Silver in surplus this year; CPMSilver in surplus this year; CPM
By: Rhona O'Connell
Posted: '28-APR-06 11:00' GMT © Mineweb 1997-2004
LONDON (Mineweb.com) -- The latest silver yearbook from CPM Group reports that the supply of silver into the market in 2005 amounted to a record 791 million ounces (24,594 tonnes), an increase of 5.1% over 2005 level. The report states that the bulk of the increase came from sales by the Indian government, which amounted to approximately 32 million ounces over the course of the year. Mine production constituted 529.6 million ounces (16,472 tonnes), up 1.7%, with the majority of the increase coming from Mexico, Peru and Australia.
Following declines in 2002 and 2003, production has increased in both 2004 and 2005, partly as a result of higher silver and base metal prices. The group expects supply to continue to rise in 2006, possibly by as much as 30 million ounces or almost 4%. The market as a whole was, on CPM’s calculations, in a small deficit of 15.7 million ounces, equivalent to just over one week’s industrial demand and the group estimates that the market will be in a surplus this year, with demand falling; unsurprisingly the majority of the contraction is expected to be concentrated in the photographic sector. This does not take account of any investment absorption through the planned silver Exchange Traded Fund (for which Barclays has already deposited 1.5 million ounces with a custodian) or the Exchange Traded Commodity that is scheduled for launch in London in May.
The report suggests that around 400 million ounces of silver may remain above ground in bullion form, with an additional 540 million ounces, give or take, in silver coins. This estimate of 400 million ounces amounts to approximately six months’ supply.
While mine and scrap production are well documented as components of supply, government sales are perhaps less central to the public eye. CPM observes that the only government to sell silver, other than as a conduit for domestic mine production, was India. The Indian government has held 87 million ounces of silver in inventory since the late 1980s, with the majority held by the Reserve Bank of India and the government announced in January of last year that it wished to sell a good proportion of the metal. After a sluggish start (and it has been reported in the market that there was some question over the quality of some of the material), demand improved in the latter part of the year and sales increased sharply. Much as with the gold market, the government has stipulated that it will not disrupt the market through its sales programme and it has not specified how much it intends to disperse.
CPM does not expect other governments to be sellers of silver in the foreseeable future, arguing that the US’ government inventories are now very low and that the People’s Bank of China sold off its holdings during the period 2000 to 2004. Other central banks hold almost 17 million ounces of silver equivalent to roughly one week’s demand and minute by comparison with gold, and have demonstrated no intention to sell.
On the demand side, the group estimates that silver demand was flat over all in 2005, Contracting photographic demand and a reduction in demand in the electrical and electronic sector and for solid silver jewellery was offset by substantial increases in electroplating for jewellery and decorative ware. This area is expected to remain strong in 2006. The continued inroads made by digital technology served to reduce silver demand in the photographic uses (and will continue to do so); the drop in 2005 is estimated at 14%. Peak demand in this sector is placed at 1999, since when demand has dropped by 59 million ounces, equivalent to the mine production in 2005 of Bolivia and Chile combined and representing an average annual fall of 4% per annum. The digital onslaught has only been really noticeable in the past couple of years; prior declines are attributed to economic conditions and reduced vacation travel. The group points out that silver-bearing film usage had been increasing in many parts of the world in the early part of the decade, with digital technology too expensive for some consumers; this has now changed and emerging market economies are starting to embrace digital technology.
In all, CPM suggests that the economics of the silver market have set the scene for recent price increases. The group points out that the market is coming to the end of a 16-year period in which inventories have been steadily eroded. The contraction in the photographic market is seen as pivotal in the shift in the market forces; the future is likely to hinge on developments in primary supply.