The overall fall in supply in the first quarter illustrates the importance of recycling and producer hedging to the gold market. With the gold price more than 10% below all-time highs and easily available supplies of old gold jewellery having already been sold in reaction to the strong up-leg in the gold price to the August 2020 peak, recycling fell 8% y-o-y and 17% q-o-q. Producer de-hedging of 25.0t contrasts with 34.7t of new hedging in Q1 2020 and together these sources of supply offset an increase in mine production to a record for the first quarter of any year. Looking ahead, we believe annual mine production looks set to hit a new all-time high in 2021, barring unexpected disruptions, but recycling is likely to remain subdued.
Current Q1 estimates indicate that mine production increased by 4% y-o-y to 851.0t. To an extent this was due to fewer COVID-19 related interruptions compared to the same period last year, but higher output from North American mines and increased mining rates at Grasberg in Indonesia primarily lifted mine production to its highest Q1 on record. On a q-o-q basis, production fell by 5% in Q1, normally the weakest quarter of the year, due principally to normal seasonal fluctuations in Russian and Chinese production.
Coronavirus restrictions had minimal impact. Disruption to mining operations due to the coronavirus pandemic was negligible in Q1, only meriting a couple of mentions in individual countries, both in South America. We do not, however, believe that operations have been able to catch-up on gold output lost due to the pandemic; for most types of mines there is no flexibility to recover production following a shutdown. The y-o-y comparison is likely to be more meaningful in the second quarter, however, as it was the second quarter of 2020 that saw the most significant impact of lockdowns on global mine production.
North American gold output increased significantly in Q1. Canada (+21% y-o-y) saw increased output from existing operations such as Detour Lake and Meadowbank. In the US expansion and grade increases at operations such as Turquoise Ridge, Fort Knox, and Pogo contributed to production growth of 13% y-o-y.
Substantial production increases were also seen from Mongolia (+170% y-o-y) and Indonesia (+29% y-o-y), both driven by large changes in by-product output from large copper-gold mines. In Mongolia, higher gold grades at Oyu Tolgoi drove higher production, despite issues with the underground expansion of the mine. Grasberg in Indonesia saw an expected increase in underground mining rates as the mine continues its transition away from open-pit mining; this will continue over the next few years and Indonesian output should benefit accordingly.
Despite the global increase in mine production, some countries saw y-o-y declines. In Papua New Guinea output was 19% lower y-o-y as a result of production at the Porgera mine having been suspended since 25 April 2020. The suspension, driven by the government’s decision not to renew the mining lease, may be reversed following news that a provisional deal has been reached to re-start operations later this year.1
Argentina saw gold output drop 13% y-o-y due to COVID-19 delays at Veladero, where the mine is transitioning to a new heap leach pad. In Peru, residual restrictions as a result of the coronavirus pandemic, together with lower grades at several mines, saw gold output 9% lower y-o-y.
In China there was no sign of a bounce-back in gold output in the first quarter as mine production fell 2% y-o-y. Two fatal accidents in Shandong province in January led to suspensions at several operations in that region whilst safety checks were carried out. This decline is all the more notable considering coronavirus-related production interruptions hit Chinese output hard in Q1 2020, when mine production was down 12% y-o-y. China, the world’s largest gold producer, has seen output fall for the last four years and could be overtaken by Russia, where production has grown recently and looks set for further gains as some large projects are commissioned over coming years.
Net producer hedging
The global hedge book fell further in Q1 due to net producer de-hedging of 25.0t, continuing the trend of de-hedging seen during the previous three quarters.
Comfortable margins keep producers on the sidelines. Although the gold price fell 10% during Q1 – and more than 18% from the all-time high seen in early August 2020 – little new hedging has been reported by gold mining companies. All-In-Sustaining-Cost (AISC) margins remain high and mining companies seem content to allow shareholders greater exposure to the spot gold price, although we are aware that some smaller and development-stage companies may be required to increase hedging coverage at some point this year as a requirement of debt funding.
The supply of recycled gold in Q1 was 270.2t, 8% lower y-o-y, despite a 13% increase in the average quarterly price between Q1 2020 and Q1 2021.
It is, though, arguably more relevant to consider the q-o-q picture when ascribing consumer recycling behaviour to changes in the gold price: recycled gold saw a 17% quarterly fall alongside a 4% decline in the average gold price from Q4 2020 to Q1 2021.
The data underscores what econometric modelling tells us: that changes in the gold price have an immediate, but temporary, effect on recycling.2 Intuitively, this makes sense – the average gold price being higher than it was in the same quarter one year ago would not be expected to automatically prompt a surge in the supply of gold from recycling in the current quarter. People are encourage to sell their old gold jewellery in response to a rising gold price during a given period, not because prices are higher versus one year previously. We saw this in Q3 last year: the price rose roughly 30% from the beginning of the second quarter to the Q3 peak, and recycling grew by 32% q-o-q, although we must recognise the impact of some key markets being released from lockdown during this time.
Once those easily available supplies have been sold, it generally takes another upsurge in the price to flush out further items for scrap. The y-o-y decline in recycled supply seen in Q1 leads us to believe that much of the near-market supply of recycling feedstock has been depleted and that it will likely take another significant rise in price to draw this out.
Some country-specific factors may have limited recycling supply in the first quarter. Improved economic activity in India, especially in the rural sector, along with expectations of a higher gold price, appear to have reduced recycling volumes. In China, better-than-expected retail sales for gold jewellery have greatly reduced the amount of inventory selling back from the jewellery sector. It is also possible that the strong global fiscal response to mitigate the economic effects of the coronavirus pandemic has reduced the need for distressed sales of gold, in contrast to the mostly monetary actions seen during and after the 2008 Global Financial Crisis.
We believe that recycling is likely to remain subdued throughout 2021. The need for significant increases in the gold price, a more optimistic economic outlook, and low near-market supplies, create headwinds for higher levels of selling back. The y-o-y reduction in recycled gold more than offset growth in mine production in the first quarter, underlining the importance of this component of the gold supply/demand balance.