How Will China Affect Silver Output?

Bloomberg put out some interesting news regarding the silver market, stating that refined silver output in China has peaked and it could stop growing because less will be produced as a result of halting of mine expansions, higher costs for production and lower prices received for the metal itself.

Zhou Juqiu, chairman of the gold and silver division at the China Non-ferrous Metals Industry Association, said that output may rise to nearly 10,000 metric tons this year from 9,092 tons in 2007. Silver prices have more than halved from an 18- year high in March after hedge funds and speculative investors sold commodities to raise cash, while recession fears reduced demand for industrial use of the precious metal.

China's annual silver output growth already slowed to 10 percent last year compared with an average 30 percent between 2001 and 2006, Zhou said. "There won't be much growth going forward'' in the next few months. While producers are still "doing ok,'' they are faced with an increasingly difficult environment, including tighter financing and reduced export market, he said.

In July China revoked the export rebates on silver to control use of limited natural resources. This will force China to rely on imports to fill the needs for the precious metal. “China has the world's biggest potential for silver consumption,'' said Li Xiaoni, vice president of China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters.

The country's consumption already accounts for 70 percent of the global total for industrial use, she said. China's consumption of silver has grown by over 10 percent recently reaching 4,000 tons last year, Zhou said. He also stated that China has 26,000 tons of silver reserves, about 9.6 percent of the global total, and the fifth biggest in the world, and that about 60 percent to 70 percent of China's silver is the byproduct of smelting for lead, zinc and copper.

This bit of news is interesting considering everyone is talking about the entire slowdown throughout the world. Perhaps the Chinese have not yet caught up with enough silver using iPods and cell phones.

During our trip to Europe for the Silver Summit in London, Paris, and Munich, it was relayed to this writer that the silver delivery times from the LBMA keep getting moved back. In fact it was suggested that any recognizable problem might actually take place out of London rather than New York.

However, even though the source was top-notch, it is still considered a rumor by us and therefore should be considered such by you. However, if we examine this a bit further we know when there was essentially a default in nickel in London some time ago, the Association required those that had physical metal to “loan” it back into the market for those that were on the wrong side of the market.

In the meantime the Comex silver supply has decreased now standing at about 123 million ounces. A few months ago it stood much higher, as reported previously, and over 10 million ounces have moved into investors' hands (Eligible Category) within the Comex holding facilities. The dealers are now basically in control of roughly 60 million ounces of silver.

I have received some feedback on people that have just given up on the precious metals story, and some that trust gold only, or like the metal but wish they never heard of a mining company.

In today’s world, black is white and up is down. Very little makes sense and sometimes even when you win you can end up “losing.” This does not mean that you should give up on this area of your portfolio. In our studied view ,nothing will be doing better in the future than the precious metals and eventually the underlying mining shares (that survive).

In conclusion, 2009 will be a trying year and we see a rally ahead but are approaching it with caution.

Comments

[GMiki1:]

Well, that's the thing, mining company investors, myself included, are rather disgusted. I still expect a silver breakout, however, and it seems to be rising of late. I follow Ted Butler as well, David, and he's as bullish as ever. In re China, I have money in Silver Dragon, which was very manipulated and plummeted, but it does have great assets in China and Mexico, is a producer, and has assets in tin, which is in short supply.

By the way, how can people in infrastructure and not be in base metals? I see Sprott gave up its moly fund, but how do we replace pipelines and such without moly?

Jan 23 11:11 AM

[applesauce:]

The energy infrastructure should cause copper and other base metal to explode. With mines being moth balled we should see demand outstipe supply in a couple of years. Unfortunately it will take time for governments to get the ball rolling, then you will have lawsuits from enviormenalist slow thing up a bit more unless there is a green source suppling the electricity.
A sort of greenmail I suppose.

Jan 25 02:48 PM