Silver imports surge in H1, but the momentum may not last

Rising demand for silver in two of the world’s largest consumers, China and India, since the beginning of this year is seen raising hopes of a better price performance for the metal. A precious metal and industrial metal at once, silver generally follows the footsteps of its more sought-after sibling, gold.

The first half of this year has been no different. In the initial months, silver prices rose two per cent on strong investment demand and in line with gold. The market came under pressure following the waning effect of most of the supportive factors, including interest rates and currency. In other words, the Fed rate hike and firmer dollar have pressured the market down.

To be sure, demand is a significant driver of the silver market. Three countries — USA, China and India — account for close to two-third of global fabrication demand; and between China and India, they account for about 40 per cent. Demand for jewellery has decidedly been weak in the two Asian majors in the whole of last year.

Fortunately, rising consumption in the photovoltaic and automotive sectors has propped up the metal.

Now, there are incipient signs that the tide could again be turning in favour of the metal. According to reports, fabrication demand in China and India is seen rising as evidenced by import data. Both China and India have shown strong growth in import of the metal in recent months.

From around 6,000 tonnes in 2015, India’s silver imports declined by nearly half to about 3,100 tonnes last year, reaching lows not seen since 2012. This was the combined effect of limited liquidity in rural areas after two years of below-normal monsoon and withdrawal of high denomination currency notes in November.

But the first few months of this year have seen the tide turning with an increase in inflows. Arrivals in the first half are estimated at 3,000 tonnes, nearly equal to the volume for the whole of last year.

Will these levels of imports sustain in the second half of the year? While opinions differ, according to consultancy firm Metals Focus, it will be difficult to achieve the same level of import in the second half of the year. The firm sees the surge in import in H1 not so much as an indication of consumption demand, but for replenishing inventory to meet the expected demand growth in H2.

It is also seen as an anxious response on the part of traders to build inventory well before introduction of the Goods and Services Tax.

Importantly, in India, from June to September, demand for precious metals such as gold and silver ebbs because of the pre-occupation of the rural population with agricultural activities. After September, with the commencement of the harvest and improved liquidity in rural areas, demand returns.

This year, if farm output is good and rural incomes rise, renewed demand for silver has the potential to emerge in the form of jewellery, coins and silverware.

The remarkable firmness in the rupee will of course help contain any upside price risk to prices. At the same time, farmers’ agitations in different parts of the country — seeking loan waivers, price support and so on — have cast a shadow on the emerging situation. Investment demand is likely to continue to struggle. India’s silver imports will aggregate 4,500- 5,000 tonnes for the whole year, says Metals Focus.

The writer is commodities market and agribusiness specialist. Views are personal