Silver market faces supply crunch as Mexico curtails production

Silver market faces supply crunch as Mexico curtails production by Neils Christensen for KitCo News

Expected mine shutdowns of at least a month in Mexico will reduce the global silver supply since the country is the world’s largest silver producer.

Nevertheless, analysts are not rushing to say this will automatically mean higher silver prices, as normally occurs when there are reduced supplies in any commodity. That’s because in this instance, industrial demand is also suffering as the COVID-19 pandemic impacts the global economy.

Further, with refinery and transportation issues but sharply rising physical demand, silver was described as a market “in turmoil.”

The Mexican government this week declared the pandemic as a national health emergency and as a result is forcing all non-essential businesses to close up shop until at least April 30. Silver miners likely are considered non-essential. Some mining and exploration companies have already said they are halting operations.

According to data from the U.S. Geological Survey, in 2019, Mexico produced 6.3 thousand metric tons of silver, which represented about 23% of global mine supply. Statistics from the consultancy CPM Group put 2019 output at around 740 million ounces, of which 173 million were from Mexico.

“They are the largest silver-producing country by a wide margin,” said Jeff Christian, managing director of CPM Group. “So interruptions of silver-mine production from Mexico would hit the market.”

On top of this, Christian said, refinery production in Mexico and elsewhere is being curtailed, and the industry faces transportation issues. Much of the world’s precious metals are shipped by air freight due to their high value relative to their weight.

“You can’t even ship refined metal easily from country to country because the planes that normally carry that aren’t flying,” Christian said. “The whole precious-metals complex is being hit by supply and supply-chain disruptions. That is going to continue to be a problem and an issue. Mexico joining the lockdown just makes it that much worse.”

Impact on prices uncertain
While shuttered production will disrupt the market’s supply-and-demand fundamentals, some analysts are not convinced that this will have a major impact on silver prices in the near term. Others say the outlook is hard to forecast at the moment since fabrication demand is also suffering, even though physical investment demand is picking up.

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