According to the Wise Finance APP, MetalsFocus stated that currently, the silver market has been in a structural shortage for the fourth consecutive year, primarily due to the continuous growth in industrial demand. It is expected that this situation will continue and significantly deplete above-ground silver inventories. Therefore, the key issue currently facing the silver market is whether silver ore supply can restore supply-demand balance.

After achieving a year-on-year growth for 20 consecutive years, silver ore supply peaked at 0.9001 billion ounces (27,996 tons) in 2016. During this period, the silver price fluctuated slightly, but the average price remained around $13.3 per ounce. After 2016, the average silver price rose to $20.7 per ounce, and the current spot price is approximately $31.5 per ounce. However, despite the rise in silver prices, it is projected that the silver ore supply in 2024 will still be 62.8 million ounces (1,954 tons) less than the peak in 2016, a decrease of 7%. Looking ahead, it is expected that the structural shortage will support the silver price, potentially reaching record highs in the next five years; however, silver ore supply may only see a small increase globally.

Silver ore supply prices lack elasticity, mainly because 55% of silver is a by-product of base metals. Although silver ore production is an important source of revenue, its economic benefits and extraction plans are mainly influenced by the copper, lead, and zinc markets. Therefore, even with a significant increase in silver prices, it is unlikely to affect production plans closely linked to other metal markets.

Currently, major base metal mining areas commonly engage in output financing transactions, further exacerbating the tight supply situation in the silver market. The reason why silver miners sign silver streaming agreements is often because silver does not determine the core economic value of silver mines, and they can use future silver income to obtain lower capital costs.

Currently, silver output streaming financing contracts and mineral rights gold agreements account for about 4% of the total silver supply, further disconnecting silver production as a by-product from the fundamentals of the silver market.

Of course, not all silver is produced as by-products. It is estimated that around 28% of global silver supply this year will come from primary silver mines, and its production is directly related to silver prices. Despite the significant increase in silver prices since 2016, primary silver production has declined, which is a major reason for the decline in supply since the peak production. One reason for the production decline is the decrease in ore grade: over the past decade, silver grade has declined by 22%, meaning that silver prices must rise by the same percentage to maintain profitability.

On the other hand, the reasons for the closure of major silver mines not only include geological issues but also involve regional dynamic factors. For example, the Escobal silver mine in Guatemala reached its peak production of 21 million ounces (653 tons) in 2016, but due to local community opposition leading to legal proceedings, the mine has been suspended. In 2018, the Constitutional Court of Guatemala upheld the ruling to suspend mining operations because the mine had failed to negotiate with the local indigenous community as required by law. The court has mandated that the mine continue negotiations with the Xinka people, with no specific completion date set.

Similarly, under pressure from environmental organizations, the Supreme Court of Panama ruled in November 2023 that the operating contract of Cobre Panama copper mine signed by First Quantum Mining violated constitutional provisions, leading to the mine's shutdown and a reduction of 2.8 million ounces (87 tons) of silver supply in the market.

The continuously rising production costs further constrain silver supply. Despite the high silver prices, in many cases, the increase in operating costs exceeds the growth in revenue, resulting in companies focusing on silver as a key business having little improvement in operational cash flow. In addition, capital expenditure requirements continue to rise, mining costs increase, leading mining companies to continuously increase investments to maintain current production levels. Therefore, many silver miners have been operating at a loss in recent years.free cash flowIt has been negative.

However, if silver prices increase as expected, many primary silver mines' marginal economic benefits will reach the transformation threshold, where higher silver returns can be converted to better free cash flows. At that time, the way management allocates capital will determine the future supply of primary silver mines. In recent years, shareholders have received returns through dividends and share buybacks at levels much lower than the peak levels of the 2011-2012 cycle. Under increasing pressure for shareholder returns, it is expected that some of the increased free cash flow will be directly used for shareholder returns rather than for expanding production.

In addition,ESGRestrictions continue to escalate, with ongoing community opposition, rising mining costs, and frequent procurement issues, all exacerbating the risks of new mine production. Therefore, some mining company management teams are more inclined to seek growth through mergers and acquisitions rather than develop new mines. Nevertheless, some companies will still proceed with project development, including greenfield and brownfield expansions, and may even restart currently maintained mines.

The timing of new silver mining supply is crucial, as silver mine development often takes several years; this means that new silver mining cannot balance the current supply shortage in the short to medium term. To address the shortage, we need to rely on silver recycling and demand adjustments to cope with expected silver price increases. Price-sensitive sectors (mainly silver jewelry and silverware) will be the quickest to alleviate the shortage. Additionally, in the industrial use of silver, saving and substitution of silver may partially alleviate the shortage, but due to the need for product redesign and certification, the process itself may take one to two years; in retail investment, if investors buy on highs rather than take profits, they may also not immediately alleviate the supply shortage in the investment sector. Therefore, only by continuously depleting above-ground silver inventory can the market supply and demand be balanced in the next few years.