Has Peak Silver Arrived?

Whilst a lot of precious metals investors are solely focusing on gold, we would almost forget about silver, also called ‘the poor man’s gold’ although things are changing fast on this market as well.

2016 was the first year in more than a decade wherein the primary silver production (coming from mines either as a main product or a by-product credit) decreased. After seeing a total silver production of approximately 668 million ounces in 2007 increasing to 891 million ounces in 2015, we saw a (first) decrease to 886 million ounces in 2016.

Source: The Silver Institute

As you can see on the previous image, the total recovery from scrap and the inflow from hedges decreased as well, causing the total silver supply to decrease by approximately 3% to 1.007 billion ounces, the lowest level since 2013.

Whilst the total demand for silver also decreased to 1.028 billion ounces, 2016 was the fourth consecutive year with a supply deficit. Sure, the deficit was just 21 million ounces, but that’s entirely due to the lower demanf for jewelry and investment purposes. As you can clearly see in the same table, the demand from those two end-uses was 519 million ounces in 2015, but fell to just 414 million ounces in 2016, a decrease of 105 million ounces.

Source: Ibidem

One of the arguments of bears is the decreasing use of the precious metal in the photographic sector. It’s absolutely impossible to deny that, but it’s also already clearly visible in the trend since 2007. In 2007 the silver demand for the photographic sector was 117 million ounces 12.32% of the total world demand, but last year, the sector needed just 45 million ounces of silver, which is now just over 4% of the total world demand.

This means that even if the demand for photographic uses would drop to zero (which isn’t impossible, although the sector demand has remained relatively stable since 2013), this would most definitely NOT cause a shift of the demand curve. One main contributor to the steady demand would be the increased use of the photovoltaic sector, where the silver demand reached its highest point éver.

So the supply side of silver isn’t really slowing down (yes, the total demand was lower due to lower demand for investment uses), but the silver demand from industrial sectors is still at an elevated level.

Source: Ibidem

This also means the supply side will have to (try to) keep up with the demand. According to the Silver Institute, only 30% of the mine supply is coming from mines which have the commodity as a primary product. 12% comes from primary gold mines, whilst an additional 23% is mined as part of primary copper deposit. With the current low gold and copper price, not a lot of new mines will be developed which will put pressure on the supply side of the equation.

Fortunately 35% of the mine supply came from lead-zinc mines, and as these two commodities are performing well, it’s not unlikely more lead and zinc mines will be brought into production, boosting the silver output in the process. That being said, several larger zinc mines have been shut down and are still shutting down, and it looks like the average grade of the precious metal as a by-product in the ‘advanced stage’ zinc mines is dropping, perhaps even to a level where smelters don’t deem the silver to be payable due to low recovery rates in the process.

Long story short: the demand for silver is there ‘to stay’, but will the supply side be able to keep up with the demand? Scrap supply seems to have peaked, whilst it won’t be easy to increase the mine supply.

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