The total supply of gold grew marginally by 1% in 2018, up from 4,447.2t to 4,490.2t. This growth was supported by similar y-o-y increases in mine production and recycled gold. 2018 was the second consecutive year of modest net producer de-hedging.
The final quarter of 2018 saw gold mine production fall back from the record quarterly total achieved in Q3. Output totalled 854.1t in Q4, 2% lower q-o-q and 1% lower y-o-y. Over the year, gold mine production rose fractionally, up 1% to 3,346.9t. Although slowing in recent years, this is now the tenth year of annual growth and the highest level of annual mine output on record (eclipsing the previous record in 2017).
Structural changes constrained some major producing nations. Stricter environmental regulations resulted in 2018 Chinese gold production falling once again: annual output declined by 9% y-o-y. The regulations – relating to cyanide in tailings – have had a dramatic impact on national gold production since their introduction, including the closure of some marginal operations. In Indonesia, annual output plunged 24%. This was primarily due to a combination of the completion of Phase 6 ore at Batu Hijau and the exhaustion of higher-grade ore from the final phase of the Grasberg open pit.
In South Africa, production fell 18% y-o-y. The closure of some loss-making projects hit output during the year, while industrial action compounded the pressure on local miners. Goldfield’s South Deep project was impacted in Q4 by a 45-day strike in response to retrenchments, while strike action at Sibanye-Stillwater operations (relating to a three-year wage agreement), as well as safety incidents and seismic disruption, caused losses.
Gold output in Peru fell 9% y-o-y as the local opposition to mining that has occurred during recent years took its toll. Declining production profiles at existing projects and a reduced production pipeline are evidence of miners’ reluctance to grow output in the country. Production fell significantly at Lagunas Norte, Yanacocha and Orcopampa, which together produced 27t of gold output in 2017.1
But some producing nations were bright spots in 2018. In Australia, record local gold prices during the year, as a result of weakness against the US dollar, supported growth in mine production. National output grew 4% y-o-y, despite losses earlier in the year at Kalgoorlie Super Pit earlier due to a ground slip. And this growth is likely to be supported by greater levels of exploration spend by Australian miners, which now stands at multi-year highs.
Russian gold production rose 10% y-o-y in 2018. Supported by state incentives – such as royalty waivers, tax incentives and low-cost loans – local gold miners of all sizes boosted output in 2018. In Papua New Guinea, national gold production grew 23% y-o-y, driven by higher output at the Lihir and Hidden Valley projects. Canadian annual output grew 9% in 2018, as greenfield projects continued to ramp-up. Production at Brucejack, Rainy River and Moose River have boosted overall annual gold production, and the project pipeline continues to provide support. Production growth from key West African jurisdictions, such as Burkina Faso and Ghana, also contributed to the overall increase in gold mine production.
While challenges remain for the gold mining industry, there is reason to be optimistic regarding the production pipeline. Intermediate and junior companies – whose projects greatly outnumber those of the major miners – have been successful in accessing new capital, helping to drive project development. Fruta del Norte, Meliadine and Gruyere are all examples of projects due to begin production in 2019.
Net producer hedging
Net producer de-hedging was seen for a third consecutive quarter in Q4, with the global hedge book declining by a further 10t. On an annual basis, net producer de-hedging totalled 29.4t, following on from 27.9t of net de-hedging in 2017. At the end of 2018 the global hedge book stood at an estimated 195t, -13% y-o-y, continuing the general downward trend.
Despite the global net de-hedging in 2018, recent gold price strength in some key producer currencies has created an ideal environment for hedging. This was most evident in Australia, where local miners such as Resolute, OceanaGold and St Barbara all announced additional hedging agreements in late 2018 in order to benefit from record local prices. This continues a trend of miners engaging in more tactical hedging. It should also be noted that several option positions, totalling around 15t, were expected to reach maturity at the end of the year.
Gold recycling returned to more historic norms towards the end of 2018, a progression that has been ongoing following the 14% jump in 2016. Recycled gold of 285.4t in Q4 was 3% higher y-o-y, while the annual level of recycling barely changed (+1%) at 1,172.6t.
Turkey and Iran remained the largest gold recycling markets in Q4. Currency appreciation during the year, coupled with inflation cooling in Turkey during the final two months of the year, helped to bring gold prices down from recent highs. Currency weakness, inventory liquidation by retailers, profit-taking and distress selling had been features of both gold markets during 2018. In Egypt, the normalisation of recycling levels is evident. A lower and more stable local gold price together with an improved economy has reduced gold recycling.
Increases in gold recycling were seen in many Asian markets in Q4 as consumers sold into a price rally. Declines were seen in India, where fewer auspicious days for weddings in 2018 reduced the need for people to sell back gold in order to fund wedding costs. In addition, anecdotal reports from Kerala – a key gold-buying state – indicated that consumers opted to use their gold as collateral for loans rather than sell back. In China, a q-o-q decline was primarily driven by seasonality: recycling of old stock amongst retailers was higher in Q3 ahead of the Hong Kong and Shenzhen jewellery fairs late in the quarter.
Gold recycling in western markets was broadly stable. Levels remained consistent throughout 2018, as a combination of depleted near-market supplies and range-bound prices deterred consumers from selling.