Silver surplus not likely to diminish

Higher prices for silver in 1987 may prove to be the precious metal’s undoing this year, with more of the metal making its way to the market.

“Although silver consumption has been growing at around 2.5% per annum since its bottom in 1983, the recent spate of mine reactivations following last year’s substantial price recovery is likely once more to undermine the metal’s fragile fundamentals,” writes Metals & Minerals Research Services of London in a recent quarterly report. A surplus of supply has been the metal’s problem the past few years, a situation not expected to improve. Mine output this year in the non- Communist world is expected to rise by about 7.4%, the company says, inflating the bullion surplus to its highest level since the first part of the decade.

“The size of this surplus will undoubtedly put pressure on the higher prices established in 1987, when silver experienced a January- December improvement of just under 30%,” writes the company.

Silver averaged $7(US) per oz in 1987, up dramatically from $5.47 the year before. This year, Metals & Minerals is projecting an average price for the metal of between $5.50 and $6.

Investment demand might help spur prices, but silver traditionally moves in tandem with rising or falling gold prices, and the recent softening of the latter has had a similar effect on the white metal.

“The precious metal’s salvation may come from a further weakening of the U.S. dollar and higher inflation levels later on in the year, but we do not expect silver to regain the price highs it enjoyed in 1987,” says Metals & Minerals.

Meanwhile, the Bureau of Mines in the U.S. reports domestic silver consumption last year fell 3.1%. Stock accumulation of domestic silver last year was the lowest in five years.

The largest user category, photographic materials, required 4.7 million oz more silver in 1987 than in 1986, but still was about six million oz off its 1979 record. Three other usage categories reflecting slight increases were medical, catalysts and commemorative objects. Electrical contacts and batteries were down, as was the combined usage of electroplated ware, sterling ware and jewelry.

Mine production in the U.S. in 1987 totalled an estimated 37.3 million oz silver, up 3.1 million oz from the year before. Old scrap recovered last year amounted to 25.4 million oz, 2.2 million oz higher than in 1986.

Mexico is the largest producer- nation of silver in the non-Communist world. *

Excessive growth in the supply of gold and only slight increases in demand suggest much lower gold prices in the early 1990s of $300-to-$350(US) per oz, according to the market study undertaken jointly by The WEFA Group and Resources Strategies in the U.S.

Massive investment in gold- mining capacity will result in a rise in world gold production of 16% by the mid-1990s, to more than 1,650 tons, says the study. China and the Soviet Union are helping to inflate the supply, which is also growing because of steady increases in secondary recovery of gold.

On the flip side, the study says consumer and industrial demand for gold will increase by less than 2% per year — from 1,836 tons in 1986 to 2,000 tons in 1995.

Barring a return of high interest rates or a long, deep recession, investment demand is unlikely to be great enough to sustain the $450 gold price of today.

Supply of zircon (equal to 93% of the non-Communist world output) is dominated by three countries — Australia, South Africa and the U.S. — but it was not always so, Roskill of London says in a recent study of zirconium. (Zirconium is a metallic element found mainly in the mineral zircon.)

During the first part of the 1980s, the balance of production capacity shifted from Australia towards South Africa: Australian zircon capacity fell by 186,000 tons per year while South African capacity rose from virtually zero to 160,000 tons per year.

Roskill says a shortfall of zircon became apparent in 1986 and intensified the following year. As a co-product of ilmenite, rutile and monazite, zircon output is always affected by the demand for these minerals.

Refractories, ceramics and abrasive and foundry uses account for almost 90% of world-wide zirconium comsumption, Roskill says.