SINGAPORE/HONG KONG (Reuters) - The solar industry's rapidly growing demand for silver could hit a wall next year, as the rising price of the precious metal forces solar cell makers to cut use of the metal in their battle against overcapacity and a near halving of product prices.
Silver consumption by solar panel makers nearly doubled in 2010, exceeding growth in all other industrial applications and capturing the attention of silver bugs. But the curve has flattened this year, and looks likely to head south in 2012.
Overcapacity in the solar industry ranges up to 10 gigawatt, or two thirds of 2010's production, and will continue to outstrip weak global demand, which analysts expect to grow just 6 percent in 2012.
About a tenth of the solar industry's raw material costs are contributed by silver, which has the highest electrical conductivity of any element, allowing it to soak up all the electrons generated in solar cells. It is by far the industry's biggest expense besides cell base material polysilicon.
"Silver is just too expensive," said Andy London, global manager of the Photovoltaic Business Unit at Heraeus, which, together with DuPont (DD.N), is one of the top two global suppliers of the silver paste used to make solar panels.
"When silver was $15 an ounce, it was simple math to say, 'Well we will use 10 percent more silver and we will have more output of the cell because it's worth it'. At $30, it's the opposite -- it's not worth the extra money they'd get for extra power, because they would have to pay so much more for the silver."
Solar cell makers use silver to paint the grid lines on the front of a silicon wafer -- the main component of a solar cell. A small amount of silver is also painted on the back of the wafer. The highly conductive metal helps collect and transfer the electrons generated when photons in sunlight hit the wafer.
SOLAR PANEL PRICES PLUMMET
The prices of solar panels have plummeted about 40 percent this year, as the world's largest solar energy market, Europe, crumbled under the weight of a deepening debt crisis.
But silver prices stayed high as investors flocked to safe haven precious metals amid economic woes, forcing solar cell makers to find ways to shave cell costs right down to its constituent silicon, tempered glass and aluminum.
Solar firms' use of silver, estimated at just under 0.1 gram per watt of power in 2011, could drop by as much as 25 percent next year, and reach about half in 2014, Heraeus' London said.
"To survive, we are eternally finding ways to cut costs, improving our production processing to boost the cell efficiency and cut use of some materials," said Jason Chow, chief financial officer at Solargiga Energy Holdings, one of China's largest solar wafer and cell makers, with revenues of 1.86 billion yuan ($292.43 million) last year.
Spot silver traded at about $31 an ounce on Wednesday, or 38 percent off its all-time high of $49.51 in late April. Though silver has given up most of its gains this year during market turmoil in recent months, it still was twice as valuable as at the end of 2009.
SILVER ALTERNATIVES EYED
The explosive growth in silver demand from the solar industry -- a more than fourfold jump between 2007 and 2010 -- prompted silver paste makers to expand their operations in Asia to be near China, the world's largest solar cell producer.
Faced with reduced demand outlook for the short term, these producers are reducing silver loading in their products and hunting for substitutes, to satisfy customers seeking cheaper raw materials.
"Our effort is to generate more power by introducing new technology with lower silver consumption," said Walt Cheng, Greater China managing director at DuPont Electronics & Communications.
Researchers have considered replacing silver with other metals, such as copper and nickel, but silver stands out for its conductivity and compatibility with silicon. These factors make its complete elimination unlikely in the near term.
The solar industry consumed 1,546 metric tons of silver in 2010, or about 6 percent of the world's total fabrication demand, up from 3.6 percent in 2009, ThomsonReuters unit GFMS and the Silver Institute said in a research report.
In the long term, the solar sector still offers huge potential to boost demand for the precious metal. After solar inventory clears and product prices recover, investment in the industry is expected to return, driving capacity expansion and silver usage.
"The industry is probably going to double in three to five years," said DuPont's Cheng. "The key driver of strong demand comes from how much the industry can reduce cost."
For now, rising silver prices remain a disincentive to prop up silver usage.
After a year of wild swings, silver prices are expected to remain at lofty levels in 2012, riding on the coat-tails of gold, supported by economic uncertainties in the United States and Europe.
But overall demand for the precious metal from industries including solar power should ease in the next six months amid a slowing global economy.
Dominic Schnider, head of commodity research at UBS Wealth Management in Singapore expects the spot price of silver to reach $37 an ounce over the next 12 months while price levels in the lower $20s should offer solid support.
"When prices dropped from $40 to $30, that was very good from a solar manufacturing point, but nobody thinks it's permanent," said London of Heraeus. "Everybody says prices are going to stay high." ($1 = 6.3606 Chinese yuan)
(Editing by Clarence Fernandez)