: “-” = not available or not applicable 0.0 = zero or less than 0.05 “dollar” refers to the US dollar unless otherwise stated. Prices: Unless otherwise stated, US dollar prices are for the London Silver Market fixing. Table Rounding: Throughout the tables and charts, totals may not add due to independent rounding. 5Independent - Informed - International The Future of Silver Industrial Demand - March 2011 1. Introduction & Executive Summary Industrial Demand Forecast1.0 Introduction In recent years, silver industrial demand has greatly expanded its role in the global silver market. This has largely been due to tremendous growth in industrial offtake itself, although weaker performances elsewhere (photography and silverware in particular) have helped to further raise its share of global fabrication demand To put silver’s industrial demand growth into perspective, in 1990 it stood at 273 Moz, representing a respectable 39% of total fabrication demand. By the turn of the millennium, the global total had grown by 100Moz, which saw its share exceed 40% for the first time. After a setback in 2001 (when the technology bubble burst), industrial offtake grew uninterrupted for the following six years. This culminated in a record high of over 465 Moz in 2007, which accounted for 55% of total silver fabrication. Although silver demand suffered after the global economic crisis that began in the latter part of 2008, by 2010 industrial demand had already recouped most of the lost output. In fact, although restocking of a (heavily) depleted supply chain accounted for much of the improvement last year, it is also clear that industrial demand resumed its long-term secular rise, a trend which is set to continue over the entire forecast period under review in this report. It is not surprising, therefore, that industrial demand has garnered such attention. The Silver Institute, in recognition of its significance for the future of the silver market, has commissioned GFMS to provide greater insight into this sector. This report therefore aims to build on the work that GFMS has published in the World Silver Survey, by examining in greater detail the role that these uses are likely to play in the future. We make a realistic assessment of the future prospects of total silver industrial demand, and where the growth opportunities are likely to emerge. In order to do so, we have first assessed the scope for growth in the established end-uses. Second, the potential market impact of 11 more recent applications of silver, ranging from wood preservatives to superconductors, are also analyzed. By bringing together these two components, we have generated a five-year forecast for global silver industrial demand, covering the period 2011 to 2015. 1.2 Economic and Price Forecast The economic outlook provides the most important basis for determining the prospects for global silver industrial demand, while prices are generally more of a secondary concern. In terms of the former, healthy western market growth over the past decade has been an important contributory factor to the strength in silver industrial demand, but arguably of greater relevance has been the performance of many developing countries, and especially markets such as China and India. To put this into perspective, during 2000-08, GDP growth in China and India averaged 9.9% and 7.1% respectively, compared with a far more modest 2.7% and 2.2% for the European Union and the United States (respectively). As a result of this strong economic growth, each country has undergone a period of rapid urbanization (which extends back much further than the past ten years), a by-product of which has been a jump in both infrastructure and consumer spending. It is of little surprise, therefore, that both have seen a jump in per capita GDP, with, for example, China realizing a threefold increase over the past decade (although it still remains relatively low, compared to western markets). The following commentary focusses on GFMS’ most likely outcome for the global economy, termed the Base Case forecast. (Alternative economic scenarios, and their impact on industrial offtake, are considered in Chapter 5.) © Copyright GFMS Ltd (Base Case Scenario, million ounces) 2010 2015F Industrial Demand 487.4 665.9 0 10 20 30 40 50 60 70 Industrial Photographic Jewelry Silverware Coins and Medals % of Total Fabrication 2009 2015F Demand split Source: GFMS 2000 Industrial Demand’s Growing Importance 6 Independent - Informed - International The Future of Silver Industrial Demand - March 2011 Following last year’s healthy rebound in global GDP growth to 4%, 2011 is expected to see a marked slowdown, to a rate of 2.8%. This is for two main reasons. First, it will partly reflect the absence of several stimulus packages, which helped lift economic growth last year. Second, inflationary concerns, as a result of these stimulus measures, but also because of rising commodity prices, will see governments look to either curtail expenditure, or tighten monetary policy (although the ability to do so will be limited, with unemployment levels in many countries remaining stubbornly high). Looking further ahead, GDP growth is expected to edge