Maxwell Gold

Director –Investment Strategy

Investment Insights February 2017

Solar remains a bright spot for silver demand
Summary
 Silver demand for solar panels is a growing segment of its Exhibit 2: Silver demand rises with global PV capacity.
industrial demand with record levels expected in 2018. Global PV Demand (lhs)
80 PV share of Silver Industrial Demand (rhs) 16%
 Economies of scale and falling costs may make economics a 70
PV share of Total Silver Demand (rhs)
14%
key driver for growing US solar market beyond policy.

Installed Capacity (gigawatts)
60 12%

% Annual Silver Dem and
 International solar usage may spur growth amid climate 50 10%
controls and growing energy needs in India and China. 40 8%

Global silver demand for solar set to rise 30 6%

20 4%
Silver’s unique reflective and conductive properties make it a key
10 2%
component in capturing and generating electricity through
0 0%
sunlight. The fastest growing industrial segment for silver has been 2011 2012 2013 2014 2015 2016E
its use in photovoltaic (PV) panels for solar energy. This has Source: GFMS Thomson Reuters, GTM Research, ET F Securities. Chart data as of 11/1 6/1 6

resulting in demand for solar PV usage becoming a key component New technologies aimed at replacing silver-reliant silicon PV panels
for the silver market (see Exhibit 1). for other materials is a risk but silver’s unique properties and
process stability will likely keep it preferred among manufacturers.
Exhibit 1: Silver demand for global solar PV remains a key
growth segment of its industrial demand.
10 2016 Forecasted Silver Demand (year-over-year change)
Economics trump policy for US solar
8.1
energy industry?
Silv er demand in million ounces

8
6 With the Trump administration’s America First Energy Plan
4 lacking any mention of renewable energy, many are questioning the
2 outlook for US solar energy and the impact for silver demand.
0.0
0 Policy and tax incentives remain important catalysts, but falling
-2 -1 .1 costs from improving technology coupled with rising economies of
-2.1
-4 scale will likely grow as a determining factor as well.
-3.9
-6 -4.7
Solar PV Ethylene Photography Brazing & Electrical & Other
Oxide Solders Electronics Industrial
In 2016, US solar PV capacity rose 95% to a record 14,626
Catalyst Application megawatts as average panel costs continued to fall from $0.56 to
Source: GFMS Thomson Reuters, ET F Securities. Chart data as of 11/16/1 6
$0.36/watt. This, along with technology and battery advancements,
Global solar PV annual installed capacity is expected to steadily rise has helped improve solar’s economic viability (see Exhibit 3).
reaching 112 gigawatts by 2021, with a cumulative increase in PV
Exhibit 3: US solar PV capacity hits record as costs fall.
electricity capacity of 506 gigawatts over the next 5 years (2016-
US annual solar PV capacity installation (lhs)
2021) according to GTM Research. This should boost silver demand 16,000 Average Silicon Solar Module (rhs) 1 4,626 $1.8
which uses about 2/3 ounce of metal per PV panel (see Exhibit 2). 14,000 $1.6

12,000 $1.4
According to a recent study CRU Consulting estimates strong
Price per watt

$1.2
Megawatts

10,000
growth in silver PV demand over the next 5 years with an annual $1.0
8,000 7 ,492
average of 114 million ounces. Peak consumption of 148 million 6,251 $0.8
6,000
ounces is forecasted in 2018 - about twice that of 2015 demand. 4,7 62 $0.6
4,000 3,37 2
$0.4
1 ,925
In response to silver’s 2011 price rally, a trend of thrifting has 2,000 851 $0.2
emerged among PV panel manufacturers. This trend of substituting 0 $0.0
the precious metal for less costly alternatives like copper, however, 2010 2011 2012 2013 2014 2015 2016
Source: GTM Research, SEIA, Bloomberg, ETF Securities. Chart data from 1 2/31/1 0 to 12/31/16
appears to have stabilized. Additionally, a lower amount of silver in
each panel is likely to be offset by the anticipated rise in volume.
1
Past performance is no guarantee of future results.
New electricity being built and installed in US continued its shift Other countries led by Mexico, France, Australia, Brazil, and the
last year to three major sources: solar, natural gas, and wind (see Philippines are also anticipated to ramp up solar energy capacity in
Exhibit 4). According to the US Energy Information the next five years. These emerging solar markets are expected to
Administration, the levelized cost of energy (LCOE) - a primary equate China’s total solar energy capacity increase (see Exhibit 5).
cost metric for the utility industry- has seen a 40% cost reduction in
Exhibit 5: Expected cumulative global PV installations by
solar. The LCOE for solar PV fell from $130/megawatt (MWh) in country (2016-2021).
2014 to $74/MWh in 2016 making headway against coal
($95/MWh), natural gas ($56/MWh), and wind ($59/MWh). A
major component of solar’s competitiveness, however, has been the
Emerging
Investment Tax Credit (ITC), which if taken into account lowers solar markets
(27 %) China (27 %)
solar PV’s 2016 LCOE to $58/MWh in line with other fuels.
UK (1 %)
Exhibit 4: New electricity generation in the US continues
to shift to solar along with natural gas and wind.
Other Wind Coal Natural Gas Solar Germany (2%) US (21 %)

