In their latest Commodity Investor report, Barclays Capital forecast a tarnished outlook for silver this year, asserting that silver's fundamentals appear to be the weakest within the precious metals complex.

As the major earthquake in China's Sichuan Province renewed concern about base metals supply, Barclays' analysts said they felt power shortages and logistical difficulties posed a much greater risk to base metals production.

Meanwhile, Barclays forecast platinum prices will average $2,100 for the second quarter as platinum supplies are heavily dependent on South Africa and the delicate power supply situation as well as mine safety concerns leave mine output extremely susceptible to potential disruptions.

The analysts projected continued industrial demand growth-albeit at a slower rate for silver, while other forms of demand are likely to remain on their downtrend while mine supply should rapidly accelerate.

Six years of robust growth have been primarily fuelled by demand from India, China and the U.S., particularly on the back of strong demand from electrical and electronics sub-sector, the analysts noted. However, this year, although we expect continue growth in industrial applications, we do not expect that growth to significantly outpace the anticipated decline in other sectors.

This year we expect overall fabrication demand to be mostly unchanged. By contract we expect the growth in mine supply to remain particularly robust.

Noting the large number of major projects and expansions scheduled to come online, Barclays forecast the largest annual silver mine production increase since 1990 for a record 6.5%. In our view, burgeoning mine output should offset weakness in other forms of supply, leading to an overall increase in supply, the analysts said. Silver's fundamentals appear to be the weakest within the precious metals complex.

Investment demand remains the only factor that could provide some partial compensation, according to Barclays. Speculative interest on Comex is already strong, while the three physically-backed silver ETFs now cumulatively hold 6.6Kt, with flows for the year to date up almost 700 tonnes. In our view, silver's poor fundamentals are likely to add to downward pressure on prices.


While Barclays noted the base metals supply concerns that have resurface following the major earthquake in China's Suchuan, the analysts said it is too early to determine the extent of base metals production losses resulting from the disaster. The much greater risk to metal supply is power shortages and logistical difficulties. Those facilities facing transportation restrictions will have to run down stocks to continue operating and risk being forced to reduce output if sufficient raw materials cannot be sourced.

Zinc, lead and aluminum are most at risk and prices have reacted accordingly, Barclays said. Although zinc prices have risen, the analysts expect the price increase will only be temporary and for prices to come under pressure before long. Chinese aluminum production is at risk of falling below projections this year and we expect a noticeable pick up in consumption given huge growth in downstream production.

Barclays also noted that lead supply is vulnerable to disruptions and that the market remains tight this year.

A key component of current soft Chinese physical buying for many of the base metals is destocking by semi-fabricators.  But stocks cannot be run down indefinitely and we ultimately expect a pick-up in buying. There is potential for softness for copper prices in the coming weeks, but the fundamentals still support a test of $8,800/t going forward.

The impact of constrained tin output is clearly being illustrated by falling stocks and with the fundamentals looking like undergoing further tightening we expect more price gains towards $2,999/t, the analysts said. We expect nickel prices to firm in late Q2 in line with a pick-up in stainless steel activity and overall we expect less volatile prices this year.


Despite attempts to substitute and lower platinum content in auto-catalysts, Barclays advises that industrial demand for platinum remains largely price inelastic and in turn the market is set to stay in deficit, further eroding the lower level of above ground inventories.

Meanwhile the analysts suggested that supply -side interruptions are also likely to spur positive investor sentiment towards gold.  Most external drivers remain price positive particularly given expectations for the dollar to weaken further. Gold prices were buoyed by investor interest and this is likely to remain the key price determinant this year. Physical buying emerging on dips is likely to cushion prices, rather than drive them higher, Barclays concluded.