Mexico’s Mines Ramp Down Put Pressure on Silver Supply

Mexico is the world’s top silver producer. According to the Silver Institute, the country’s production totaled 196.6 million oz in 2018, accounting for roughly a quarter of the global production. Fresnillo plc is Mexico’s crown jewel: the company churned out 58.1 million oz that year, making it the biggest producer worldwide. Newmont and Pan American Silver are other prominent companies with assets in Mexico. As a number of mines in Mexico ramp down operations in response to the COVID-19 outbreak, it is only natural that investors are cautious of a looming silver supply crunch.

Mexico’s silver ramp down adds to the fact that other producers are also diminishing or halting operations. Silver Seek, a publication that specializes in silver investment, estimates that, not considering Mexico, approximately 50 percent of the world’s silver production is currently offline. If Mexico is added to the estimate and global lockdowns continue for a protracted period of time, then the deficit becomes enormous. 

Nevertheless, it is still uncertain how the contraction in supply will affect the white metal’s price. Approximately 56 percent of silver demand is industrial. That is expected to decrease as a consequence of the economic downturn. As Kitco News pointed out, “while silver prices are off their 11-year lows, they continue to struggle to find consistent momentum. Silver also continues to underperform against gold, with the gold-silver ratio hovering at 113, just down from recent record highs.”

The bullish outlook is based on the assumption that safe-haven demand will eventually increase, offsetting the supply deficit and pushing prices up. To this point, analysts at Refintiv commented to Capital.com: "We expect prices to recover from current lows, driven by bargain hunting, before moving higher later in the year once the market hysteria calms down and safe-haven demand kicks in."

As different factors pull on the white metal’s fundamentals, the only safe conclusion to make at the moment is that silver remains a market in turmoil.