Silver Mine Supply Is Running Out of Steam
from Wall Street Journal After 12 straight years of gains, global silver production is expected to fall in 2015 as lower prices take a toll. Silver mine production rose 5% in 2014 to reach 877.5 million ounces, the 12th successive gain and a new record, according to the World Silver Survey, published by industry lobby group The Silver Institute and metals consultancy Thomson Reuters GFMS. But this year will see silver output decline amid a dearth of new mines and as aging operations see their production fall, the report said. “We’re just not seeing the investment in new mine capacity that would be needed to sustain continued record peak production,” said Andrew Leyland, an analyst with GFMS who worked on the report. Falling silver prices are behind the trend. Silver prices tumbled 20% in 2014, and fell 36% in 2013, exceeding the losses in gold and other precious metals. In the year through Tuesday silver prices rose 6.2% but remain close to the five-year low of $15.365 a troy ounce set in March. 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% 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, Mr. Leyland said. Roughly 70% 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% in 2014, largely due to a 19.5% 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% of total physical demand, slipped 0.5% as silver use in electronics and photography decreased. In 2015, silver demand should tick higher as demand for coins and bars improves, Mr. 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% of total demand, which stood at 1,066.7 million ounces. As a result, silver prices should tick higher throughout 2015. “We view this year as being the nadir for pricing on an annual average basis,” Mr. Leyland. “There’s still potential for another selloff in the next few months to send us lower, after that our base case is for a modest rally going into next year,” he added. 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.