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2012 SILVER MARKET OUTLOOK from Thomson Reuters GFMS

IMPORTANT NOTE: The following is for informational purposes only and was developed by Thomson Reuters GFMS. It does not take into account the investment objectives, financial situation or particular needs of any particular person. Information is from sources believed to be reliable, but is not guaranteed as to its accuracy or completeness. Opinions and estimates are the judgment of Thomson Reuters GFMS and are subject to change without notice. Distribution of this information does not constitute agreement with, or an endorsement of, the views expressed. Obviously, future outcomes are impossible to predict with certainty. Investors should obtain advice based on their own individual circumstances and understand the risks before making any investment decisions.

Silver Market Supply Analysis

The supply of silver can be broadly divided into two categories, namely supply from new mine production and from above–ground stocks. The latter can be sourced from the recycling of fabricated products or from the mobilization of bullion stocks owned by private individuals or governments. In addition, producer hedging can also contribute to supply.

In 2011, total silver supply is forecast to rise marginally to a new record of 1,064.4 Moz, due to robust gains in mine production and scrap, which will comfortably exceed losses in net government sales and producer hedging. Further growth in total supply is expected in 2012, with volumes posting a fresh all-time high of 1,122.5 Moz.

The last decade has seen a rapid expansion of silver mine production

Global silver mine supply has been on an upward trend since mid-1990s, and this year it is on target for its eighth consecutive all-time high, totalling 784.1 Moz. Historically, only around one quarter of silver mined in the world is derived from primary silver ore deposits. The remainder of output is produced as a by-product of mining and from refining other metals. As a result, silver mine supply, as a whole, is not acutely sensitive to fluctuations in the silver price.

Further strength is expected in 2012, with mine production rising to a new high

Global silver mine production is anticipated to continue its upward trend, growing by an estimated 6% in 2012, reaching 827.5 Moz. Higher output in Mexico, mainly from by-product silver output will be the main driver of growth, with further additions expected from Peñasquito and from the expanded San Francisco del Oro mine (both lead-zinc operations), while the start-up Concheño, a primary gold mine, will also contribute to higher silver production.

Elsewhere, also lifting production from the primary gold mining sector will be the start-up of Pueblo Viejo in the Dominican Republic, while the continued ramp up of Hidden Valley in Papua New Guinea, will also contribute.

Output from primary silver mines is expected to rise next year. In Russia, silver supply will be boosted by a full year’s production from the expanded Dukat complex, where the concentrator is now running at design capacity also incorporating feed from the satellite Goltsovoye mine. In addition, buoyant silver prices over recent years has stimulated the development or resuscitation of a number of projects, two of which due to enter production next year are Shafter in the United States, and Wonawinta in Australia. Going forward, given our positive outlook for the price next year primary silver mine closures are expected to have a negligible impact to mine supply.

Net producer hedging is likely to recover in 2012, although volumes will be restricted

Following a flurry of silver hedging activity in late 2010 that carried through into the first half of this year, net silver hedging in 2012 is expected to contribute silver supply to the market for the third successive year, raising the size of the outstanding producer hedge book back to a level not seen since the late 1990’s. With the silver price forecast to break back above $40/oz in 2012, producers of silver as a by-product are expected to once again take the opportunity to lock-in non-core revenue streams, with hedging activity expected to occur within punctuated periods of higher prices.

Scrap supply will continue to grow in 2012, albeit modestly

As illustrated in the chart below, scrap supply in the silver market has little in common with recycling of its sister metal, gold. Whereas the latter is heavily dependent on jewelry and is therefore highly price elastic, the recovery of spent silver follows a quite varied path. This is due to the markedly different composition of silver fabrication, with jewelry only accounting for around one-fifth of the global total. Furthermore, the price sensitive component of silver jewelry is far smaller compared with gold, even if we broaden the price elastic category to include silverware offtake. Although a small slice of industrial scrap may respond to price developments, environmental legislation will have a far greater bearing on the recovery of silver from the industrial segment. As alluded to above, the bulk of global jewelry offtake is consumed in western markets and is therefore characterized by high mark-up products, which will not be considered near market. As a result, western jewelry supply will only respond to large price movements and in fact will also be partly contingent on the health of the wider economy.

While 2011 marks a fresh record for silver scrap, gains will almost entirely be driven by the boom in receipts from jewelry, silverware and coins. In contrast, photographic scrap is expected to see further structural losses, while industrial scrap posts a slight dip as underlying growth is masked by the one-off surge in recovery from ethylene oxide plants that occurred in 2010. Looking ahead, scrap is forecast to edge higher in 2012 as strong silver prices stimulate higher recycling of old jewelry and silverware pieces. Meanwhile, industrial scrap is likely to recover its lost ground in 2011, which should be sufficient to cover the expected losses from the photo-related scrap.

Net government sales are likely to remain subdued in 2012

Our current estimate suggests that net government stock sales could fall by some 80% to a 14-year low in 2011. The massive decline is almost exclusively driven by a collapse in disposals from Russia, which has accounted for the majority of global sales over the last three years. Looking ahead to 2012, as the country’s stocks have been reduced considerably over the last few years, we expect Russian stock sales to remain at current low levels. Nevertheless, given the highly opaque area of the scale of government stocks, we would caution that our forecast for Russia may be somewhat conservative. However, even if sales prove higher in 2012, it is difficult to conceive of them being weighty and therefore putting substantial downward pressure on silver prices. Excluding Russia, we have noted little appetite on the part of governments to sell silver from 2008 onwards and we believe that it is unlikely that this will change over the next 12 months.

Additional Information

• Silver Market Outlook Overview
• Silver Market Demand
• Silver Market Investment