Byproduct of metal price meltdown is a higher silver price

Byproduct of metal price meltdown is a higher silver price

Polymetal's Dukat complex in northeastern Russia – 2014 production of 24m oz silver. Image: Polymetal

Silver futures trended weaker on Wednesday with September contracts down slightly to exchange hands at $14.55 an ounce in afternoon trade.

Like gold, silver went off to the races at the start of the year to hit a 2015 high of $18.36 on January 22 before falling back to trade down 7% for the year. The precious metal is 28% below the level it was trading at a year ago.

A new report by Capital Economics sees a brighter outlook for silver in the second half and out to 2017. The independent research house says one of the primary reasons for the anticipated higher silver price is the nature of silver mine supply.

While the market has been in oversupply in recent years, less than a third of global output comes from primary silver mines – the remainder is produced as a by-product in mines which target copper, gold, zinc, and lead.

Capital Economics expects the decline in gold and industrial metals prices (copper was trading barely above six-year lows on Wednesday and zinc's 2015 rally has evaporated) and subsequent capex cuts will therefore hasten the decline in silver supply:

"About 35% of silver comes from lead and zinc mines. While the zinc price is up 10% since July 2012, the lead market has been plagued by years of negative performance prompting production to fall by 6% in 2014. What’s more, zinc’s positive price performance has been driven by mine closures that have removed about 1 million tonnes of supply since 2013.

"While efforts are being made to restart some idled mines and to expand existing mining projects, there is limited investment going into new mine capacity. As a result, silver as a by-product could start to dry up soon, leading to a much sharper slowdown in output than we had originally anticipated."

Byproduct of metal price meltdown is a higher silver price

Source: Capital Economics, Thomson Datastream, Bloomberg, GFMS, WSTS, Companies’ websites

At the same time output from the top 15 primary silver mines have also fallen back and is down 3% during the first half of the year. Production from Mexico and Peru, responsible for 36% of the global total declined 7% year on year in May.

Capital Economics anticipates mine supply to be no better than flat in 2015 and the market – thanks in part to strong investment demand – to return to a deficit in 2015. The house view is a year-end silver price of $16.50 per ounce and a longer term move back to $22 thanks to a rebound in electronics demand.

Byproduct of metal price meltdown is a higher silver price

Source: Capital Economics, Thomson Datastream, Bloomberg, GFMS, WSTS, Companies’ websites