Rewards spur China’s gold rush

Rewards spur China’s gold rush

By Richard McGregor in Beijing

Published: February 4 2008 22:15 | Last updated: February 4 2008 22:15

After more than doubling production in the past two years, the managers at the Habahe Huaitai gold mine in Xinjiang have factored in a similar surge this year.

There are numerous reasons for the rise, including better knowledge about the project’s reserves, but above all, a spokesman said, increases are being driven by higher global gold prices.

China’s mini-gold rush made it the world’s biggest producer in 2007, the first time any nation has surpassed South Africa since the late 19th century.

“Because of the higher gold price, companies with enough capital are lifting production,” said an official of the China Gold Association, citing one mine in Shanxi province planning to quadruple output over the next two years.

Gold production in China rose by 12 per cent to reach 276 tonnes in 2007, according to GFMS, the London-based precious metal consultancy, ahead of South Africa, with 272 tonnes.

By the standards of some Chinese industries, gold output has risen at a stately pace. Local production of iron ore, the global price of which has also risen sharply, increased by 40 per cent year-on-year in 2006, as miners tried to profit from the resources boom. But in a year in which global, and South African, production fell, the additional Chinese output in 2007 of 27 tonnes was hugely significant.

Production, of gold, and other resources, has been spurred by small, semi­private mines, often producing low grades of ore in ventures that would have been unviable a few years ago. The lack of environmental scrutiny, at least compared with similar projects in western countries, also keeps costs down.

“There is so much money sloshing around in the economy that in many ways mining has become the new real estate,” said a China-based foreign mining executive.

China has more than 1,300 licensed gold mines and more than 1,000 gold mining companies, according to official figures. None of its gold companies ranks in the top five producers in the world.

The foreign share of Chinese production is small at about 8 per cent, with none of the large groups figuring significantly in the market.

With most potential mining leases divided up into small quilt-like plots, and the best prospects often reserved for locals, the big groups have had little incentive to invest in China, even though, officially, restrictions have been eased.

Besides price, the other spur for production is rising consumption, triggered by official approval for an exchange to trade gold and new investment products.

The Shanghai Gold Exchange, opened in 2002, has provided real-time pricing. Until the late 1990s, the central bank set the price daily. The second boost has come from banks, which market both bullion and “paper gold” notes, which can be bought and sold with ease across the counter.

“This has really helped make gold into an everyday investment product,” said a Hong Kong-based banker involved in the market.

The strengthening renminbi remains a constraint on the market, as gold is priced in US dollars. The gold lobby also continues to push for a removal of a 17 per cent value added tax on gold. “Gold has become a kind of alternative investment,” said Albert Cheng, of the World Gold Association. “But if the VAT was removed, that would be good news for investors.”

The Chinese market for jewellery is relatively small compared with the main ­centres and is only about one-quarter the size of India’s. For all the euphoria of the past two years, China’s mantle as the top producer may not last long.

Hussein Allidina, chief commodities economist at Morgan Stanley in New York, said output might begin to decline in six years because China lacks the “geology for large sustainable gold production”.

“Thus, we expect lower growth from China in 2008 and 2009, with marginal costs continuing to rise as higher grades are exhausted,” he said.

Even this year’s rise in production might not be all it has been portrayed, since in the past some production was kept off the books so it could be exported. The onshore investment market is now bringing such production to the surface.

Additional reporting by Wang Bing in Beijing and Javier Blas in London