Chinese Solar Panel Manufacturers
Employees carry solar panels at a solar power plant in Aksu, Xinjiang Uyghur Autonomous Region May 18, 2012. Reuters

Silver may not fare as well as some investors hope, even if the "war on pollution" by the government of China -- the world's largest maker of photovoltaic (PV) panels -- phases out coal-power plants.

Silver paste is used in crystalline silicon PV solar cells, according to industry association the Silver Institute. China is the largest producer and exporter of solar panels in the world. The European Union and the U.S. have even complained that China floods their markets with artificially cheap solar panels and kills domestic producers.

The case of higher silver prices is simple: if China’s leaders crack down on pollution, as avowed last week, China’s energy production could shift from coal-fired electricity plants towards alternative energy, like solar panels, driving up demand for silver. That’s the case made by ETF Securities in a note earlier this week.

Solar panel uses take up about 5 percent of annual silver supply, estimated ETF Securities research director Mike McGlone. Last year the Chinese government also mandated an increase in domestic solar capacity to 25 gigawatts by 2015, a further drive to demand, he added. A gigawatt is enough to power between 750,000 and 1,000,000 U.S. homes.

Chinese demand for silver in solar panels could double in a few years, if that mandate goes through, said McGlone. “It’s certainly increasing rapidly,” he said, of such demand.

“Who’s the largest PV producer in the world?” he added. “Their biggest source of pollution is coal-fired electricity plants. If we can replace some of that electricity production with renewable solar panels, that’s perfect. It makes sense.”

About 100 million ounces of silver are projected for use for solar energy in 2015, about double today’s levels, on Silver Institute estimates.

But that view doesn’t chime with other industry data, which sounds a cautionary note to silver investors.

Global silver demand for solar panels could actually decrease 1.5 percent in 2014, to just 52.4 million ounces, metals consultancy Thomson Reuters GFMS estimates. China’s solar panel industry used more than 35 million ounces in 2013, but that could decline slightly in 2014, as producers become thriftier, to a potential low of 30 million ounces.

China's solar panel makers also aren't immune to financial struggles. Consider the bond default of solar panel maker Shanghai Chaori Solar, the nation’s first-ever corporate bond default. Solar panel prices have also fallen sharply in recent years, leading to consolidation and cuts within the sector, reported the Wall Street Journal.

Chinese net silver imports are projected to continue falling in 2014 thanks to a cut in unnecessary and “uneconomic” solar panel production capacity, noted Citigroup Inc. (NYSE:C) Government subsidies will be cut substantially, Citigroup analysts said, removing a spur to growth.

China also exports many of its solar panels, complicating the picture. China made almost two-thirds of solar panels worldwide in 2012. Still, they installed 12 gigawatts of solar panels within China in 2013, or a third of global installations.

The long-term case is clear, even if the timeline for higher silver prices remains fuzzy, argued McGlone.

In 2005, China used less than a million silver ounces in producing solar panels, relative to the 38 million ounces absorbed in 2012, according to Reuters GFMS data.

Even as silver powder and paste makers reduce silver in solar cells, to stay competitive and help struggling customers reduce input costs, Chinese solar panel installations are nonetheless forecast to grow.

“China expects to increase installations to 14 GW in 2014 and is increasingly focusing on pushing domestic demand as it loses business with the U.S., due to the trade war,” said GFMS.

China’s global market share in solar panel production likely grew in 2012.