100% 4% 3% 4% 5% 3% 6%
% newly installed energy generation

9% India (1 4%)
90% Japan (8%)
7%
24% 29% 25% 26%
80% 1 0% 39%
41 %
70% 1%
60% 1 0% Source: GTM Research, ETF Securities. Chart data as of 11/1 6/1 6.
32% 29%
50% 1 6% 47 % 43%
29%
40%
30% 51 % Precious Metals Outlook: Silver
36% 31 %
20%
30%
39% As outlined in our October report, Gold and silver: similar but
27 % 27 %
10%
4% 8% 9% different, silver’s drivers in addition to gold are producer price
0%
2010 2011 2012 2013 2014 2015 2016 inflation, changes in silver supply, and industrial production (see
Source: GTM Research, SEIA, ETF Seucurities. Chart data from 01/01/10 to 12/31/1 6 Exhibit 6). A combination of higher inflation, a weakening US
Part of last year’s record surge in US PV capacity was due to the dollar (in first half of year) and improving manufacturing growth is
anticipated halt of the solar ITC at year-end. The ITC, however, was likely to see silver prices trade in the $20-22/ounce range in 2017.
extended through 2019 at the 30% level with step down rates until Exhibit 6: Silver closely tracks industrial production
2021 before expiring. While Trump’s tax reform plan is still 80 6-month average PMI (lhs) 200%
Silver Price (rhs)
unclear, changes to the ITC are unlikely a battle worth fighting for 75
150%

% Change (year-over-year)
the administration as they are due to unwind beginning in 2019. 70
ISM Manufacturing PMI

65 100%

Additionally, a major focus of the Trump administration has been 60 50%
jobs of which the US solar industry created an estimated 51,000 in 55
50 0%
2016. According to a report by the Solar Foundation, they also
45 -50%
estimate the US solar industry currently employs 260,000 workers
40
– a bulk of which related to residential installations. Further, -100%
35
potential near term adjustments to the current ITC may spur 30 -150%
immediate demand to take advantages of these benefits before the
1969

1999
1993
1975

1981

1987

2011

2017
2005

window closes as we saw in 2016.
Source: Bloomberg, ETF Securities. Chart data from 01/01/69 to 01/31/17

Solar’s growth anchored outside US Global Manufacturing PMI at 52.7 (above the long-term average of
51.4 and sitting at a 34-month high) indicates manufacturing
Looking beyond the US, solar’s prospects remain bright. Following
activity will continue to pick up this year. We believe global PMI
the 2015 Paris Accords, the international community has made
manufacturing will continue to improve, although the pace of
headway in reducing emissions to which solar PV remains a key
growth will slow as we approach a 6-year high of 55 at the year-end.
component along with other renewable energy sources.
After reaching a decade high in December 2016, we expect COMEX
China, the leader in solar energy, continues to grow its clean energy
silver inventory to fall 17% by the end of 2017 back to the levels
initiatives by expanding its solar PV capacity. According to its
seen at the beginning of 2016 as mining capital expenditure has
National Energy Administration, China doubled its PV capacity in
continued to slide. Additionally, we factor an 18-month lag to this
2016 to over 77 gigawatts. India has also looked to solar to meet the
input into our model reflecting the time it takes forgone investment
rising energy demand from a growing and modernizing population.
to bite into supply. As mining capital expenditure and investment
In a recent union budget speech by the Minister of Finance, the
continues to decline this should further weigh on silver supply
government plans to move forward with solar park programs
which has been in a supply deficit for the past 11 years.
generating a potential capacity of 40 gigawatts under both phases.

2
Past performance is no guarantee of future results.
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Definitions: Global Manufacturing PMI Index (PMI) is an indicator of the economic health of the manufacturing sector. COMEX = the primary market for
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ETF001114 02/28/18

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