It should be no surprise that two of the keys to solving the puzzle of silver's supply and demand dynamics are 1) demand for base metals and 2) the Chinese economy. These two factors are not as disparate as they may first appear.
China: Metals Masters
Although it is attempting to transition to a more service-based model based on financialization, China is still an economy predominated by industry and manufacturing. It has essentially spent its 25 years of uninhibited growth in the same role that the U.S. occupied during the latter 19th century: the world's industrial superpower. There's no secret about how virtually everything is "Made in China."
However, this transition to a more modern economic system has been fraught with hiccups. Analysts have called it a matter of a "hard" or "smooth" landing. The difficulty of the transitional phase has been exacerbated by the shocks and slumps in the global economy, of which China's manufacturing sector is squarely at the center.
China is among the top countries in mining the various base metals used in industry, like copper, nickel, lead, and zinc. It is also, coincidentally, the biggest consumer of these metals in its mass production of various products and construction projects. (This is likewise the case with gold.)
The connection with the silver supply comes from the oft-cited fact that most of the newly mined silver is actually a byproduct of base metal mining. Silver is recovered as a secondary product from lead and copper mining, for instance, because it is so frequently found in the same ore as these metals. Roughly half of annual silver production comes from lead, zinc, and copper mines.
Most experts have forecast a rather painful slowdown of Chinese mining and manufacturing—the "hard landing" variety. This has an impact on oil consumption, steel production, and may even lead to the country closing a portion of its abundant coal power plants. Stockpiles of steel and copper have piled up in China as demand from industry continues to slow. Moreover, data from the London Metals Exchange (LME) show that demand for base metals like lead, zinc, copper, and nickel have been plunging.
Given the weaker outlook for these metals combined with winnowing demand from China's industrial sector, it's unavoidable that silver will also be hit. As falling demand causes producers of industrial metals to scale back production, there will be a considerable decrease in how much the silver supply grows due to the connection between these metals mentioned above.
The commodities research firm CPM Group predicts that the global silver supply will fall by 2.1% this year compared to 2015. CPM added, “Prices are forecast to benefit from slowing mine supply, modestly rising fabrication demand, and ongoing strength in investment demand.”
This all points toward a silver lining for the precious metal even if the current rally begins to top out. Investor sentiment has been strong regarding silver, but prices could also see a direct boost from slowing supply growth from the mining industry.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.