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LAWRIE WILLIAMS: Silver price prospects set fair

According to the latest figures from GFMS, prepared on behalf of The Silver Institute – global silver production fell by 5 million troy ounces last year – the first fall in new production for 15 years.  Although the fall was a minimal 0.6%, global silver demand in 2016 was estimated to have exceeded supply by a rather larger 147.5 million ounces - a seemingly ever-continuing global deficit in silver supply vs demand.  Further some preliminary Q1 figures from some of the leading producers suggest that supply may fall further in the current year, perhaps rather more sharply, while demand will likely be unchanged, or perhaps higher still with growth in the photovoltaic sector in particular.

Whether real supply/demand figures have much impact on silver prices short term is contentious – the price is driven largely by some rather anomalous dealings in the futures markets, but in terms of a long term trend, assuming these are continuing signs of future continuing, and perhaps growing, shortfalls in supply, fundamentals are likely to assert themselves as time progresses.

Table 1.  Top 20 Silver Producing Nations 2015/16

Rank 2015

Rank 2016

Country

Output (Moz) 2015

Output (Moz) 2016

1

1

Mexico

192.0

186.2

2

2

Peru

138.0

147.7

3

3

China

110.0

112.4

6

4

Chile

48.6

48.1

4

5

Russia

50.8

46.6

5

6

Australia

49.0

43.6

7

7

Bolivia

42.0

43.5

8

8

Poland

41.5

38.5

9

9

USA

35.0

35.4

10

10

Argentina

34.7

30.0

11

11

Guatemala

27.5

26.9

12

12

Kazakhstan

17.3

17.8

13

13

Sweden

15.9

16.4

15

14

India

12.0

14.0

14

15

Canada

12.2

13.0

16

16

Indonesia

10.0

11.2

17

17

Morocco

9.6

10.1

18

18

Turkey

5.5

5.6

20

19

Armenia

4.0

4.6

21

20

Iran

3.3

3.6

 

 

Rest of World

31.9

30.5

 

 

Global Total

890.8

885.8

Source: GFMS, Thomson Reuters

The most important part of global silver output is as a byproduct from gold and base metals mining and declining production in both sectors will likely lead to a further downturn in global silver production this year and in the future.  Already a prolonged strike at Escondida, the world’s largest copper mining operation, but one which produces a fair amount of byproduct silver, along with downturns at other base metals mines, has seen Chile’s Q1 silver production fall by a massive 26% - and Chile is currently the world’s fourth largest silver producer (see Table above).

One of the biggest contributors to by- or co- product silver supply are major lead/zinc/silver mines as the three metals tend to be closely associated.  Some of the biggest mines in this sector have reached/or are reaching the ends of their productive lives.  Furthermore,  low metals prices over the past few years have led to a decline in mineral exploration activity in both the gold and base metals sectors and this too will have an adverse impact  on the level of future supply, although the prospect of higher zinc prices ahead does seem to have stimulated the development of some new mining operations.

From the table of major silver producers above, if it wasn’t for Peru, the world  No.2 silver miner seeing an increase in production in 2016 of some 9.7 million ounces, the global demand fall would have been far greater.  But there are signs that the downturn in copper production (and the corresponding fall in byproduct silver output) seen in Chile, and noted above, may also be happening in Peru too. 

Mexico, the world’s No.1 silver producer has also been seeing falls in output – notably from Goldcorp’s huge Penasquito mine – which although classified as a gold mine is one of the world’s largest individual mine producers of silver.  Here the mine has entered a planned lower grade production area which will continue for the next couple of years too.  Primero’s San Dimas mine also reported a substantial fall in output where, as GFMS reports, production was adversely impacted by enhanced ground support work and labour issues among others.  New labour problems have recently resurfaced with the company announcing in mid-February, that workers had initiated strike action, resulting in the complete stoppage of activities on site.  This strike was finally resolved in April after about a 9 week interruption and the mine is currently returning to full production.  Thus Mexico may well see another downturn in overall silver production this year.  Prior to 2016 the country had seen 12 years of uninterrupted silver production growth.

Whether the silver price will respond much in the short term to the likelihood of anther output decline this year is, however, a contentious point.  Much depends on investment demand, which is volatile to say the least.  Perhaps even more is dependent on the gold price to which the silver price seems inextricably tied.  If the gold price rises, silver tends to do even better, but if the gold price falls the reverse is also true.  However any substantial silver price rise – and by substantial I mean a price above $35 or so – the silver price could be capped due to the ready availability of above ground stocks.

Longer term, the decline in usage in photography, which used to be silver’s main area of demand, now seems to have dwindled to almost insignificant proportions, and has been more than replaced by growth in the photovoltaic sector – which is continuing to see annual advances due to the increasing impact of the green energy sector.  Other industrial uses do seem to be growing too so there remains a good prospect of continuing supply/demand deficits provided investment demand holds up.  Should gold advance too then the prospects for silver would seem to be set fair.  Recently the Gold:Silver Ratio (GSR) rose back above 75.  As gold steadies and rises the GSR should fall back to silver’s advantage.  We have been predicting a level of 65 which could prove conservative – but remember 2011.  If silver rises too far too fast it will likely be brought crashing down again by the big money to protect  some very large short positions.  Caveat emptor.

15 May 2017

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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