Silver production gains expected to end this year

May 6, 2015

Lower prices for silver are expected to put an end to 12 straight years of gains in global production of the metal.

The World Silver Survey, published by the Silver Institute and Thomson Reuters GFMS, found that silver mine production rose 5 percent in 2014 to reach 877.5 million oz. It was the 12th successive gain and a new record but output is expected to decline in 2015. The survey cites a dearth of new mines and aging operations as part of the cause.

“We’re just not seeing the investment in new mine capacity that would be needed to sustain continued record peak production,” Andrew Leyland, an analyst with GFMS who worked on the report told The Wall Street Journal.

Another reason for the slowdown is falling silver prices. Silver prices tumbled 20 percent in 2014, and fell 36 percent in 2013, exceeding the losses in gold and other precious metals.

With profits under pressure, silver mining companies have focused on cutting costs. The so-called “cash cost” of producing an ounce of silver – a measure that excludes capital expenditure, corporate overheads and exploration costs – fell 16 percent to $7.74 an ounce in 2014.
While these cost-cutting efforts helped cushion the blow of weaker silver prices, they also suggest that producers are unlikely to tap the debt markets to fund new projects, Leyland said.

Roughly 70 percent of the world’s silver supply is produced while mining other metals, particularly gold, copper, lead and zinc. Declines in the prices of these commodities are also likely to weigh on silver supply going forward, the report said.

Global physical demand for silver fell 4.1 percent in 2014, largely due to a 19.5 percent drop in demand for silver coins and bars, according to the report. Weaker prices spurred demand for silver jewelry, as jewelers switched to making larger-format, heavier pieces made of sterling silver. A similar trend was spotted in silverware, where fabricators switched to sterling silver and away from plated products. Demand for silver from industrial sources, which accounts for 56 percent of total physical demand, slipped 0.5 percent as silver use in electronics and photography decreased.

In 2015, silver demand should tick higher as demand for coins and bars improves, Leyland said. Sales of silver bars and coins have already pushed higher in the first quarter, auguring a rebound, he said.

“I think we’ll see a stronger year for coin and bar demand, but not a record year,” he said.

Demand from the jewelry sector should also continue to improve, while industrial demand for silver will remain broadly flat as gains in solar power and electronics offset weakness due to manufacturers’ continued efforts to reduce per-unit silver content.

As a result of falling mine supply and firmer demand, the global silver market should see the supply shortfall increase in 2015, from the slight shortfall recorded in 2014, Mr. Leyland said. Silver mine supply lagged demand by 4.9 million ounces last year, the World Silver Survey said, or about 0.5 percent of total demand, which stood at 1,066.7 million ounces.

As a result, silver prices should tick higher throughout 2015.

GFMS expects silver prices to average $16.50 an ounce in 2015, and $17.50 an ounce in 2016. Silver for July delivery rose 0.8% to close Tuesday trade at $16.579 a troy ounce on the Comex division of the New York Mercantile Exchange.


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