To: Commodities Trading Desk / Global Strategy
From: Commodities Research Lead
Date: February 15, 2026
Subject: PHYSICAL SILVER SUPPLY CHAIN INVESTIGATION (2025-2026)

Executive Summary:
The silver market is currently navigating a structural supply-demand decoupling. Despite XAG/USD breaching $100 per ounce, global mine output remains stagnant. Our investigation confirms that the 70-80% of global silver produced as a by-product of base metal extraction (copper, zinc, and lead) creates a hard ceiling on supply elasticity. In Mexico and Peru, the world's primary sources, producers are prioritizing margin over volume or are constrained by the economics of their primary base metal deposits.

1. Mexico: Strategic Profitability Over Volume
Mexico remains the world's largest producer, but 2025-2026 reports indicate a deliberate shift in operational strategy.

* Production Metrics 2025: Total output was approximately 231.8 million ounces. While some majors like First Majestic saw record silver equivalent (AgEq) production of 31.1 million ounces, the pure silver component was lower.
* 2026 Guidance: Leading producers are lowering targets. Fresnillo, the world's largest primary producer, revised its 2026 silver guidance downward to 42-46.5 million ounces (from 45-51 million). First Majestic has also guided for 13.0-14.4 million ounces in 2026, a decline from 15.4 million in 2025.
* Strategic Rationale: Rather than chasing record prices with volume, Mexican miners are lowering "cut-off grades." By processing lower-grade ore that was previously uneconomical, they are extending mine life and maximizing margins at the cost of immediate ounce throughput.

2. Peru: The By-Product Trap
Peru is the world's second-largest silver producer, but its output is inextricably linked to its massive copper and zinc complexes.

* Production Trends: 2025 silver production reached 3,600 metric tons (approx. 115 million ounces). While the government projects a massive $55 billion in mining exports for 2026, this is driven by copper, not silver.
* Supply Inelasticity: At the Antamina complex (Peru's largest), silver is a secondary credit. Expansion decisions are dictated by global copper demand and LME copper prices. Even with silver at $100, a copper miner will not increase throughput if the copper market is oversupplied or if the capital expenditure for copper expansion is not justified.
* Operational Constraints: Declining ore grades at mature sites like Cerro de Pasco and Andaychagua mean that even maintaining current levels requires increased investment.

3. Analyzing Supply Elasticity Constraints
The physical supply chain is currently "inelastic," meaning supply does not respond proportionally to price increases.

* The 70% Factor: Approximately 70-80% of silver is a by-product. If a mine produces 1 pound of copper for every 0.05 ounces of silver, silver prices moving from $30 to $100 adds significant revenue but does not change the physical reality of the ore body.
* Lead Times and Depletion: New primary silver projects (the remaining 20-30% of supply) require 8-12 years for permitting and construction. In 2025, there were only 52 primary silver mines globally; this is expected to drop to 46 by the end of 2026 as older mines hit depletion.
* Inventory Drawdown: With mine supply flat at roughly 813-835 million ounces and industrial demand (solar, EVs, AI data centers) pushing total demand toward 1.2 billion ounces, the market is entering its sixth consecutive year of structural deficit.

4. Market Outlook 2026
While paper markets and spot prices have crossed historical resistance, the physical market is characterized by:

* Tightening Refined Exports: New 2026 export restrictions from China (which processes 60-70% of global refined silver) are compounding the scarcity of physical delivery bars.
* By-product Limitation: Unless global industrial production triggers a massive boom in copper and zinc demand, the silver "by-product" supply will remain trapped by the economics of those base metals.

Conclusion:
The "Great Silver Squeeze of 2026" is a reality of geology and mineralogy. High prices cannot "print" more silver when the majority of the metal is tied to copper and zinc mine plans designed years in advance. We expect the physical premium over spot to remain elevated throughout the fiscal year.
#xag #silver