In 2023, the silver market charted a structural deficit of 184.3 million ounces. The projection is for an even larger supply shortfall this year in the neighborhood of 215 million ounces. This would be the second-largest silver market deficit ever recorded.
Meanwhile, mine output has sagged since peaking in 2016.
This raises an important question: Can silver miners respond and restore the market balance?
There are significant challenges.
According to Metals Focus, silver mine production peaked at 900.1 million ounces in 2016. At the time, the price of silver averaged around $13.30 an ounce. Since 2016, the average price has increased to $20.70 an ounce. Today, the price is well over $31 an ounce.
But mine production has yet to respond to the higher price. Metals Focus projects mine output will come in 62.8 million ounces lower than that 2016 peak, a 7 percent decline.
Metals Focus forecasts that while we will see record silver prices over the next five years, “mine supply growth is likely to remain modest, with only minimal increases globally.”
Why won’t silver production ramp up to meet the demand and take advantage of these higher prices?
Metals Focus blames the price inelasticity on the fact that more than half of silver is mined as a byproduct of base metal operations.
“Although silver can be a significant revenue stream, the economics and production plans of these mines are primarily driven by the markets for copper, lead and zinc. Consequently, even significant increases in silver prices are unlikely to influence production plans that are dependent on other metals.”
About 28 percent of the silver supply is derived from primary silver mines, where production is more tightly tied to price. But silver mines face their own challenges including declining ore grades and rapidly rising mining costs.
Ore grades have fallen by about 22 percent, meaning the silver price has to rise that much to maintain margins.
Metals Focus summarized the cost challenges facing silver miners.
“Rising production costs have further constrained silver supply. Despite higher silver prices, operating costs in many cases have outpaced revenue growth, leading to little or no improvement in operating cash flow for silver-focused mining companies. Moreover, capital expenditure requirements have continued to rise, with mining cost inflation requiring increasing investment just to maintain current production levels. As a result, many silver miners have been free cash f low negative in recent years.”
If silver prices rise as projected, mines will reach a threshold where higher revenues translate into improved free cash flow.
“At that point, the future of primary silver mine supply will depend on how management allocates capital.”
Even if mining companies allocate significant resources to finding new sources of silver and developing new mines it will take time for production to ramp up and ease the supply shortage. According to Metals Focus, “It is implausible that new production could balance the current deficits over the short to medium term. For those shortfalls to end, we are instead dependent on recycling and demand to react to the forecast price rally.”
For the next few years at least, we will have to depend on drawdowns of above-ground stocks to meet the supply deficit.
