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What Impact Will Digital Photography Have on Silver?
by Douglas Kanarowski 
August 22, 2003

The response to my previous essay, "78 Approaching Forces For Higher Silver Prices," was overwhelmingly favorable and the silver market appears to have given it the nod as well. As always, there were a few critics and a wise investor will always give them a fair hearing. In the essay 70 positive forces and 6 negative forces that are expected to impact the future price of silver were listed. Digital photography was intentionally left off of the list and now you will know why. Just as a reminder, I am just an individual investor that believes that my good Lord has blessed me with a slightly above-average level of analytical skills. Other than that, I am a lot like the guy next door.

In the minds of the silver critics, digital photography represents the single greatest threat to higher silver prices. Since the digital question sounds so legitimate and refuses to die, I think it appropriate to fully resolve this lingering issue once and for all. Not only does the critic deserve an answer, but the silver investment community needs a clear and concise essay that adequately addresses this issue. In the latter case, I expect that the resolution of this issue will build their confidence and dispel their doubt.

I enjoy Bill Fleckenstein's backwards & entertaining style of writing. He announces his conclusions up front and then follows them with supporting evidence. In that spirit I will begin by stating: THE EVER GROWING DIGITAL PHOTOGRAPHY MARKET WILL HAVE LITTLE OVERALL EFFECT ON SILVER DEMAND.

Three Little Thingies….

For the average silver advocate, it should only be necessary to present facts from three diverse information sources. One, and by permission, the prestigious CPM GROUP'S SILVER SURVEY 2003. Two, a report of my DIGITAL/ANALOG PRICE COMPARISON OUTING. And third, COMMON SENSE.

A Trip Down Memory Lane….

The digital advocate has argued that the new digital technology will replace a very high percentage of the old silver-halide or analog photography at some point in the future. "Out with the old and in with the new!" While the defenders advocate that both technologies will quietly co-exist and may even grow side by side. History produces examples from one extreme to the other. Inside your house you might find plastic, stainless steel or sterling silver eating utensils. You may eat off of china (pottery), glass, plastic or even a paper plate. The news will arrive via newspaper, radio, TV or the internet. Your house may be heated by wood, coal, oil, electricity (possibly nuclear), natural gas or solar. In the field of transportation, walking led the parade yet po-folk' and lycra-clad joggers are still at it. At various times along the way came bicycles, busses, cars, trains and planes. Co-existing technologies all. But in the next room you might have a stack of 45 RPM records, 8-track tapes, an 8 mm home movie camera or a beta video tape player. Fountain pens, a suit of armor, jousting lances, and wooden false teeth likewise have bitten the dust. All completely ousted by a new technology. Replacement or co-existence? Which is the right model?

Its Tool-Time!!!…

While I was thinking about this, the wife reminded me that our puppy had outgrown the doghouse. I needed to drive some nails and I found ALL my answers at the hardware store. Big Al showed me the newest nail gun on the market. It was an awesome, rapid-fire unit that was powered by replaceable CO2 cartridges or compressed air which he noted, had to be supplied by an alternate source. It had adjustments for power settings, nail types, penetration distances and other bells and whistles that I didn't even understand. One gentle squeeze of the trigger and that puppy would send a six-penny nail from here to kingdom come while passing through the bull's-eye of three targets along the way. A building contractor or a guy doing a heck of a lot of carpentry projects would have LOVED IT and certainly BENEFITED by its ownership. On the down side, and not wanting to dampen Big Al's enthusiasm, I secretly concluded that the nail gun was heavy, dangerous, expensive to repair, had a gang of moving parts subject to breakage, and required special nail-strips for ammo. Worst of all, it was far more costly to buy and then operate than the hammer on the shelf right next to it. When Al turned to help another customer, I sheepishly took my $20 dollar hammer to the check out. Simple, cheap, effective. Digital will co-exist and not replace.

The Survey Please!!!!…

The table on page 15 shows that in the year 2002, total world demand for silver was 785 million ounces. But let’s reduce this number a little further.  Out of this number, jewelry and silverware used 271 million ounces and photography used 255 million ounces. Photographic demand is huge force in the overall silver market.  Therefore, it WOULD APPEAR that any SIGNIFICANT disruption of photographic demand would be very important to the whole silver market.

