Silver demand which declined a modest 2 per cent in 1998 was affected by several factors last year, most notably higher silver prices. The strength of the US dollar also meant that silver prices in other local currencies were high, thus boosting the supply of scrap available to the market.

Moreover, the economic crisis in east Asia and poor harvests in India were contributing factors. However, for the tenth consecutive year, the market continued to have a structural deficit, with fabrication demand exceeding supply from mine production and the recycling of scrap, causing the continued erosion of above-ground stocks of silver in bullion and coin form by nearly 105 million ounces.

After three years ofgrowth, fabrication demand fell by 2.2 per cent in 1998 to 840.6 million ounces.

The fall in the world total was primarily the result of a sharp decline in east Asian and Indian fabric demand by 13 per cent and 16 per cent respectively, a combined 46 million ounces.

By contrast, north American and European fabrication demand for silver were both up by 9 per cent. North American demand rose to 214.4 million ounces, with the United States consuming 188.8 million ounces of that total. Again, the US was the largest user of silver followed by Japan where offtake totalled 112.8 million ounces and by India at 104.3 million ounces.

Nearly 70 per cent of the metal was consumed in industrial applications and photography last year, the release added.

The largest end use for silver was the industrial category which accounted for 323.7 million ounces. Silver's unique properties lead to a wide range of uses from electronics, to medical, to electroplating. North American and European industrial demand increased bynearly 8 per cent and 3 per cent respectively, while Japanese industrial offtake fell by 11 per cent and Indian industrial demand by 10 per cent.

Electrical and electronic uses represent the largest percentage of industrial demand, the release said. Total supply of silver to the market declined by 2 per cent last year, despite gains in three main sources of supply: mine production, scrap, and official sector sales.

Those gains were offset by a large drop in producer hedging and lower disinvestment than in 1997. Overall, mine production represented 65 per cent of total supply, while scrap contributed 22 per cent, official sector sales accounted for 6 per cent, and the balance came from private sector bullion stocks.

Globally, silver mine production increased for the fourth consecutive year, up 5 per cent, reaching a new record level of 545.5 million ounces. Primary silver mines increased their share of total output to 26 per cent up from 23 per cent in 1997. Much of the growth in primary production isattributable to the very large quantity of silver produced at Cia, Minera Mantos de Oro's Chimberos deposit in Chile, which will be mined out within one year. Lead-zinc mining generated 37 per cent of all silver, copper 22 per cent, and gold 13 per cent.

Mexico was again the biggest miner, producing 92.5 million ounces, nearly 17 per cent of the world's silver output. For the third straight year. Mexico's Industries Pefioles topped the list of silver producing companies worldwide, alone supplying 36.4 million ounces to the market.

Central and south American production was up 7 per cent, primarily due to the growth in Chile. Peru as the second largest producing country, recorded a modest decline of 1.7 per cent, reaching a total of 65.1 million ounces.

In the US, primary mines contributed over half of the country's total production last year, though production fell slightly from 63.2 million ounces to 62.8 million ounces. Canada produced 36.2 million ounces, all as by-product last year. Europeanproduction was up 3 per cent from 1997 to 58.3 million ounces, with Poland contributing nearly two-thirds of the total.

In 1998, the demand for `new' silver fell by 6 per cent due to a rise in scrap supply. Recycled scrap, an important component of overall supply, posted a 13 per cent increase to 190.4 million ounces in 1998 largely due to higher silver prices last year.

Overall, scrap represented 22 per cent of total supply. Again, the US was the largest recycled at 55.7 million ounces, followed by Japan at 29.2 million ounces, the survey stated.

Despite higher average prices in 1998, the contribution to supply from producer hedging declined significantly, the report says. Net outstanding positions increased by only 5.1 million ounces last year. The largest hedgers of silver have generally been gold producers, who either operate silver projects or produce substantial volumes of silver as by-product of gold mining.

By contrast, primary silver producers have tended to remain unhedged and fullyleveraged to the silver price. Building on the momentum which began in the summer of 1997, silver's price peaked at 7.81 in early February 1998 following Warren Buffett's announcement that Berkshire Hathaway had acquired 130 million ounces of silver. But, the price did fade in the second half of the year, reaching a low of 4.69 in December.

However, with an average annual price of 5.44 (up 13 per cent over 1997), silver enjoyed its best performance in eleven years. The trading range of 3.12 and the 37 per cent volatility recorded last year were also the highest levels posted in 11 years. Lease rates surged in the first half of 1998, putting the market in backwardation.

As a consequence, changes in the supply of and demand for liquidity were the most influential factors in determining price behavior last year, the report said.