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Silver to See Better Days Ahead on Industrial Activity Pick-Up

Madhurima Das

Silver prices have gained a meager 1.2%, so far this year, due to the coronavirus-induced crisis. Silver, like gold, is considered a safe-haven asset in times of uncertainty. While gold has clocked a 13.8% year-to-date return, riding on the U.S-Iran tensions, the coronavirus pandemic, strained U.S.-China relations, and the ongoing civil unrest in the Unites States, silver has grossly underperformed the bullion. This is mainly because industrial applications account for roughly 60% of the global silver consumption and the slowdown in industrial activity amid the pandemic has dealt a massive blow to the white metal.

U.S Manufacturing Activity Inches Up in May – A Silver Lining

Per the Federal Reserve, industrial production declined 11.2% in April in the United States — marking the sharpest drop in the index’s 101-year history — as several factories had to slowdown or suspend operations due to the coronavirus pandemic. Manufacturing output for the month fell 13.7%, the steepest decline on record. Further, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) came in at 41.5% for April — hitting the lowest level since April 2009. On a positive note, the PMI in May inched up to come in at 43.1%, as businesses are resuming operations in most states.

Although the reading remains below 50 (which denotes contraction), the sequential improvement offers a ray of hope. Considering that the manufacturing sector accounts for 11% of the U.S. economy, a pick up in the sector raises hope that the economy is beginning to heal.

Meanwhile China’s industrial production showed a 3.9% year-over-year improvement in April compared with the 1.1% decline suffered in March. This was the first growth in industrial output since December 2019, when the coronavirus hit the country. Silver plays a vital role in the production of solar cells that produce electricity. China is the largest photovoltaic (PV) silver market globally. China is also the world's largest auto market. With more than 36 million ounces of silver utilized annually in motor vehicles, a pick-up in manufacturing activity will translate to silver demand.

Miners Resuming Operations

Mexico, which is the world’s largest silver producer, churns out nearly 23% of world production of the white metal. About 80% of Mexico’s mining sector has now restarted, as the country continues to ease restrictions on miners. Peru, which comes second, is also allowing miners to resume production.

The Silver Institute anticipates global silver mine production to decline 4.6% in 2020 mainly on the disruption of operations and mine closures amid the pandemic in the beginning of the year. Overall demand is expected to decline 3%, as strong investment demand, which is expected to grow 16% on macroeconomic uncertainty and geopolitical tensions, will likely be offset by the weak industrial demand witnessed so far.

The Institute expects silver prices to attain the $19 level by the end of this year. However, the full-year average price is projected at $15.70, indicating a 3% year-over-year drop.

The concerns over the riots in the United States, rising animosity between the United States and China over Hong Kong, as well as the coronavirus showing no signs of abetting any time soon, it will continue to fuel the safe-haven demand for gold and silver. Global efforts to restart and revive economies following the coronavirus pandemic-induced lockdowns are anticipated to boost silver demand, leading to a rebound in silver prices.

Demand from the electrical and electronics sector should account for the bulk of gains. Silver utilization in the automotive industry is likely to register impressive growth aided by vehicles’ rising sophistication and electrification. Silver use in 5G-infrastructure and upcoming intelligent electronics is also likely to fuel demand. The ongoing revolution in green technologies, aided by the exponential growth of new energy vehicles and investment in solar photovoltaic energy, will act as a major catalyst.

Industry Performance & Rank

In tandem with lower prices, the Mining - Silver industry declined 10.2% year to date, while the S&P 500 depreciated 4.4%. The industry falls under the broader Basic Material sector, which slid 10.2%.



The industry currently carries a Zacks Industry Rank #132, which places it at the bottom 48% of more than 250 Zacks industries. The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates gloomy prospects for the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Investors keen on the industry may consider Pan American Silver Corp. PAAS and Alexco Resource Corp AXU, which currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Vancouver, Canada-based Pan American Silver Corp has an estimated long-term earnings growth rate of 2.4%. The company has a trailing four-quarter earnings surprise of 32.2%, on average.

The Zacks Consensus Estimate for fiscal 2020 earnings for Alexco Resource, which is also based in Vancouver, indicates a year-over-year surge of 166.7%. The estimate has also moved up from an expectation of a loss of 5 cents to earnings of 4 cents per share, over the past 60 days.

Investors might consider keeping an eye on stocks like Endeavour Silver Corporation EXK and Hecla Mining Company HL. Both these companies carry a Zacks Rank #3 (Hold), at present, and have positive earnings estimates for 2020.

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Hecla Mining Company (HL) : Free Stock Analysis Report
 
Alexco Resource Corp (AXU) : Free Stock Analysis Report
 
Endeavour Silver Corporation (EXK) : Free Stock Analysis Report
 
Pan American Silver Corp. (PAAS) : Free Stock Analysis Report
 
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