In order to satiate the world’s growing hunger for silver, a lot of pressure has been placed on its supply chain. And with total annual supply recently exceeding 31k metric tons (1.0b ounces) for the first time ever, the suppliers of this white metal have so far made a valiant effort to meet demand.
Silver demand is on the rise for a variety of reasons, in large part due to big increases in investment demand. And this has naturally created a structural imbalance that has spawned a major secular bull market. A bull in silver of course translates to higher prices. And silver’s much higher prices have provided ample incentive for the major sources of supply (recycling and mining) to boost output.
On the recycling front, silver’s higher price (+1,094% from its 2001 low to its 2011 high) has prompted more folks to recover silver scrap from devices that would normally end up in junk yards. And as a result, we’ve seen a 30% increase in scrap supply over the last 10 years (per the latest figures from research and consultancy powerhouse GFMS).
The biggest supply increase by volume though is from mine production. Mine production has always been by far silver’s largest supply source, in 2011 accounting for about 70%. And as you can see in the chart below, the miners have really stepped up their efforts in wresting this metal from the ground.
Represented by the blue bars is global mined silver production (in metric tons) over the last ten full years per figures compiled by the US Geological Survey. And this USGS data is superimposed (in red) by the annual average daily price of silver.
The first thing of note is that in 2002, the first full year of silver’s bull, mine production came in at an all-time high. And provocatively this 20kt tally capped off an eight-year run that saw production rise by an impressive 43.9%. This increase was quite unusual considering it occurred in the late stages of silver’s preceding secular bear.
Though muted amidst this anomalous production increase, the adverse effects of the bear did eventually come to the surface. And after years of neglect on the capex front, the mining industry’s deteriorating infrastructure just couldn’t support a continued rise in production. Even though the price of silver started mounting a charge, output couldn’t respond.
Silver mine production was actually down a hefty 6.0% in 2003, and it wouldn’t exceed 2002’s output until four years later. But after 2006’s new all-time high, mine production was off to the races. Silver’s huge price increase had spawned major development in the mining industry. And through 2011 the miners have responded by delivering six consecutive years of production growth.