higher, averaging 3.2% over 2012- 15, although this will still fall short of the performance during 2000-08, when world GDP growth averaged 4%. In terms of the price outlook, silver prices are forecast to continue rising this year, with the annual average comfortably eclipsing the 1980 record high (although in real terms the 2011 forecast average will fall short of the $55 posted in 1980). This will be driven in large part by further inflows of investment demand, and supported by additional growth in fabrication demand. However, higher silver prices will tend to see efforts increase in terms of thrifting or substituting away from the white metal. That said, because of silver’s unique technical properties, the ability to switch in favor of an alternative metal has so far been restricted to a few applications (such as multi-layer ceramic capacitors, which have migrated away from silver:palladium to copper:nickel compositions). Instead, the use of silver in several established applications, particularly in the electrical sector, could potentially be replaced with nano silver. These uses would therefore continue to benefit from silver’s technical properties, although the absolute volume of silver demand could, in some cases, be somewhat lower. However, any substitution favoring nano products, although encouraged by prevailing high prices, is only likely to emerge over an extended period of time, and potentially beyond the scope of this forecast (allowing not only for regulatory approval, but also the time required for a supplier to qualify and then “roll out” a new product). Looking ahead to the remainder of the forecast, annual average prices are then expected to drift lower, in reflection of less robust investment in the silver market. Even so, it is worth stressing that both prices and investment flows will remain at historically elevated levels in 2012. Indeed, next year will mark only the second occasion when prices will have achieved over $30 on an annual average basis, in nominal terms. Thereafter, silver prices will continue to respond to what will be a less supportive investment climate. Part of the shortfall, created by weaker investment offtake, will be absorbed by continued growth in world fabrication demand. In particular, record levels of industrial and jewelry demand will offset faltering offtake in photography and coins & medals (although following an initial bout of weakness, by 2015 silverware could recover to 2009 levels). Although prices are therefore forecast to drift lower through to 2015, average prices are still expected to exceed 2009 levels by this point. 1.3 Industrial Demand Forecast Before considering the outlook for silver industrial demand it is worth briefly reviewing recent developments in this sector. Following a relatively subdued trend in the 1990s, during which growth averaged 2.5% per annum, the next decade saw a ratcheting up of this performance, with industrial offtake rising by 3.7% (on average) through to 2008. Although 2009 saw a sharp decline, this proved to be largely a “one-off” event, with global industrial offtake last year quickly recouping much of the lost output. Looking ahead, a bullish picture for the future of silver industrial demand emerges. From an estimated volume of 487.4 Moz in 2010, the global total is expected to post an interrupted period of growth through to a record high of 665.9 Moz in 2015. Although it is important not to overlook the contribution from ‘new’ industrial uses of silver, it is also apparent that much of the growth in the global total will be driven by stronger demand for a number of the established uses, two key examples of which are outlined below. GDP Growth Forecast: GFMS “Base Case” -1 0 1 2 3 4 5 20142012201020082006200420022000 Source: GFMS; IMF G D P gr ow th % pe r an nu m Real GDP Growth 7Independent - Informed - International The Future of Silver Industrial Demand - March 2011 First, the robust increase in the manufacture of electrical contacts reflects the success of an established use, for example in terms of its development in the auto industry. The use of electrical contacts in cars has risen rapidly, not simply in response to an increase in the volume of vehicles made, but also because the number of end-uses for contacts, has expanded. Indeed, the list of core uses has grown considerably, from controlling windshield wipers and seat adjustments, to managing navigation systems. Features that were once the preserve of high-end automobiles have, over time, become an industry standard. Legislation has also played a critical role in the auto industry, as it has mandated for ever greater safety features. As a result, the latest electrical circuitry, used in (for example) speed or distance limiters, will most likely form part of an industry standard in tomorrow’s auto market. Electrical contacts therefore offers an example of an established end-use that is in the process of effectively re-inventing itself. The second example concerns the development of the photo voltaic (PV) industry, which demonstrates how exogenous factors have had (and continue to have) a material bearing on a long-established use of silver (in this case, its use as a conductive