Silver's Supply Tightening in China: A Strategic Investment Opportunity Amid Backwardation and Export-Driven Market Shifts

The global silver market in 2025 is witnessing a seismic shift driven by China's unprecedented export surge and structural imbalances in its domestic supply chain. As the Shanghai Futures Exchange (SHFE) grapples with record-low inventories and deepening backwardation, the interplay of speculative positioning and industrial demand is creating a compelling case for investors. This analysis dissects the mechanics of China's silver market, the implications of its export-driven dynamics, and the strategic opportunities embedded in its commodity structure.

Market Structure: Backwardation and the Scarcity Premium

China's silver market has entered a state of pronounced backwardation, where near-term futures contracts trade at a premium to longer-dated counterparts. As of late 2025, the SHFE forward curve shows the Apr'26–Feb'26 spread at –¥49/kg and the Jun'26–Feb'26 spread at –¥77/kg according to market data. This inversion reflects acute physical supply tightness, driven by a confluence of factors:

1. Depleted Inventories: SHFE warehouse holdings have plummeted to 531,211 kilograms-the lowest level since 2015 according to USAGOLD. This scarcity has intensified competition for immediate delivery, pushing up near-term prices.
2. Export-Driven Restocking: In October 2025, China exported 660 tonnes of silver to London, a record outflow aimed at stabilizing global prices according to market analysis. While December saw a 17-month high in SHFE vault inflows (+129 tons) according to market data, inventories remain far below mid-year peaks, underscoring persistent tightness.
3. 
   Industrial Demand Surge: The photovoltaic sector's voracious appetite for silver, coupled with policy-driven shifts from gold to silver due to new gold transaction taxes, has further strained supply.

The China–LBMA basis-a measure of the price differential between Shanghai and London-has remained persistently positive at 2.55% (US$55.2/oz as of November 28) according to Bloomberg, signaling robust near-term demand for physical silver. This premium is a direct consequence of China's inability to meet domestic fabrication and investment needs, creating a self-reinforcing cycle of scarcity and price inflation.

Speculative Positioning: A Market on Edge

Speculative activity in Q4 2025 reveals a market bracing for volatility. According to the CFTC Commitments of Traders Report, non-reportable non-commercial long positions in silver stood at 74,466 contracts, dwarfing short positions of 18,543 contracts. Commercial entities, meanwhile, held a net short position of 74,197 contracts (114,318 shorts vs. 40,121 longs). This positioning highlights a critical dynamic:

• Investor Optimism vs. Producer Hedging: The large non-commercial longs suggest strong speculative bets on continued price strength, likely driven by backwardation and industrial demand. Conversely, commercial short positions indicate hedging by producers and fabricators, who are locking in forward prices to mitigate near-term cost risks.
• Liquidity Constraints: With SHFE inventories at multi-year lows, the ability of commercial players to fulfill physical delivery obligations is constrained. This creates a liquidity premium in near-term contracts, further entrenching backwardation.

The speculative landscape is further complicated by geopolitical risks. Analysts warn that potential U.S. tariffs on silver could lock up existing U.S. silver stocks, exacerbating global supply challenges. Such a scenario would likely amplify backwardation and force China to accelerate exports, creating a feedback loop of scarcity and price escalation.

Strategic Investment Implications

For investors, the current market structure presents a dual opportunity:

1. Backwardation Arbitrage: Traders can exploit the premium in near-term contracts by rolling short-dated positions into longer-dated ones. However, this strategy requires careful monitoring of inventory replenishment and geopolitical risks.
2. Long-Position Bets: The persistent China–LBMA basis premium and robust speculative longs suggest that physical silver will remain in high demand. Investors could target SHFE-listed silver ETFs or futures contracts to capitalize on near-term price resilience.

Yet, caution is warranted. The market's reliance on China's restocking efforts-already strained by export outflows-leaves it vulnerable to policy shifts or production disruptions. Additionally, the speculative longs, while indicative of bullish sentiment, could unwind rapidly if backwardation unwinds or inventories rebound.

Conclusion

China's silver market in 2025 is a microcosm of global commodity imbalances, where backwardation, speculative fervor, and industrial demand converge. The structural tightness in SHFE inventories, coupled with a speculative landscape skewed toward long positions, creates a high-conviction environment for investors. However, the path forward is not without risks. Geopolitical volatility and inventory replenishment timelines will be critical watchpoints. For those willing to navigate these complexities, the current market structure offers a rare alignment of price momentum and fundamental scarcity-a strategic opportunity that demands both agility and discipline.