By CPM Group
There is some confusion in the investment community about silver prices in China, which are different from those quoted in London or New York. This is neither unusual nor unique. The current misunderstanding is preventing investors from fully grasping important developments in the Chinese market.
As requested by Silvercorp, CPM Group is providing a thorough explanation of the nature of silver prices in China, and their divergences from London prices. Beginning in 2023 but accelerating this year, Chinese silver prices have been rising more sharply than prices in London and New York. This is due to strong demand from Chinese industrial users, jewelry and silverware buyers, and investors. This report lays out some of the explanations of what prices actually are used in physical transactions in China and why and how they differ from London prices. CPM intends to follow this Market Commentary with a more comprehensive report soon.
One of the first things to note is that price differentials between markets, especially two quite different markets that are 5,700 miles apart, is that there are more than one silver price in each of these markets. Metals prices, including silver, vary around the world, even across town, reflecting market differences.
Companies producing and selling silver in China typically use Chinese silver prices as benchmark. This is the same as in most other countries. Some large producers outside of China sell at the London daily price. Many others sell at ‘spot’ or forward prices set between them and the buyers, typically either smelters, refiners, or financial intermediaries such as bullion banks and trading companies. It should be no surprise then that the price in China regularly varies from the price of silver in London. But it gets more complicated.
There is a 13% Value Added Tax attached to the silver prices quoted on the Shanghai Futures Exchanges’ silver price quotes that are available and referenced by investors that actually are not applied to what appears to be the vast majority of SHFE silver trades. Thus, for an apple-to-apple comparison against London prices, one needs to look at a VAT-adjusted SHFE silver price.
The VAT is only paid on SHFE futures contracts that are used to take physical delivery, which appears to be a small percentage of SHFE silver trades. The two charts on the next page show the significant difference between observed and VAT-adjusted price series.
The VAT is paid on physical silver sales, not futures that do not get delivered physically. Silvercorp sells basis the Huatong Silver Exchange price, which is a spot physical sale price. VAT is paid on such purchases.
Shanghai (without VAT) at a discount to London
Within Shanghai, there are different exchanges quoting different silver prices.
The Shanghai Futures Exchange (SHFE) has a silver futures contract, on which around 100 million ounces of silver trade daily. These are futures contracts, however. The delivery of physical silver through these futures contracts is smaller, since much of the trading is by entities that wish to buy and sell silver and have exposure to silver price changes, as opposed to buying or selling physical silver.
The Shanghai Huatong Silver Exchange (HSE), meanwhile, is a physical exchange market trading silver, platinum, and palladium. (Fair disclosure: the Shanghai Huatong Silver Exchange is a long-time client of CPM and CPM’s partner in the production of the Chinese language version of CPM’s annual Silver Yearbook.) It is the only spot silver exchange in China providing a platform for spot silver transactions. The Huatong Silver Exchange publishes daily spot silver Fixing Prices and Settle Prices that serve as the industry benchmarks for spot silver transactions in China.
London is the major silver trading center globally. Daily clearing volumes in the London Bullion Market (LBMA) are typically 200 to 300 million ounces per day. There is a daily official silver price, used in many commercial contracts and financial transactions around the world among producers, smelters, refiners, trading companies, industrial users, financial institutions, and investors. That price is fixed daily, but silver trades virtually around the clock with the price changing all day long. Actual trading volumes are a multiple of the clearing volumes.
CPM has more work underway related to the Prices of Silver in China (emphasis on the plural: Prices). We are seeking data series from HSE to allow its comparison to SHFE and London, since it appears to be the more important benchmark for domestic Chinese physical transactions. We also are seeking more information on SHFE delivery rates against futures contracts. We expect to complete this research and analysis in the weeks ahead.
Conclusion
Overlooked in all of this confusion about what prices are actually paid to Chinese silver producers is one very important fact. Silver prices in China have been rising sharply relative to London prices, especially since 2023. This reflects the strong demand for silver from industrial users, jewelry buyers, and investors in China, demand growth trends that are accelerating this year.
This CPM Group Market Commentary is sponsored Silvercorp, one of the premier silver mining companies in the world. CPM Group thanks Silvercorp for making this paid CPM Group research available free of charge.
This is third-party content provided by Silvercorp Metals Inc. (NYSE-A:SVM; TSX:SVM). Please see full disclaimer here.
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