Following the multi-year devaluation of the peso, silver mines in Mexico have experienced marked cost deflation (in US$ terms) with costs now 9% lower than the rest of the World (RoW) on a CRU Business Cost basis.
The biggest risk to this continued competitive position is peso appreciation. Under a low silver price (US$10/oz) scenario, we would expect to start seeing curtailments globally although surprisingly -Mexican cost competitiveness or expected supply would not vary much due to the polymetallic (and insulated) nature of the large silver mines.
Mexico: Downside risk has eased so peso appreciation now likely Since November 2016, the peso has experienced high volatility due to concerns that US protectionist policies might damage Mexican export prospects. Renegotiations to improve NAFTA got underway in August and risk of extreme action on trade by the US has dissipated to some extent. The Banco de Mexico has raised rates this year to combat higher inflation resulting from a liberalisation of fuel prices early in the year, but with inflation set to fall into the target range of 2%-4% in 2018, we don't expect any further interest rate increases this year. At the end of August, the peso was trading around 17.80 to the dollar, up 14% since the end of 2016. This insight looks at the present cost position of Mexican silver mines along with how that position may change under a stronger peso and a lower silver price.
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