LAWRIE WILLIAMS: World’s Top 10 Gold producers – Peak Gold already here?

According to the latest estimates from major precious metals consultancy GFMS, global gold output in 2015 grew by an almost infinitesimal 0.2%, but is now seen as turning down in 2016 as the almost wholesale cancellations and deferments of major new projects due mostly to financing difficulties, and big cutbacks in exploration expenditure, are at last beginning to make an impact.  Indeed GFMS analysts were already seeing the start of a downturn by Q4 2015.

So far annual global production has been advancing largely due to some major projects already being well advanced in the production pipeline when the gold price started to turn down in 2011.  These provided more than sufficient new gold to replace the naturally declining output from aging mines and any shutdowns due to ore depletion or for economic reasons up until last year.  But now these new mines and expansions are mostly at full capacity with relatively little out there in terms of new projects to bring in new production, while the exploration cutbacks will have been creating legacy issues which will diminish any potential growth in the years ahead – indeed will likely lead to accelerating decline in global gold output for a number of years to come.

To an additional extent, mining companies’ success in cutting unit costs, albeit helped along by the big fall in the oil price, has been another reason production cuts have not occurred as fast as many analysts believed they would.  We have pointed out before that the initial impact of low prices is often a production increase as those which can do so combat the lower revenues by mining to higher grades.  If mill throughput is maintained, then output rises.

Currencies too have had a major impact on gold mining economics with parities against the dollar, in which gold is sold, having fallen – sometimes drastically- in most gold mining nations.  With most operating costs incurred in the local currency this has had a major effect on profitability, prolonging the lives of mines which might otherwise have shut down as being uneconomic.

GFMS suggests in its latest quarterly publication’s analysis that output was already beginning to reduce in Q4 and that Q3 2015 gold output may prove to have been the highest quarterly figure for many years to come (peak gold) as the slowdown at last starts to filter down to the producers. Not before time some may say.

GFMS’s latest country-by-country production estimates for 2015 shows little change in ranking among the world’s top gold mining nations.  (Note, these are estimates and are subject to change as further data becomes available, but are unlikely to alter much).  It does suggest that the continuing production decline in South Africa means that the nation which dominated global gold output for much of the 20^th Century has fallen down another slot to be overtaken by Canada.

Top 10 Gold Producing Nations (tonnes) – 2015 (Estimated) (GFMS)

Source: GFMS, Thomson Reuters

At the lower end of the Top 10 Indonesia has come in in 8^th place after a strong 15% increase in output.

But perhaps the key observation in the GFMS analysis is that in Q4 last year total gold supply dropped by 7% and that new mined production fell by 4%, the largest quarterly reduction since 2008. GFMS also saw a net return to dehedging by producers.  The prediction is that the Q4 production decline will continue in 2016, and in the years ahead.

After so much in the way of negative predictions for the gold price from most bank analysts at the end of last year and the beginning of this, it is thus also mildly encouraging for gold holders that GFMS sees the gold price making a gradual recovery during the year, particularly in the second half, as pent up Asian demand returns and mine supply continues to contract, thus further improving overall fundamentals.  But it should be noted that the GFMS prediction is only for gold to trade above $1200 an ounce towards the end of the year – not the kind of massive rise predicted (hoped for) by some of the more committed gold followers – and to average only $1,164 overall over the full year.

On gold demand, as we have noted beforehand, we would quibble with the way GFMS calculates Chinese demand which is hugely significant in terms of global gold flows (See: China’s gold absorption, not retail consumption, is the key to global gold flows).  The consultancy seems to ignore the big level of Chinese gold imports plus domestic production and scrap supply, represented by the huge SGE withdrawal figures last year (2,596 tonnes) in favour of a far more limited assessment of consumption.  It does comment on massive, and increasing, holdings by the Chinese commercial banking sector, but does not include these in its consumption figures.  Yet in our view this is still gold flowing into China, never to come out.  These bank intakes do not appear to be included in overall global supply/demand figures, yet if they were they would almost certainly turn what GFMS describes as a gold supply/demand surplus into a deficit.  That’s statistics for you.

01 Feb 2016 | Categories: Gold

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