* Silver demand from photovoltaics drops by a third in 2012 from 2011 record
* Demand drops even as solar panel sales increased about 9 percent
* Long-term prospect bright for solar power and photovoltaic silver demand
By Rujun Shen
SINGAPORE, Dec 31 Surging silver prices have cut demand from the solar power sector by a third this year from 2011's record highs, and the decline will continue next year as the industry that uses nearly 5 percent of global silver supplies scrambles to cut costs.
Silver paste is a key component in the photovoltaic panels that dot the roof tops of houses and buildings to trap the sun rays for electricity generation.
A nine percent increase in silver prices this year, on top of a tripling in prices since end-2008, has forced many panel manufacturers to reduce the amount of metal they use, even though sales of panels are rising.
As a result, silver consumption by the industry plunged to 40 million ounces (1,244 tonnes) in 2012 after touching a record of more than 60 million ounces in 2011, following years of rapid expansion, according to metals consultancy Thomson Reuters GFMS.
Expectations that prices of the precious metal may rise as much as 38 percent in 2013 will only encourage the industry to further cut usage.
"It suddenly went from not counting for anything to 20 percent of cost for cell makers," said Charles Yonts, an analyst at Credit Lyonnais Securities Asia, a Hong Kong-based brokerage.
"Since it was so unimportant, the R&D engineers hadn't paid any attention at all until last year to reduce silver consumption. And from then, they've done it with a vengeance."
Silver demand slumped even as solar panel consumption increased 8 percent in 2012 to about 30 gigawatts, according to data from NDP Solarbuzz, a research and consulting firm.
Apart from rising costs, the solar power industry is also grappling with overcapacity and tumbling product prices as panel demand from the key European markets weakens as the euro zone's economy slumps. Trade spats involving the United States, the European Union and top panel maker China created more trouble.
The photovoltaic demand in 2011 was nearly ten times the wattage in 2007, Solarbuzz said. A median forecast by industry officials and analysts is for 10 percent growth next year.
"Gradually people have been using less silver and that trend will continue in the future," said Finlay Colville, vice president of NDP Solarbuzz.
"As the reduction in silver usage is faster than the growth of the solar industry, there is going be a decline in silver use."
Poland's KGHM Polska Miedz S.A., BHP Billiton and Fresnillo Plc, the world's top three silver producers in 2011, contributed a combined output of 117.5 million ounces, about 15 percent of the world's total silver mine production, according to GFMS.
Much of the world's silver is mined as by-products of other metals, including copper, lead and zinc.
Because silver is the best conductor, solar panel manufacturers have little choice but to rely on the metal, which means long-term demand will remain resilient.
"In the short-term, the solar industry faces the problem of oversupply. But in the long run, demand should grow steadily and silver paste demand will grow, too, because substitution of silver will not progress very fast," said Carl Lee, spokesman at Gigasolar Materials Corp, a Taiwan-based paste maker.
Growing environmental awareness is also likely to boost the industry's future prospects, solar panel manufacturers say.
"We are believers that this industry has a solid future and will continue to get back longer-term to double-digit growth," said Ellen Kullman, chairman and chief executive officer of leading silver paste supplier DuPont, at an earnings conference call in late October.
"It's just not going to happen in 2013."