It’s been one of the most striking features of the world gold market in recent years: the fall of South Africa and the rise of China.
This was again confirmed in figures released in South Africa on Friday and in the outlook papers from the 2007 commodities forecasting conference held by the Australian Bureau of Agricultural and Resource Economics, or ABARE, in Canberra at the start of last week.
ABARE estimated that South Africa’s demand had fallen to 279 tonnes in 2006 but figures released by the Chamber of Mines of South Africa put the figure even lower: 275.1 tonnes (or 275.119.4 kilograms).
This means South Africa’s annual gold production was now at its lowest since a big strike in 1992 cut production.
(And Australian gold output last year of 249 tonnes is the lowest since 1993.)
The falls in production in two of the top three producers in the past few years has helped underwrite the price rises in the past year: a scarce resource is getting relatively scarcer, despite rising output in China, South and North America.
Production levels have been in slow decline for 23 years as the higher grade ore deposits have been exhausted and rising mining costs in the country have made lower grade ore increasingly uneconomic.
But there’s now a feeling that (as ABARE points out) the surge in world prices over the past four years could be starting to boost output from deeper and more expensive deposits. Should world prices continue at present levels South African output could stabilise around current levels but a sharp fall in the world price for a sustained period would see output slump further.
And helping will be the steady loss of value in the US dollar which is the background against which supply and demand in the industry seems to operate.
South Africa’s Chamber of Mines said on Friday in a statement:
“Total South African gold production for 2006 was 275 119.4 kilograms, which was 7.5% lower than in 2005.
“This is the lowest level of gold production since the strike in 1922 reduced production to 218031 kilograms.
“For Chamber member producers production fell by 7.9% to 235 042.5 kilograms as the 1.5% increase in tons milled was not sufficient to compensate for the 9.3% decline in the average grade mined.”
The bottom line is that the country’s annual output has now halved over the past 10 years.
It’s been a vicious circle for the South African gold industry.
Forced to work lower grade ores, mining costs have risen sharply (in Rand) as the mines go deeper and the shallower deposits are worked out.
That in turn triggers another round of cost cutting by the companies, including abandoning lower grade operations.
The figures say it all: production of ore up 1.5 per cent, average grade mine down by 9.3 per cent, costs in Rand up more than 20 per cent.
To extract greater amounts of ore to combat falling grades, more ore has to be mined and with domestic inflation in South Africa above those in producers like Australia, China, the US and Canada, costs are rising sharply and profitability is being undermined for every tonne of ore produced.
South Africa is still the world’s largest producer, but its share of global mine production has fallen to around 11 per cent (ABARE estimate) from 50 per cent in the early 1980s.
The only thing keeping the industry going at the moment would be the high world price gold which averaged $US604 an ounce in 2006 and is expected to rise again this year to around $US670 an ounce (ABARE). Gold prices averaged $US271 an ounce in 2001 and trade around $US650 an ounce at the moment.
ABARE said in its outlook paper on the metal last week that “South Africa’s gold output is forecast to stabilise over the medium term as a number of mothballed gold operations recommence production. Production at Harmony Gold’s Phakisa Shaft project (280 000 ounces a year peak production) is expected to begin in 2009.
“Another Harmony Gold operation, the Elandsrand new mine project (445 000 ounces in 2010), is expected to ramp up production toward the end of the outlook period.”
And on China, ABARE said:
“In 2006, China was the world’s fourth largest gold producer behind South Africa, Australia and the United States. Gold production in China has increased by around 4 per cent a year since 2001 and reached an estimated 240 tonnes in 2006.
“China’s gold mine production is expected to continue to increase over the projection period as favourable minerals prospectivity and policies provide encouragement to overseas companies, leading to an increase in exploration and project developments.
“Greater investment by international mining companies is expected to translate into better exploration technology being used and more efficient mining techniques being adopted – factors that are likely to support growth in China’s gold output over the medium term.”
