Silver market faces tight supply as Mexico cuts production

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(Kitco News) – Mine closures planned for at least a month in Mexico will reduce the global silver supply as the country is the world’s largest silver producer.

Nonetheless, analysts are not rushing to say that this will automatically lead to higher silver prices, as normally happens when supply is reduced for any product. Indeed, in this case, industrial demand is also suffering as the COVID-19 pandemic is having an impact on the global economy.

In addition, with refinery and transportation issues but sharply increasing physical demand, silver has been described as a “boiling” market.

The Mexican government this week declared the pandemic a national health emergency and, as a result, is forcing all non-essential businesses to go out of business until at least April 30. Money miners are probably considered non-essential. Some mining and exploration companies have already announced that they are shutting down their activities.

According to data from the US Geological Survey, in 2019, Mexico produced 6,300 tons of silver, which represented about 23% of the world’s mining supply. Statistics from consulting firm CPM Group put 2019 production at around 740 million ounces, with 173 million coming from Mexico.

“They are by far the largest silver producing country,” said Jeff Christian, Managing Director of CPM Group. “So disruptions in production from Mexico’s silver mines would hit the market. ”

On top of that, Christian said, production at refineries in Mexico and elsewhere is reduced and the industry faces transportation challenges. 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 easily ship refined metal from one country to another because the planes that normally carry it don’t fly,” Christian said. “The entire precious metals complex is affected by supply and supply chain disruptions. It will continue to be a problem and a problem. Mexico’s entry into the lockdown only makes matters worse. “

Price impact uncertain
While shutting down production will disrupt the market’s supply and demand fundamentals, some analysts are not convinced it will have a major impact on silver prices in the near term. Others say the outlook is difficult to predict at the moment as manufacturing demand is also suffering, even as demand for physical investment picks up.

While silver prices are at an 11-year low, they continue to struggle to find steady momentum. Silver also continues to underperform gold, with the gold-to-silver ratio hovering at 113, just below recent highs. May silver futures were last traded at $ 14.145 an ounce, relatively unchanged that day.

“The demand for silver, or the lack of it, is getting all the attention right now as the world remains concerned about a global recession,” said Ole Hansen, head of commodities strategy at Saxo Bank.

Although weak global growth due to the spread of the coronavirus will continue to weigh on industrial demand for silver, Hansen said investment demand could end up driving the market. He described the money market as a Sleeping Beauty begging to be awakened.

“From an investor’s perspective, silver should do better than gold in a supply crisis,” he said.

Hansen added that he is currently more bullish on silver than gold; however, he added that the market has yet to exceed current conditions.

Bart Melek, chief commodity strategy officer at TD Securities, said he was not surprised that Mexico was ending its mining operations. Mexico’s announcement comes less than a week after South Africa shut down its mining operation, which impacted the supply of platinum and palladium.

“From a fundamental supply and demand perspective, this will tighten the market a bit,” he said. “But I don’t know what the prices will do in the short term.”

However, Melek added that the problem in the silver market is not just the picture of supply and demand. Market volatility remains relatively high as investors remain concerned about the impact of the coronavirus on the global economy, he said.

“At the moment it is a liquidity problem and until we really understand the full impact of the virus on the economy, investors will not focus on supply and demand,” he said. he declared. “At the moment, we don’t know how long these global lockdowns will last. ”

But neither does Melek rule out the issue of the money supply altogether. He added that this will provide long term support for the metal. He also said that as silver continues to underperform gold at historic levels, there is long term value in the market.

“Once we understand the full impact of the virus on the global economy and can see beyond short-term volatility, money supply problems will be a major factor in the price,” he said. -he declares. “This prepares us for higher prices in the future. ”

Meanwhile, Christian pointed out that there are many cross currents in the market, not only reduced mining supply, but reduced demand for manufacturing silver for industrial purposes, but also increased demand for investment. Historically, industrial uses have been the biggest source of demand for silver.

“Many factories where silver is used to make products – from solar panels to electronics to jewelry – are also closed,” Christian said. “So not only is supply negatively affected, but manufacturing demand is also negatively affected.”

However, investors have stepped up their purchases of bullion and silver and gold coins, he continued. For example, he pointed out that US Mint data shows sales of American Eagle silver coins jumped to some 5.5 million ounces in March, from around 650,000 in February.

“While you have a reduction in the refined supply, a reduction in the manufacturing demand, you are actually seeing this increased demand for physical silver in coins and bullion,” Christian said. “But the supply is limited because you can’t ship the material, and the factories that make the blanks [for coins] are closed. The workshops that manufacture the parts are closed.

“So the market is currently in turmoil in terms of logistics to get the metal from A to B.”

By Neils Christensen and Allen Sykora

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. This is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and / or damage resulting from the use of this publication.


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