Did W. C. Fields Really Say,  "Ah yes!  Another clear cut example of confusing the issue with the facts my boy."?

On that same table we could scan back over the last 11 years of photographic silver consumption in millions of ounces.  Starting with 1992 and ending with 2002, we have the following progression of (rounded) numbers: 199, 201, 216, 221, 231, 242, 257, 267, 262, 257, and finally 256. The nail gun crowd will want to jump on this one as there seems to be a down-trend developing. After all, the peak year for silver photo usage was at 267 million ounces in 1999. What's up with the drop? See the next two paragraphs.

If The Picture Is Fuzzy Ya Gotta Keep On Digging…

On page 112 is a much longer term (26 year), bar graph of silver photo usage going back to 1977. The overall picture that you see an ever-rising progression of stair steps with a gentle, somewhat flat trend since 1999.  The graph shows that silver photo usage is solidly and convincingly in a long term up-trend. Furthermore, the total length of each bar is color coded with four inputs: US, Japan, Europe, and other countries. This is important. Only Japan is showing a marked decline in silver photo usage (and we all know how sick the economy has been over there). Given the increase in digital camera sales in the U.S., one would have expected a silver decrease here at home. It didn’t happen or hasn't happened yet.

Paye E. Tension…

The second explanation of the decrease in silver photo usage is given on page 16. "Photographic use of silver dropped for the third straight year, as (#1) weak economic conditions, (#2) large inventories of film and paper, (#3) and the steep reduction in both air travel reduced the volumes of photographic materials being used in general photography. (#4) Graphic arts use continues to fall, as both advertising and publishing suffer reduced output and (#5) these applications shift to no-silver using technologies and (#6) technologies that reduce their silver requirements." I added the numbers for the benefit of the reader. However, the important thing to see here is that of the six contributors listed, ONLY #5 IS DIGITALLY RELATED. And, you may have properly observed, many of the other causes are relatively big events. Page 112 even puts more issues on the table and this time digital isn’t even mentioned. “Travel, especially for vacation, is way down around the world, due to war, terrorism, the newly emergent SARS respiratory disease, weak economic conditions, and more. Photographic use is heavily dependent on vacations and travel: People take more pictures when they travel.” This time I’ll let the report speak its own conclusion. Page 20, “Photography is showing some weakness as well, but this is primarily due to cyclical economic weakness. Photographic use of silver is expected to continue for years to come.” 

If You Want It Done Right, You Have To Do It Yourself…

One would normally think that a comprehensive silver report would include a category called Recycled Photographic Waste or Chemical Recycling or other such descriptive heading. There are some GIANT NUMBERS lurking here yet the headings are just not to be found. Since the CPM report has no such language, the digital advocate may jump to the grossly mistaken conclusion that photography consumes silver in mass quantities that are forever lost. End of story. This is not the case.

Why Am I Hearing The Same Sounds That Animals Hear Just Before A Big Earthquake?…

Back to the table on page 15 we see that in the year 2002, SECONDARY SUPPLY contributed 198 million ounces toward meeting the 2002 demand of 785 million ounces. Or, roughly one quarter of demand is met from Secondary Supply. What exactly are they talking about here?  Well, Secondary Supply is further broken down into three components: old scrap, coin melt, and Indian scrap. But what exactly do they mean by SCRAP? Pages 92, 93 and 94 tell us that scrap includes: scrapped fabricated objects, old coins, old jewelry, decorative objects, household objects, a host of industrial waste, spent ethylene oxide catalysts, old electronic scrap, old sterlingware, old silverware and finally, PHOTOGRAPHIC chemicals, films, and papers. Did you notice the last word I just put in capitals?

Houston, We Really Do Have A Really Big Problem…

Page 93 “Much of the silver that is recovered annually from SCRAP (emphasis mine) is old photographic materials – silver recovered from used solutions from developing film and paper prints. Additional silver is recovered from film and paper directly. Perhaps as much as 160 million ounces of silver is recovered from photographic scrap each year.” Oh my goodness! Out of a total of 198 millions of ounces recovered from scrap and listed as Secondary Supply, 160 million ounces of that total are RETURNED to the market from silver based photography. Now, can you see why I thought a category for Recycled Photographic Waste or Chemical Recycling or other such descriptive heading would have been appropriate?

