Could This Trend Send Silver Stocks Higher?

Silver miners First Majestic Silver (NYSE: AG  ) , Hecla Mining (NYSE: HL  ) , and Fortuna Silver Mines (NYSE: FSM  ) reported a sharp increase in production for the second quarter. The surge in production comes at a time when silver prices are expected to remain rangebound. However, silver miners can take heart from the fact that industrial demand is continuing to pick up. While a pick-up in industrial demand will not lead to a significant upside in silver prices, it will certainly provide a floor. Indeed, if silver miners can bring down their costs, they can capitalize on the pick-up in industrial demand.

Silver miners report sharp increase in output
Earlier this month, the likes of First Majestic Silver, Hecla Mining and Fortuna Silver Mines reported a sharp increase in second-quarter production.

Mexico-focused Canadian miner First Majestic recorded an output of 3.86 million equivalent ounces of silver for the second quarter ended June 30, an increase of 18% year on year.

Hecla Mining said in its preliminary production results that its output increased 14% to 2.5 million equivalent ounces of silver for the second quarter ended June 30 from 2.2 million equivalent ounces of silver, recorded in the same quarter of last year.

Fortuna Silver Mines, which operates mines in Peru and Mexico, also posted 52% growth in its silver production for the second quarter ended June 30 to 1.6 million equivalent ounces of silver.

The surge in silver production, however, is coming at a time when prices are expected remain rangebound due to lower investment demand (except for ETF holdings and coins demand), chances of stronger dollar in the backdrop of tapering of the asset-purchases by the Federal Reserve, and the fact the market is expected to remain fundamentally imbalanced.

However, silver miners can take heart from one big development has taken place in the first two quarters. Silver's industrial demand, which was near-flat last year, has picked up strongly in the first six months of this year.

Industrial demand picking up
Back in April, the International Monetary Fund's (IMF) World Economic Outlook forecasted growth of 3.6% for the global economy this year, up from 3% in 2013. The forecast raised hopes that the demand for the industrial metal may improve as it has applications in wide-ranging industries.

However, it was difficult to predict how much improvement will be seen in silver's industrial demand. In November 2013, Scotiabank predicted that the industrial demand would remain 'subdued' except for relatively new applications such as solar panel industry.

A glance on this year's industrial demand figures, released recently by Thomson Reuters GFMS, a metal consulting firm, paints an optimistic picture though. Indeed, the data shows that the industrial demand was very robust in the first half of the year and the trend is likely to continue.

According to the Silver Institute, citing data from Thomson Reuters GFMS, the demand for the industrial metal picked up strongly across all sectors, ranging from the semiconductor and photovoltaic industries to the ethylene oxide industry during the first half of the year.

The consulting firm said that there has been a big jump in global renewable energy demand; and, as a result, the demand for silver from the photovoltaic industry could witness 10% growth this year.

Record-growth in the semiconductor industry has also improved the industrial demand outlook for silver given that it is widely used in electronic products that contain semiconductors. Worldwide sales of semiconductors stood at $78.5 million in the first quarter of the year, the highest ever sales recorded during the period, the Silver Institute noted.

Silver's application as a catalyst has also increased significantly during the period. According to GFMS, silver's use in the production of ethylene oxide, a key element for making wide-ranging chemicals, plastics and cleansing products, is expected to climb 23% in 2014 to 8 million ounces.

The figures reflect a very strong recovery in industrial demand. Indeed, data provided by Scotiabank shows that between 2004 and 2007, when the global economy was rapidly growing, industrial demand for silver rose 7%, annually.

Miners still have to lower costs
Earlier this year, Barclays forecasted that the total silver supply (mines, scrap-sales, and official sales) this year will exceed the demand by 6,482 tons, which was one of the reasons why I was little cautious on miners. However, the pick-up in industrial demand should help ease some of the supply glut. Still, silver's gains are likely to be capped, as I noted in an article earlier this month. The key then for miners will be to bring down costs in order to ease margin pressure. If miners can lower costs, they will certainly be worth a look, especially in the wake of improving industrial demand. 

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