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Material Matters: Silver, Zinc And Coal

Commodities | Jan 30 2017

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A glance through the latest expert views and predictions about commodities. Silver use in PV cells;  zinc markets; China's coal policies; dividend outlook for miners.

-Silver demand in solar cells likely to decline in the medium term
-High price of zinc relative to other metals will begin to destroy demand
-Coal output restrictions likely to return in China
-Morgan Stanley suspects relative underperformance in mining sector


By Eva Brocklehurst


Citi suspects demand for silver in the photovoltaic (PV) cells market may improve in 2018, based on optimistic estimates of global cell capacity. Demand for silver in solar cells is in a state of flux and likely to decline over the medium term, as 2017 becomes a year of de-stocking of capacity and global demand catches up with supply.

Demand for silver emanating from solar cells comprised 7% of total silver demand in 2016, according to industry estimates. It is believed, based on these estimates, that the volume of silver used within PV cells is declining around -5% every year, because of continued efforts to reduce costs.

In the event that silver prices rise rapidly, the broker believes companies may adopt more stringent cost-cutting programs, or invest in non-precious metal components altogether. Alternative technologies are still too expensive to displace existing solar cells but the risks of copper substitution within IBC solar cells could decrease the silver paste market share over the medium term.

Meanwhile, PV rooftop tiles may eventually improve end use in residential markets and grow the distributed energy network. The amount of silver used in roof tiles is not yet clearly evident. Much depends on whether the tile is a thin-film solar cell or a monocrystalline silicon. Hence, based on current arrangements, Citi approximates 100-120 mg of silver per tile could be in use. The broker expects both the efficiency and rising adoption rates will increase the penetration of PV cells among US households.

In the current market, where the Chinese government has clamped down on feed-in tariffs for solar PV systems, Citi believes only the lowest-cost manufacturers are likely to survive and possibly increase market share. Policy and subsidy changes may begin to slow down production and, while solar growth in China exceeded expectations in 2016, the broker question is whether the rate of growth is sustainable.


Chinese trade and smelter production data have confirmed that market tightness is yet to emerge. Nevertheless, zinc prices look robust in the high US$2000/t range, Macquarie asserts. Chinese smelters are now making minor reductions in output and the ex-China market is preparing for a marathon negotiating period for 2017 concentrates. Macquarie believes the wind is favouring sellers at this juncture.

The broker agrees continued price strength suggests prices will be above US$3000/t by the end of the year. After that, the trajectory is less certain. Glencore's shuttered mines are likely to return to production at some point while new projects are being accelerated.

The price of zinc relative to other materials such as aluminium will begin to destroy demand the longer the price remains high. In 2018 the broker expects continued shortages of metal but also a subsiding of demand growth. Macquarie's current base case rests on a re-start of the Glencore mines in mid 2017. A combination of these changes is likely to dampen prices before more concrete physical market re-balancing arrives in 2019/20 to bring zinc prices back down to earth.


China is expected to underpin the global coal market in the near term. If prices continue to slide, Macquarie expect some form of output restrictions will come back, such as the 276 days policy, which was suspended in November until the end of the first quarter. The government recently outlined a thermal coal price target around the annual contract price of RMB535/t.

Supply intervention now appears only likely if prices are above RMB600/t or below RMB470/t. The Chinese government's pronouncements may be enough to prevent prices trading outside this range and the broker's confidence in this scenario is one of the main factors underpinning its recent upgrades to coal price forecasts.

The broker also contemplates a scenario where China will pull back from its readiness to accept coal imports, as an alternative measure to support domestic coal prices, particularly as the policy goal is to support domestic mining.

Macquarie notes Beijing's ability to strongly intervene in domestic supply renders traditional supply and demand analysis for coal largely obsolete. It is possible the government could make further adjustments to import taxes and/or coal quality cut-off levels, in an effort to dissuade imports and provide more assistance to domestic coal mines.

This is not Macquarie's base case. Nonetheless, the broker believes it is a risk worth highlighting, as if this was to happen it would clearly provide downside risks to seaborne coal price forecast.


The potential for the mining sector to re-rate on structural changes in dividend policies is a key debate, Morgan Stanley observes. Yet, analysis indicates the mining sector is unlikely to re-rate on a shift to dividends, based on pay-out ratios.

Analysis of long-term dividend trends suggest there is a modest historical correlation between dividend yield and relative performance, except at extreme levels. The broker warns the market is currently close to such an outlier and, historically, this has driven 2% relative underperformance in the following 12 months.

The broker believes dividend signals are not as strong as the debate suggests and the market is currently close to such a level which is not helpful for sector performance. The broker notes a switch from progressive dividends to pay-out ratios reduces the risk of over-investment during periods of high cash flows. On average, Morgan Stanley calculates companies are targeting 50% pay-out ratios.

This compares to 42% and 44% for Rio Tinto ((RIO)) and BHP Billiton ((BHP)) respectively. The pay-out ratio dropped to 26% and 32% respectively during the super cycle, as progressive dividend policies encouraged more re-investment in growth relative to dividends. In the pre-super cycle period pay-out ratios reconcile neatly with the new dividend policies, the broker asserts.

Considering the outlook for volume growth across commodities Morgan Stanley believes it will be hard to replicate double-digit rates of growth. On a base case estimate the broker's forecasts imply 3% and 2% growth in dividends per share for Rio Tinto and BHP Billiton, respectively, for the 10 year period 2017-27.

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