Pullin' A Few Lose Ends Together…

256 million ounces used in silver photography ….. a really big number. 160 million ounces recovered from photo scrap …. another really big number.  There's a hand up at the rear of the class.... That's right Randy, in 2002 only 96 million ounces were therefore actually LOST in photography! The number suddenly got much, much smaller. Even if silver pictures went the way of the Dodo bird, and digital took up 100% of the slack, a maximum of 96 million ounces would be effected. Should we stop there?  I …. Don't …. Think …. So!  (P.S. Keep this 100% figure in mind as we start incorporating percentages.)

All Scrap Isn't Scrap.  All Photography Isn't Photography…

Photography basically just means taking a few flicks at a family gathering right? Only sometimes. A nice pie-chart on page 113 further breaks that 256 ounces of photography down into four sub-sectors: Commercial or Basic 160, Medical X-rays 63, Dental & Industrial X-rays 21, and Graphic Arts 12.

Hold the Phone…

Two of the four categories aren't traditional pictures, but X-rays! X-rays have a combined usage of 84 million ounces or about 33% of the pie. Although not specifically mentioned in the CPM report, digital inroads are already being made in both of the medical and dental x-ray fields. Several digital systems are already up and running. Generally, they have specialized advantages and are expensive. It's far too early to tell if these inroads will become freeways or dead end roads, but a world-view versus a hometown-view should supply the most accurate answer. If the digital x-ray applications perform much better AND cost much less, they could reasonably be expected to eventually displace the old, but-still-very-reliable silver based x-ray equipment. With what I have recently learned from other helpful souls, the two watchwords will be: GRADUAL & EVENTUAL. In either case, these words imply a slow and steady transition from where we are now, allowing the silver navigator to adjust his course. And finally, 50% of the 84 million ounces currently used are already recycled, significantly decreasing the impact of any present or future digital x-ray applications.

Two Down, Two to Go…  Survey Says…

Page 114. "Over the past few years the Graphic Arts sector (think magazine advertising) has lost a great deal of silver use to digital imaging." This is the nail gun crowd …. The professional photographers. But remember, this is by far the smallest piece of the pie chart using 12 of the 256 total. Even if digital completely took over this sector, … So what? What's more, while no one can measure the exact amounts, some of the digital pros print their work on …. Guess what? …. Silver paper and use silver in other processes.

Pass That Last Piece of Pie…

Commercial or basic home photography uses 160 million ounces before recycling credits. The question is, can we slice this number down too? Yes, a very big YES.

Special of the House #1…

Basic or Commercial photography usually means COLOR pictures as opposed to black & white. Get ready!  According to most sources, color photography routinely returns 80-85% of the silver used! A very large amount! Feeling generous and using the smaller 80% figure, we arrive at only 32 million ounces lost due to basic photography in 2002. Or alternately, 128 million ounces recycled as Secondary Supply from this lone source. Two years ago, while doing my own due diligence as a silver investor, I personally visited a small Nevada recycler. They maintain that “their process” captures almost 100% of the silver contained in the photo chemicals that they process. (To keep this record straight, this is a small company and they are presently not a big force in photo chemical recycling.) One final point here, recycling is primarily done overseas. Statistically, it might appear that other countries are dis-hoarding or producing an abundance of silver from their mines but such is often not the case. Page 94 "Some of the silver that is coming out of China is counted in this (CPM) report as mine production in Peru, Indonesia, and other countries. To count it as Chinese supplies would be to double-count this metal and to inflate the size of the silver market." 

Special of the House #2… How many go digital?…

At the beginning of this essay, you may have thought that the following question was going to be THE ONE REALLY BIG ISSUE. But, because we have already done so much damage to the digital argument, the question has practically lost all of its significance. WHAT PERCENTAGE OF CAMERAS WILL EVENTUALLY BE DIGITAL? No one knows! While precise numbers cannot be given, with a little more homework, it should be possible to venture a fairly good guess.

Time For Dessert…

From page 115 we see an estimated world population of 1.7 billion cameras including 60 million digital. Two years ago 1.6% were digital but this figure has now grown to 3.3% of all cameras. Use your mind or a piece of paper to construct a simple pie chart. 3.3% of your pie chart is digital.  Therefore, the remainder is an amazing 96.7% conventional! This is how cameraland stands even after the last two year surge in digital sales. If it was a real pie (pecan is my favorite), you couldn't even cut a sliver that was 3.3% because it's such a tiny amount!  The message is: digital has a very long way to go from where it now stands to build up any meaningful percentages.

