China and Gold Production
Out With the Old and In With the New: Gold Production Shifts to China
By Interfax-China
28 May 2007 at 12:52 PM GMT-04:00
resourceinvestor.com
CHENGDU (Interfax-China) -- China will become the world's largest gold producer by 2010, an industry insider said at the Western China Mining Summit 2007, held in Chengdu on Friday.
Chinese production of gold increased by 162.8 tonnes to 247.2 tonnes between 1997 and 2006, a trend that has also been mirrored in other developing countries like Peru, Russia and Indonesia, Morino G. Pieterse, editor of Goldletter International, a gold investment report, said. Emerging gold producing countries have increased output from 17.7% of global production in 1997, to a current 29.8%.
Conversely, gold production from traditional gold producing countries such as the United States and South Africa has steadily declined in recent years from 362 tonnes and 527 tonnes in 1997, to 251.8 tonnes and 291.8 tonnes in 2006 respectively. Across the board, gold output from traditional gold producing countries has fallen from 54.3% of global production in 1997, to 36.1% in 2006.
"China's gold output surpassed Australia's last year, is due to surpass U.S. production this year, and will surpass South African production within two years," Pieterse said.
In recent times, consumer demand has fallen steadily in line with gold production. However, this has not been reflected in gold prices, which averaged at $276.50 per ounce at the end of 2001 but have since spiked to $677.0 per ounce on April 30 this year.
Pieterse explained that skyrocketing global gold prices over the last 10 years has been led mainly by excessive market speculation, particularly by de-hedging in the last five years. Because the price surge is not a result of any significant supply and demand problems, gold prices will not rise above $700 per ounce in the future, Pieterse predicted.
Meanwhile, gold as a percentage of global currency has fallen from 84% in 1950, to 10% at present, Pieterse said. "While the United States still holds 76% of its currency reserves as gold, China holds only 1.4%, and has no real intention of significantly increasing that figure in the future."
He commented that the widespread belief that emerging Asian economies, mainly China, will mass-purchase gold to make up central bank reserves is fundamentally mistaken and based on outdated western opinions.
"Everything I've learnt in the last 25 years about the gold market is now useless and outdated," Pieterse stated.
"Asian central banks are not mass-purchasing gold, and are far more interested in the base metals market to feed growing development," he added.
Nevertheless, investment in gold mining in China has rapidly increased over the last few years, rising from $5.1 billion in 2005 to $7.1 billion in 2006.
Growing investment also indicates that the recent rise in production costs has not curtailed investment. Although the cost of production has risen to around $400 per ounce, leaping gold prices have actually increased profit margins from 12.5% in 2003 to a current 43%, which is further encouraging investment.
While production costs in traditional gold mining countries are rapidly increasing, Chinese production costs still remain relatively low.
Steve Ryan, general manager of Oxiana, a precious metals company listed on the Australian Stock Exchange, commented that although local governments are sometimes unwilling to grant foreign companies access to very profitable mines, they are also unwilling to invest significant sums in prospecting and development. "There is plenty of room for exploration expansion by foreign companies in western China," Ryan said.
At present, China only attracts approximately 3% of global exploration investment, and given the relative lack of investment in western China, this figure can be expected to greatly increase in the next 20 years, Ryan said. One of the main reasons behind low foreign investment is a lack of confidence in China's legal structure, with western companies uncertain that their investment will be secure, particularly as mine investment can run into hundreds of millions of dollars.
James Moore, president and CEO of InterCitic Minerals, noted that the main problem was in the wording of Chinese mining law. "At the moment, the law states that a foreign company has 'priority rights' to a mine, if that was changed to 'full rights', foreign investment would flood into China almost immediately. However, it is more likely that there will be no change in the law, and it will take several foreign company success stories to increase foreign investor confidence in Chinese mine exploration," he said.
Furthermore, Pietrese added he considers the political risks in China to be minimal, and stressed that it is more a matter of finding suitable business partners and adjusting to the Chinese ways of carrying out business.
"China is now dictating global markets, not the West. At the same time though, it's in China's interest that the U.S. dollar does not fall by too much," Piterse said.
Pieterse also noted that recent media reports of U.S. dollar devaluation are "wildly over-exaggerated". The 20-year low reported in 2004 was only a temporary one-tenth of a cent drop, which quickly bounced back on market corrections. Conversely, the 14% temporary rise in 2005 received relatively little media attention.
Moreover, when the renminbi was de-pegged against the dollar in 2005, the dollar only fell by approximately 5%, Pieterse said.
But with monetary reserves of just over $1 trillion, a heavily devaluated dollar will still have a negative effect on China for the near future.
© InterFax-China 2007. For more intelligence on Chinese metals and mining, click here or contact David Harman in Hong Kong at david.harman@interfax-news.com or (852) 2537-2262.
from LC
Message 23580002
KEYWORD:
CRACKER |
