Global silver supply in 2015 is set to shrink for the third year in a row, according to Thomson Reuters GFMS. In their “Interim Silver Market Review,” they estimated a shortfall of 42.7 million ounces. Total silver supply for 2015 is estimated to be 1.014.4 million ounces. This is 3% lower than last year.
Silver mining production is slated to grow only at a 0.3% rate for the year, due to the closure of many mines. Silver scrap supply has dropped by 5%, and a net 12.6 million ounces of silver has been de-hedged in anticipation of higher prices.
2015 Silver Supply
Silver supply can be broken down in the following ways:
Primary Mining Output
Primary silver mines have increased production in 2015, thanks to boosted output in Latin America. The world’s three largest primary silver mines are in Mexico, Guatemala, and Chile. Together, these three mines are responsible for most of the increase in silver mining.
Secondary Mining Output
Those gains are offset in the secondary silver mining sector. Nearly 70% of the world’s supply of freshly-mined silver is a by-product from base metal operations, whose primary goal is copper, lead, and zinc extraction. The crash in base metals has been far worse than the decline precious metals, due to slowing demand from China.
This has resulted in slowdowns or outright closures of many copper and zinc mines as companies cut costs to weather the downturn. If less copper, lead, and zinc are being mined, that means less silver as well.
Total mining production for 2015 is slated to be 867.2 million ounces, the weakest level since 2002.
Scrap Silver Supply
Scrap silver supply is falling this year as well. This is the fourth year in a row that scrap silver totals have shrunk, as sellers await an upturn in prices. GFMS estimates that scrap silver supply will fall by 5% in 2015.
Hedging and Exchange-Traded Products
Hedging is the practice of selling future production today, to lock in today’s prices. This is done when producers think prices will fall in the future. This selling forward increases the amount of “paper silver” in the market.
Silver Exchange-traded products, including Exchange-traded funds (ETFs) sell shares of themselves, backed by holdings of physical silver. These are used by investors for short-term exposure to silver price movements. With the drop in silver prices, outflows from these funds as investors cash out has helped offset part of the reductions in other sectors.
2015 Silver Demand
Silver demand can be divided as follows:
As silver prices have fallen investment demand has exploded. Sales of the American Silver Eagle bullion coin are set to break another all-time record. GFMS records silver coin demand jumped by 103% in North America in the third quarter, selling 23.6 million ounces worth of coins in those three months.
Global silver coin demand for the third quarter set a new record high of 32.9 million ounces — an increase of 95%. This demand led to shortages of coins from most major mints. Silver coin demand should account for 12% of global demand this year.
The solar industry is the largest single sector of industrial silver demand, at 74.2 million ounces This is a 17% increase from last year, and close to the all-time record of 75.8 million ounces in 2011. Solar will account for 13% of global silver demand in 2015, up 2% from last year. Demand from the solar energy sector was only 1% of total silver demand in 2005, to show how quickly it has grown.
Use of silver in the production of Ethylene oxide is expected to hit 8 million ounces. This is a 49% increase from last year, and a five-year record. Ethylene oxide is used to make many household and industrial items,
A drop in silver demand from the electronics industry due to advances in miniaturization and a drop in electronics demand in China will offset gains in other industries by 12.9 million ounces.
Industrial uses will account for 54% of silver demand in 2015.
De-hedging and Exchange-Traded Products
In a sign that miners see improvements around the corner, an estimated 12.6 million ounces of silver will be de-hedged this year. This involves buying out previously sold contracts on future silver production.
As mentioned in the silver supply section, silver ETFs have been reducing holdings, which is adding to the silver supply.
This fall in silver supply this year will be slightly more than the fall in silver demand, but continues a trend of shortages. As more mines are exhausted and exploration is curtailed, these silver supply shortages are expected to accelerate.
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.