The shine is coming off of silver, at least according to a report from Citi Research published yesterday. Citi analysts David B. Wilson, Jason S. Sappor and Ivan Szkapowski say that the recent rise in silver prices is likely unsustainable given the neutral-to-bearish fundamentals of the silver market. The analysts summarize their point of view below.

“It should be emphasized that strong retail investor demand for coins and medals in 2013, with record US Silver Eagle coin sales of 47 m oz., was driven largely by falling prices and resultant bargain hunting, while conversely 2013 ETF uptake was muted because of those same price falls. We very much doubt that bullish market sentiment is sustainable due to weakening fundamentals and forecast prices to average $20.4/oz. this year.”

Silver supply

China net silver imports to continue decline

Chinese net silver imports dropped by 37% year over year in 2013 to just 40 m oz., driven by a 46% increase in gross exports during that period. Wilson et al believe that the trend toward increased exports of silver from China will put downward pressure on the price of the precious metal over the next few quarters. “Indeed, rising Chinese exports support our view that investors will need to absorb significantly higher volumes of metal in order to keep upward pressure on prices.”

Silver fabrication

Chinese photovoltaic sector overcapacity will reduce demand

Another reason for reduced industrial demand for silver in China is the ongoing retrenchment of the photovoltaic sector. A significant amount of silver is used in the manufacture of photovoltaic solar cells. The Chinese government undertook programs encouraging the production of photovoltaic solar cells in 2009, which resulted in a huge boom in the industry and led to serious overcapacity issues by mid-2012.

“The 2009 launch of the Chinese Government’s Building-Integrated Photovoltaics (BIPV) subsidy scheme, and “Golden Sun” programs, aimed to provide upfront subsidies for qualifying BIPV systems and PV projects, dramatically stimulated investment in Chinese PV manufacturing capacity. As a result, PV sector silver usage jumped by 1240% between 2009 and 2013, to account for 6.6 m oz. or 7% of Chinese silver industrial demand, compared with less than 1% (or nearly 1 m oz.) in 2009. This investment drive, however, resulted in significant PV manufacturing overcapacity and overproduction of PV cells in China.”