Silver hit by rising cost of production

REFINED silver output in China, the world's third-biggest producer, has peaked and may stop growing as producers halt expansion because of higher costs, lower prices and reduced incentives, according to an industry official.

Rising costs of labor and higher taxes on exports had reduced producers' margins, Zhou Juqiu, chairman of the gold and silver division at the China Non-ferrous Metals Industry Association, said. Output may rise to nearly 10,000 tons this year from 9,092 tons last year, he said in an interview with Bloomberg News last Friday.

Spot silver prices have more than halved from a record in March after hedge funds and speculative investors sold commodities to raise cash while recession fears have reduced demand for industrial use of the precious metal.

China's annual silver output growth had already slowed to 10 percent last year compared with an average 30 percent between 2001 and 2006, Zhou said.

Export rebates

"There won't be much growth going forward," he added. 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 export rebates on silver to control use of limited natural resources. The association is lobbying the government to return the incentive to help struggling producers, Zhou said.

The country will increasingly rely on imports to fill the needs for silver, he said. Last year, the country's net imports were 1,067 tons, compared with net exports of 1,085 tons in 2006, according to customs data provided by Zhou.

"China has the world's biggest potential for silver consumption," said Li Xiaoni, vice president of China Chamber of Commerce of Metals, Minerals and Chemicals Importers and 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 more than 10 percent in "recent years," reaching 4,000 tons last year, Zhou said.

China has 26,000 tons of silver reserves, about 9.6 percent of the global total, and the fifth-biggest in the world, he said. About 60 percent to 70 percent of China's silver is the byproduct of smelting for lead, zinc and copper, he added.