What's That Noise At The Back Of The Class? ….

Dilbert says he has a digital and so does everyone he knows. So what? What is it with Americans? They go on vacations to foreign lands, get their picture taken on the back of a donkey, come back home and put it on the shelf and then expect everyone back in donkey country to buy a far more expensive digital camera system. We seem to always forget that we are the “affluent few” that make up something like 4% of the world population.  Instead, it is the mass populations of China, India and the Third World that will determine the fate of digital.  Page 115. "While the percentage of cameras that are digital is rising, the number of traditional cameras is growing faster than the number of digital cameras, indicative of the degree to which conventional photography remains a vibrant market."

My Digital-Analog Price Comparison Outing…

For my completely non-scientific, field-research project I visited two different camera stores. The first was the single largest camera store in a city numbering two-thirds of a million. This is the kind of high-priced store that the professionals and affluent would frequent. Wal-Mart was the second store.

High-Prices Are High Prices….

The store manager and salesmen were unanimous at “the big camera store.” They were sure that I needed a digital, otherwise I just wasn’t “with it.”  Besides, “Almost all our customers have digitals… it’s all you need and besides you can make 'em at home.”  My questions began: “Your least expensive analog?”  ….$59. “Your least expensive digital?” ….$120. Everyone knows what it takes to get your analog pictures back from the drug store but, “What is the very least amount of equipment that I will need to do my own digital pictures on a regular basis?” After lots of delays and plenty of sales talk:

The Added Cost of Goin' Digital

Additional memory cards $30.00  
Spare rechargeable battery $50.00  
Camera to printer adapter (if not compatible) $70.00  
Printer $150.00  
Ink - Black $8.00  
Ink - Color $19.00  
Paper - 50 sheets, Matte finish $14.00  

Many advocate e-mailing digital pictures to others. You then need two computers and two e-mail accounts. Total Price?  Fill in the blank ___________.  The apparent bottom line: The camera store's game was to get you hooked on THE WHOLE DIGITAL SYSTEM. Once hooked, you'll keep coming back to buy more support products and services.  Maybe this is why there were so few customers in the store.

Walley-Land…

The sales clerk at Wal-Mart was most helpful by comparison. She volunteered that she was a 15-year, part-time professional photographer and didn't own a digital. She was completely happy with her analog cameras and didn't see enough advantages to switch. She noted that, "It depends on YOUR PURPOSE or WHAT YOU WANT IT TO DO (like e-mailing pictures).  It's a little like comparing apples to oranges. They both have their own advantages." I asked, "Will your customers switch to digital?" Her response was, "See all those people in that line? They're all waiting to pick up their regular pictures and that's the way I think it's going to be."

A Little Comparison

Digital

Analog

1 Digital picture from your memory card $.29  
1 Analog picture
(24 exp., 4"x6", color)
  $.165
Cheapest digital camera
(requires computer, Internet, printer)
$19.67  
Cheapest re-usable analog
(35mm w/24 exp. film included)
  $4.87
Cheapest single-use analog
(2-pack, w/27 exp., 54 pics, Fuji, flash)
  $6.76

Overall survey conclusion: For the foreseeable future, digital will be the more expensive choice. And, if the people of the world could only own one camera, I would be surprised if even 25% chose digital.

Push em Back, Push em Back, Way Back…

A comprehensive silver/digital report would not only address the digital threat, it would go a step further and call into question the very validity of the digital argument. In other words, why doesn’t anyone question the sales projections of the digital advocates? Ok, I will. Enter Joe Schmoe and Mrs. Schmoe. He works for the home appliance industry and she has a job at a travel agency. With their combined incomes, they are nearly able to have most of the things they want. Once they get Joe Schmoe Jr. out of college, they expect Junior to get a job and finally go out on his own. Shouldn’t be too long. Junior is a senior and almost has his degree in psychology. For the longest time, they used their credit cards responsibly. But, little by little, they stopped paying in full and began to build up larger balances (average US card balance is $8K plus). Even though they had a perfectly good camera, they put a new digital on the card along with a laser printer and the ongoing supplies. Not to worry. They usually pay more than the required minimum monthly payment, but they have experienced months where the minimum was the best choice. Besides, the value of their house has gone way up. With their home equity line of credit, they can pay off those credit cards anytime they want. And, so far, they have only tapped that source as "an investment" in Junior's education and that last little vacation that they both desperately needed.

