The global silver market is expected to experience a supply deficit for the fourth consecutive year in 2016, with a shortfall of 52.2 million ounces, according to the Thomson Reuters GFMS team in its Mid-Year Silver Market Report. The consulting firm forecasts that, after four years of declining supply and demand, the silver market will experience a supply deficit in 2016. This projected deficit is the smallest since the 2.9 million-ounce surplus recorded in 2012.

On Wednesday evening, GFMS Senior Analyst John Webb outlined the findings of the consultancy at the annual Silver Industry Gala hosted by the New York Silver Association. “Although this deficit doesn’t necessarily affect prices in the short term, consecutive deficits over several years could put upward pressure on prices in subsequent periods,” GFMS said.

If we take into account the expected net inflow of 71.4 million ounces of silver into globally exchange-traded products and the 61.9 million ounces of silver inventory built up in derivatives exchanges through October, the deficit for 2016 would amount to 185.5 million ounces—roughly equivalent to nine weeks of global demand, according to GFMS. Physical inventories, including both exchange-listed products and exchange-held stocks, are estimated to have reached 2.64 billion ounces in 2016, representing a 15% increase over the previous year.

The consulting firm reported that, as of November 11 this year, the average price of silver stood at $17.23 per ounce, representing a 9.9% increase compared to the same period in 2015. GFMS’s team forecasts that the average silver price for the full year will be $17.15, up 9.4% from 2015 levels.

GFMS reports that total silver supply in 2016 is expected to decline by 3%, to just over 1 billion ounces. Mine production is expected to reach 887.4 million ounces, a decrease of nearly 60 million ounces compared to 2015, yet still ranking as the second-highest annual output in history. “Major silver mine production increased significantly, particularly in Peru, but this was partly offset by declines in silver production from lead/zinc mines and gold mines,” said GFMS.

Following four consecutive years of decline, recycled silver supply... The decline was only slight compared to 2015, falling by 500,000 ounces, according to GFMS. This represents a significant shift compared to the average annual decline of 29 million ounces over the previous four years. “The rise in silver prices has already helped to improve sentiment,” GFMS said.

The consulting firm expects hedge reductions in 2016 to reach 20 million ounces. Meanwhile, GFMS forecasts that total silver demand will decline from 1.17 billion ounces in 2015 to 1.064 billion ounces. Sales of silver coins and bars are expected to drop by 24% this year to 222 million ounces, according to GFMS. Silver coin sales are estimated at 122.7 million ounces, a decrease of 7.9% from last year’s record high of 133.2 million ounces. “The decline is hardly surprising,” GFMS said, “as last year’s robust growth set a new record. After silver prices fell in the second half of last year, investors entered the market to buy at lower prices.”

Demand for physical silver bars is expected to contract by 38% this year to 99.3 million ounces, driven by a weak Chinese economy and subdued consumer confidence in North America, according to GFMS. On the other hand, demand in Europe rose by 14% to 14.5 million ounces, fueled by concerns over Brexit and the rebound in silver prices. Physical silver bars and coins are projected to account for 21% of total physical demand in 2016, down from 25% in 2015 but significantly higher than the 5% recorded a decade ago, GFMS said.

Meanwhile, total industrial demand for silver is expected to decline by 1% to 585.1 million ounces, accounting for 55% of the physical demand in 2016, according to GFMS. Many industrial sectors are forecast to see a slight decrease in silver usage this year, driven by “challenging economic conditions” in various countries and the ongoing trends toward greater efficiency and miniaturization in a wide range of electronic applications, GFMS said.

However, one bright spot is the photovoltaic industry’s demand for silver, which is expected to increase by 11% this year, reaching a record high of 83.3 million ounces, according to GFMS. The rise is driven by global installations of solar energy equipment, with most of the growth coming from China, GFMS said. “Solar energy will account for 14% of total industrial demand this year, remaining flat compared to 2015 but representing a significant increase from just 1% ten years ago,” said GFMS.

Jewelry production in 2016 is expected to decline by 8% to 208.5 million ounces. “Reduced discretionary spending, lower consumption levels, slower economic growth, and higher silver prices have all contributed to the overall decline,” said GFMS. “However, in China, demand for high-purity silver bracelets has been steadily rising. Intensified competition in the low-end silver jewelry segment—between smaller manufacturers and brand-specific boutiques—has eroded jewelers’ profitability. As a result, overall jewelry demand in Asia is expected to contract by 10% this year. North America, which is a major importer of silver jewelry, is also forecast to see a slowdown in demand this year, partly due to a shift in jewelry preferences toward yellow-colored pieces. Domestic jewelry production in North America is projected at 28.9 million ounces, down 6% year-on-year,” GFMS noted.