Silver Supply May be at Risk
Supply and demand are the essence of any market, and this principle is particularly true of silver. More so than 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 more turnover in the silver supply. Much of the world’s silver production is exhausted by industrial demand and can’t be recycled for other purposes. Most of the annually mined silver supply (+/- 69%) is a secondary byproduct recovered from the mining of other metals. In 2015, only 30% of newly mined silver came from silver mines.
So the next time there’s a downturn in base metal mining, or a drop in these commodities’ prices, silver will also be affected. 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 experienced dwindling silver deposits. In Peru, the world’s second-largest silver producer, there was a dramatic drop-off in production during the first two months of 2017. Compared to 2016, silver output was down 12%. As well, the level of productivity at primary silver mines has fallen from historic highs to historic lows.
There is hope that a revival in capital expenditures by big base-metal mining firms is a sign that the broader sector is poised for a rebound. Even these optimistic forecasts are short of the last super-cycle for commodities after the financial crisis. If there is a decline in global base metal production, expect a much tighter silver supply as a consequence.