History Is Good For Reminding Us Of Things We Don't Want To Remember…

Economists, that are far wiser than myself, have been telling us that the US and much of the affluent world has been experiencing the greatest credit and consumption bubbles in the history of the world. I believe them. One way that this has manifest is that the Schmoe's have "felt richer" and have consequently "spent more." Translation: they have practically stopped saving and have gone much deeper into debt! Historically, their spending and saving behavior is not normal. Rather, it is grossly ABNORMAL. Without going into all the details, in every aspect of their lives, the Schmoe’s are headed for trouble. Even Junior's career choice is suspect as state, county & city social services programs are being cut everywhere. (As an aside, there are two recent psychology graduates in my neighborhood. One is working in a pet shop and the other is a seasonal, federal employee who has the job of scaring bears away from tourist camping areas!) What is more important to recognize is that all the high points mentioned for the Schmoe’s have undergone major distortions as a direct result of the twin bubbles. Economic history also says that all periods of over-consumption are followed with periods of under-consumption. I believe that too!

Abra-Kadabra…

Like magic, a single digital camera that consumers would not and could not have purchased in a normal economic environment, can now appear in three places at once: on a shelf and then again on our credit card and home equity balances. Recent digital camera growth did not evolve independent of, but WITHIN the much larger and more powerful credit/consumption bubbles. Once these bubbles pop, it seems obvious that digital sales will decline with them. Robert Prechter reminds us that economic trends slow before they reverse. So, if my analysis is correct, the pace of digital advancement will certainly slow and then possibly reverse as more powerful economic trends play out. In my view, the pro-digital growth assumptions are leaking.

Summary & Conclusions:

  1. The nail-gun and hammer is a good working analogy that suggests co-existence and not replacement.

  2. Silver photo usage has recently slowed but this is mostly attributed to Japan and to larger economic factors and not digital inroads.

  3. Silver photographic usage is grossly overstated in the minds of most market participants.  Accounting for recycling, only 96 million ounces are actually consumed and not the much larger 256 million-ounce figure widely believed.

  4. Scrap silver objects (198 million ounces) that one would normally think would count for so much, don't amount to a hill of beanie babies compared to the 160 million ounces of that figure that are recycled from mostly color photography that has more than an 80% silver recovery rate.

  5. Digital usage often incorporates silver at various points in the production/storage process.

  6. When all costs are considered, of the two processes, digital is the more costly and complicated.

  7. Digital growth has been fueled from WITHIN the larger, historical credit and consumption bubbles.  Much smaller digital sales would have taken place had it not been for these bubbles.  Due to much larger and more powerful economic considerations, the biggest percentage gains in digital may soon be behind us.

For this silver investor, "the coast is still very clear." 


Addendum to my "78 Approaching Forces For Higher Silver Prices" essay: Three more storms have popped up on my radar screen that suggest yet higher silver prices:

  1. In the approaching economic climate that we face, the long established cycle of a "preference for cash" may be replaced at the producer level with "holding onto the commodity they produce" as a MONEY SUBSTITUTE. One major gold producer appears to already be doing this.

  2. Present and future silver mines will be located in multiple countries and political jurisdictions around the world. In a low price silver environment, the miners are accepted and welcomed. IN A HIGH PRICE ENVIRONMENT, ENVY, GREED AND THE LAW OF THE JUNGLE ENTER THE EQUATION.  Increased political interference will surface and run the gamut from increased taxation & bribes to nationalization & outright confiscation of "our national treasures." All interference will ultimately result in higher costs to the silver end-user.

  3. Theoretically, when the overall stock market is rising, a single investment dollar entering the market may be sub-divided between the 400 stocks in the S&P 500 that are rising. However in a falling market, that single dollar will now only be divided between the 25 stocks that are rising within the falling market. The COUNTER-CYCLICAL PM STOCKS ARE THE BENEFICIARIES OF A MULTIPLIER EFFECT. Being in the smaller group, they receive a much higher proportion of each investment dollar.

© 2003 Douglas Kanarowski
dski209@webtv.net