paste). Although it is often referred to as a “new end use” of silver, the use of the white metal in PV was first developed over two decades ago, but until recently silver offtake in this field remained slight. The market for PVs then changed dramatically, as growing environmental concerns increasingly focussed on generating power from fossil-free sources. From this point, silver offtake soared, from around 3 Moz in 2004 to around 50 Moz in 2010. Further robust growth is also forecast for the PV industry, with silver demand in 2015 expected to be more than double the already elevated total for 2010. In forecasting silver industrial demand, therefore, we must consider which other established uses may go the way of these two examples. In addition to these segments, there are also a number of new uses of silver that merit attention. Although the total contribution from the new uses is expected to be more modest, at least within the confines of this five year outlook, there is the potential for a number of these segments to boost their silver consumption, if only beyond the scope of this forecast. As Chapter 5 shows, there are a wide range of industrial uses for silver that have been, and continue to be, introduced. Indeed, we would contend that those we have highlighted represent only a subset of potential new demand in the industrial sector, (not least in terms of the prospects for nano silver, where new outlets are frequently being discovered). Nonetheless, the analysis in this Chapter highlights the often modest amount of silver used per unit in many of these categories. In other words, while it is clear that a growing range of applications, such as medical, food hygiene and water purification, have already gained (and continue to gain) commercial success, the total volume of silver demand for each application can often remain relatively modest. It is also worth noting, however, that this has often been the case in many of silver’s established uses. In the cell phone industry, for example, where per unit silver consumption is estimated at 250mg, it has required worldwide sales of 1.6bn units in 2010 to generate annual silver demand of around 13 Moz (source: Umicore Precious Metals, GFMS). Likewise, silver consumption per button battery is also extremely small, yet en masse, the sector forms a respectable portion of the industrial silver market. Should the 0 100 200 300 400 500 600 700 20152014201320122011201020092008 M ill io n ou nc es Electrical & Electronics Source: GFMS Photovoltaics Brazing Alloys & Solders Ethylene Oxide Other Industrial World Industrial Fabrication Silver Demand for New Industrial Uses 0 5 10 15 20 25 30 35 40 45 autocats food pack supercaps supercond hyg med wood water rfid ssl batt 2015F2010E M ill io n ou nc es New uses 2010 vs 2015 Batteries Source: GFMS Wood Preservatives Medical Uses Hygiene Superconductors Supercapacitors Food Packaging Autocatalysts Solid State Lighting RFID Water Purification 8 Independent - Informed - International The Future of Silver Industrial Demand - March 2011 number of independently small-scale users in new areas of demand therefore proliferate, their combined total consumption has the potential to make a sizable impact on global silver demand. Many of the new uses addressed in Chapter 5 center on silver’s antibacterial qualities. Washing machines, face creams and socks, to name but a few, are products which actively market their use of silver. These show how the inclusion of silver can make the difference between an “ordinary” product and an extraordinary one. There is, in essence, nothing new about these products, apart Silver Consumption by End-Use, 2010 © GFMS Limited Silver Consumption Product Total Silver per Unit of Demand4 Demand5 Consumption5 Cell phones 250mg/handset1 1.6bn 13 Moz PCs & laptops 1g/unit1 690m 22 Moz Automobiles 10-30g/vehicle 72m3 36 Moz PDPs 10g/screen 19m 6 Moz Thick film PV 0.15-0.25g/cell2 14GW 47 Moz Button batteries 1g/unit 156m 5 Moz Source: GFMS, 1Umicore Precious Metals, 2Technic Inc; 3Light duty vehicles, Global Insight; 4indicative and/or average metal content; 5estimated this, the size and weight of electrical circuitry has been driven significantly lower over the past 20 years, as part of incessant trend towards product miniaturization. The consumer electronics industry bears testament to this trend. For example, the table above indicates that average silver consumption per cellphone currently stands at 0.25g, compared with around 0.35g per handset in 2005 (source: Nokia); in the space of just five years this represents a decline of close to 30%. On a more positive note, silver is not always the first target for cost-cutting, as other cost considerations (such as silicon, in terms of PV) may supersede those of silver, which often forms a relatively small share of the cost of the final product. Third, silver enjoys an increasingly high profile among the wider public, in part because of its long-standing and positive association generated by the jewelry and coin sectors, but also because of the introduction of a growing range of consumer items (as discussed above). In conclusion, therefore, we expect to see robust gains in industrial