Why solar’s resurgence could have a silver lining

It is well known that the solar power industry is currently in the throes of a massive expansion. Total global solar capacity added in 2016 is estimated to have increased some 50%, owing to a doubling of demand from economic powerhouses China and the US. According to data from SolarPower Europe, the EU-level solar trade body, new solar photovoltaic (PV) capacity installed in 2016 reached more than 76 gigawatts (GW), a dramatic increase on the 51GW generated from new panels installed over 2015, taking total global capacity to 305GW; an impressive 663% increase on the paltry 40GW output in 2010.

Given this grand resurgence, one could be forgiven for forgetting that it was but a mere six years ago that the bottom completely fell out of the industry. Back in 2011 Europe dominated solar, accounting for around 75% of production, but following huge price competition from China and subsequent evaporation of subsidies in Europe, the bubble effectively burst and flushed out an untold number of fledgling solar companies in the process. Although solar’s latest comeback is unquestionably a shot in the arm for both solar manufacturers and installation companies alike (I personally know a solar company in Switzerland whose orders have increased by 50% in the last 12 months), the real winner, of course, is the environment.

Naturally, the opportunities in this surging market have attracted considerable investor interest. An increasingly popular way for investors to gain exposure to the solar market is via ETFs, such as the Guggenheim Solar ETF and the VanEck Vectors Solar Energy ETF. These vehicles invest in a basket of companies involved in providing goods and services exclusively within the solar energy sector, and can lower risk exposure compared with investing in individual solar equities.

Another strategy is to look at potential investment opportunities in the underlying commodities critical in the manufacture of PV cells. Using this approach, one commodity of particular interest to value investors is silver.

Since hitting highs of $48.41 back in 2011 driven by inflation fears and successive waves of Quantitative Easing (QE) programs, silver, like gold, experienced a sharp cyclical correction to hit a low of just under $14 in 2015, and hasn't found the legs to take it past $20 ever since.

On the one hand, present day geopolitical stresses coupled with protracted weakness in the US dollar seem to have firmed up the bottom for silver–or perhaps even reignited its uphill trajectory–largely due to its safe-haven credentials and tight historical correlation with gold. On the other, it is silver's industrial demand that could well be the catalyst for more substantial investment inflows for both the physical metal and mining equities directly as a result of the solar revolution.

Although the average solar panel uses only around two-thirds of a troy ounce (or 20 grams) of silver, at a spot-price between $18-$20/oz it contributes more to the cost of a PV cell than it does to the other industrial applications of the white metal. For example, a laptop contains little more than 1 gram of silver, and a cell phone uses only a third of that again, so silver is but a small fraction of the cost of those devices.

Silver's unparalleled electrical conductivity makes it an indispensable element in the manufacture of PV cells in the form of a paste, and the industrial demand is increasing at a time when global mining silver mine output is slowing. The chart below shows that silver demand from the solar industry increased 8.6 million ounces in 2016 over 2015 levels, and to a large degree offsetting declines in other industrial sectors. This trend is likely to continue given that solar silver demand is projected to hit an all-time high in 2018.

As always, however, several factors exist that may act to curb industrial enthusiasm for silver in the medium term. For example, broader adoption of thin-film PVs which are said to consume up to 30% less silver could act to ease demand from solar manufacturers. Furthermore, a sharp increase in the spot price would likely see the return of PV manufacturers substituting silver for less expensive, more readily available materials such as copper, a process known as 'PV thrifting.'

Despite these developments, current demand for solar panels, may outpace the industry's ability to make sweeping changes to the manufacturing materials or processes. Some estimates put solar's total contribution to global energy at around 8% by 2020, while bodies such as the International Energy Agency predict solar could make up as much as 16% of global energy production (6250GW) in that time-frame. This continued growth is to be led by projects such as World Bank's recent approval of a large-scale, $100 million solar park in India, and the 'floating' Yamakura Dam 51'000 panel solar farm project in Japan. These projects are reflective of how quickly solar's momentum is building in the renewables sector, thus making it all the more likely that silver will be pulled along for the ride.

The information contained within is for educational and informational purposes only. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. McKay Research/James McKay is neither being compensated for this article, nor has any positions in the stocks/funds mentioned. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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