Supply and demand are the essence of any market, and the precious metals are not excepted from this fact. This principle is particularly true of silver, however. More so than even gold, which has tremendous existing stockpiles that are frequently remelted (and endlessly loaned out), the price of silver is sensitive to disruptions in the mining industry.
There’s simply more turnover in the silver supply. Much of the world’s yearly silver production, perhaps half, gets exhausted by industrial demand and cannot be recycled for other purposes. Moreover, most of the annually mined silver supply—approximately 69%—is a secondary byproduct recovered from the mining of other metals: gold mining (13%) and especially copper mining (22%) and lead and zinc mining (34%). Only 30% of newly-mined silver came from primary silver mines in 2015.
Essentially, a small amount of silver is regularly found in the same orebody as the primary metal being mined for. Given the scale of global base metal mining operations, these small quantities of silver add up quickly. The latter three metals—copper, lead, and zinc—are often grouped together as base metals or industrial metals.
By compiling and analyzing the figures above reported by the World Silver Survey last year, the SRS Rocco Report confidently states that “56% of global silver production is a result of copper, zinc and lead production.”
The Risk for the Silver Supply
This means that the next time there is a downturn in the mining of base metals, or a drop in these commodities’ prices, silver will also be impacted significantly. In fact, any decline from the peak in base metal mining will have a disruptive effect on the silver supply. If demand for silver rises or stays constant during such a supply shortfall, prices could skyrocket.
There is one more element to this story: the primary silver miners who supply 30% of global silver production have already been experiencing a dwindling of their deposits. In Peru, the world’s second-leading producer of the argent metal behind Mexico, there was a dramatic drop-off in silver production during the first two months of this year. Compared to a year previous, silver output in Peru was down 12%. (Gold production was also down.) The country’s Ministry of Energy and Mining attributed the decline to an “exhaustion of the reserves of the current deposits” being mined in the country’s top-producing region. If this trend continues, it could augur a perpetual decline from peak silver production. On top of this, the level of productivity at primary silver mines has fallen from historic highs to historic lows.
Check out the animated video below for a quick rundown of the world’s top silver-producing nations.
There is some hope that a revival in capex (capital expenditures) by big base metal mining firms like Glencore and Rio Tinto is a sign that the broader sector is poised for a rebound. However, even these optimistic forecasts are well short of the last “super-cycle” for commodities in the wake of the financial crisis. In the event of a decline in global base metal production, expect a much tighter silver supply as an unavoidable consequence.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.