Silver Industrial Case Study February 2011: Rethinking Photographic Silver Consumption

February 21, 2011

The number one problem in the financial markets isnt that traders, investors, and speculators dont know what theyre doing. In fact, they understand very well the mechanics of finance. However, many investors couldnt even begin to explain what drives commodities, but theyd be more than happy to give you a recommendation on what makes a great buy! As time progresses, one often repeated piece of misinformation becomes more popular with silver bears: Silver consumption from photography is in decline. Taken only at face value, many observe this to be true after comparing pie charts of one years consumption to another pie chart of another years silver consumption. From 2000 to 2011, the statement is true: the spread of the digital camera has impacted the data we use to chart silver consumption. However, that does not mean that there have been any shifts in consumption at all. Silvers Relationship with Photography It should be important to realize the divisions of the photography market and how they are related to silver. Keeping this information in mind, youll be able to make your own analysis of the situation, and were sure youll see why photography really isnt all that important. There are three pieces of the photography market: Color Photography Virtually all silver used in making color photography is recycled. Black and White Photography This is the only consumer-grade photo development product that consumes silver. Medical Imaging X-ray machines produce pictures that are developed with silver; silver is consumed in this process, and it is not recycled. With those pieces of information in mind, we can see quite clearly how the move toward digital photographs is affecting silverit isnt! Color photography results in essentially net-zero consumption of silver in the first place. Black and white photographs are not nearly as popular as they might have been in the days before color photography, and it would be reasonable to say that few outside those newly-engaged, married, or graduated even purchase black and white pictures. Have you even seen a real black and white picture lately? In fact, according to the USGS, 272 tons of silver were used in color photography, while the black and white segment of photography consumption added up to only 11 tons. Then we get to medical imaging. This is the only category that is actually growing, and it is the only subset of the entire photography market that actually consumes silver in the development of images. Keep in mind, too, the shift in demographics. As the baby boomers in the United States and around the world get older, it is certain that the medical consumption of silver (as it relates to photography) will only continue to rise. We will call it the broken hip blip on the silver charts.

Digits and Data According to the 2000 US Geographical Survey, it was found that some 1,870 metric tons of silver were used in photography, and it was expected that 1,450 metric tons could be recovered. Thus, we can expect that even after accounting generously, 77% of all silver used in photography is simply recycled again. To come to this conclusion, the USGS found that color negatives, reversals, and motion picture films made for 100% of silver recovery. Black and white film, by contrast, led to consumption only in the range of 50-60%, thus 40-50% could be recycled. X-rays, for all purposes showed consumption of 50-60%, thus a total recovery of 40-50% of consumed silver. Recycling silver from photography is done with ease. Consider that in 2000, the price of silver was just over $5, and yet 77% of it would be recycled. The other 23% was actually consumed. This indicates that in all photographic purposes, the separation of silver from other elements and materials isnt nearly as difficult as it is in other industrial purposes. Production as a Variable While it appears that the amount of silver is very much limited in supply, and that silver production may soon peak as the easiest-to-find silver becomes tapped (supplies tend to get short when prices rise seven-fold in one decade), silvers annual production has risen considerably since 1990, from roughly 16,000 to 20,000 tons per year. What makes this important? The other half of the photography market argument does. Analysts see only a shrinking piece of the silver pie being dedicated to the photography market, but fail to consider that the actual annual production was growing recently, while photography demand, as it appears in the comparison charts, was actually staying flat. The true amount of silver consumed in photographic development actually increased, even though by percentage, it actually decreased. Also, comparisons by percentage do not take into consideration that most silver in the photo consumption category isnt consumption at all, since a majority is recovered after the film is developed. If most silver used in photography wasnt being consumed ten years ago, then why does it matter today that the amount of silver in the photography category is shrinking? Wouldnt that just mean that less silver is floating around in circulation before it is recycled? Indeed, it would. Silvers Replacements The possible replacements for silver in photography are few; that is, without silver, we cannot have black and white image development, nor can we have any hardcopies of Xrays. It is important to note that X-rays have slowly reduced the total amount of silver consumed in each image. X-rays produced from 1987 to today are roughly 1% silver to weight; in the six years leading up to 1986, X-ray images were 2% silver by weight. There is a small exception to this rule that some analysts cite: the MRI of today is essentially what the X-ray machine was for generations prior. MRIs, unlike traditional x-

ray machines, produce digital images that do not need to be developed, and thus, do not require any silver to make the images. However, since MRI machines are costprohibitive, all the available silver left on this earth may be 100% consumed by the time the MRI completely replaces the X-ray. At best, such a view is the result of investment tunnel vision, seeing only what reinforces a position and ignoring most everything else. In this case, it is also the result of geographic, maybe even nationalistic tunnel vision. National debts notwithstanding, the United States and other developed, European nations are very, very wealthy. While the MRI may be the new standard in developed economies, much of the world couldnt even begin to consider the purchase of an MRI machine, as few can even afford a basic X-ray today. When the worlds wealth shifts from the developed world to the emerging markets, what do you think theyll demand most? Second only to food, as weve seen in recent riots, consumers will likely demand better access to health care, as well as better health care in general. To be absolutely truthful, even in the twenty-first century, more people go without health care than live with it. Those of us who have access to a doctor are, by contrast to the rest of the world, living like billionaires. In the emerging markets, it is not at all uncommon to see old American and European economy cars being driven well past their life expectancies domestically, nor decadesold appliances to be the pride and joy of a kitchen in the developing world. Likewise, it isnt uncommon to see our outdated medical equipment used to treat billions of people in emerging, frontier markets. There is still an entirely larger group of people who will consume medical care, but will not be able to afford the best of the best when it comes to medical care. Were sure that following centuries of poverty so deep that access to a doctor is all but impossible, an X-ray machine will do the trick just fine.