CHINA AND SILVER / MACLEOD FINANCE

China and silver

The silver shortage is a clash between industrial and investment demands. Markets have relied on China’s exports, now likely being withdrawn leading to significantly higher prices.

Alasdair Macleod

We are beginning to see the initial consequences of a clash between industrial use and investor demand for silver. 

Global mine supply has declined moderately over the last decade, partially made up by an increase in scrap supply. 

This has led to supply deficits over the last five years, and allowing for net investment in exchange-traded funds we are heading for the eighth consecutive year of deficits.

These estimates are compiled by Metal Focus for the Silver Institute. 

But we are left wondering whether they actually capture the full demand picture, particularly the use of silver in photovoltaics. 

Presumably, use of silver has become more efficient over the last decade, but does an increase of only 21% for total industrial use since 2017, and a decline of 2.7% since 2023 really tell the whole story?

India has stepped up her demand to an estimated 7,000 tonnes last year as well, compared with about 4,000 tonnes in 2024. 

Both China and India are now seeing investment demand increasing, not just because Asians generally have a greater acceptance of silver as sound money, but they see it as a cheap alternative to gold.

Increasingly, the picture is one of strong industrial demand coupled with growing coin and bar demand against a background of stagnant supply. 

To try and assess the seriousness of this dual demand squeeze, we need to look at it from China’s viewpoint because it has been her policy suppressing the silver price until recently.

As the second largest producer of silver, China has been drawing down on stocks to satisfy Western industrial demand. 

That is coming to an end and the market is now tightening.

In the table above, the bottom line is that over the last decade, China’s stock of silver has stopped growing and post-covid it is in increasing deficit.

For decades, China has been suppressing the price by supplying silver from its own mines and more recently drawing down above-ground reserves. 

Until 2020, there was no net drawdown but in 2025 that accelerated significantly. 

Presumably, it led to China abandoning her price suppression policy, particularly in the second half of 2025 when the price began to rise sharply. 

The loss of control over global silver markets can be seen in the next table by compariong her net supply into global markets with the supply deficit:

Global demand was escalating to the point where last year the supply deficit was over 9,900 tonnes according to the Silver Institute’s estimates. 

But insufficient supply into the west from China was a growing problem from 2022 onwards. 

Quite simply, China’s policy had to change.

China’s imports of silver for the first three months of the current year are a staggering 1,626 tonnes. 

That’s an annualised rate of 6,500 tonnes. 

We don’t know what her exports are, but an AI search reveals analysts pencilling in about 1,000 tonnes over the same period, a decline in the pace of last year consistent with the new export licencing regime which applies from 1st January. 

For now, this is only a guess.

Silver’s price prospects

China’s silver policy is now at a crossroad. 

Last year, the US finally recognised silver as a critical metal which means there is now a new strategic buyer in the market. 

If China continues to support her industrial users by making strategic stocks available, she could end up supplying the Americans. 

Additionally, the rising price of gold which reflects an accelerating decline in the purchasing power of the dollar and other G7 currencies will further stimulate demand from investors throughout Asia.

In short, silver availability will continue to be tight. 

While Metal Focus forecasts a small deficit for 2026 at 76.3 million ounces (2,543 tonnes), UBS forecasts a more credible 296 million ounces (9,210 tonnes). 

With the hard stop on global supply and China reducing her exports of bar and powder, the squeeze which drove lease rates to 40% in London last October is unlikely to be the last.

The trigger for the next price rise is bound to be gold. 

Analysts are only beginning to appreciate the financial destruction to currency purchasing powers from the Iran conflict. 

It is a fair bet that the consequences for the global economy will bring forward their ultimate destruction, increasing monetary demand for silver from nearly 3 billion Chinese and Indian citizens at a considerably quicker rate than the likely decline in industrial demand.