Gold supply bounced back in H1, up 4% y-o-y to 2,308t as the mining industry experienced much fewer pandemic production stoppages and some underlying production growth was recorded. Mine production increased 9% y-o-y in the first six months of the year. Recycled gold supply fell by 5% y-o-y in H1, despite a higher average gold price – up about 10% y-o-y – as the economic recovery reduced the incentive to recycle gold.
Mine production
H1 Mine production increased 9% y-o-y to 1,782.6t – the highest H1 in our records back to 2000. The most significant factor behind this y-o-y growth was the virtual absence of pandemic-related disruption, a sharp contrast to the COVID-19 production stoppages seen in the first half of 2020, especially in Q2 2020. But there was more to H1 strength than simply the COVID-19 factor: H1 mine production was also 3% higher than the first half of 19. Increased output from the vast copper-gold operations of Grasberg in Indonesia and Oyu Tolgoi in Mongolia further contributed to this growth, as did operational ramp-ups in North America and higher grades at some Mexican mines.
Mexico saw the largest increase in production, up 67% y-o-y assisted by rising grades at operations such as Peñasquito and Morelos. Canada reported production up 57% y-o-y, helped by new project ramp ups and the return of Musselwhite to full production following a fire in Q12019. The 50% y-o-y increase in Peruvian production was almost fully attributable to the recovery from the COVID-19 pandemic, as was the 46% y-o-y increase in South Africa, which bounced back from the weakest quarterly output in at least 50 years.
Some countries did see notable declines in mine production in Q2. In Australia, lower grades at Cadia Valley and Fosterville led to a 3% decline year on year. In China, the world’s largest gold producer, mine production fell 5% y-o-y after safety-related stoppages in Shandong province in Q1 2021 continued to affect operations in the second quarter. Lower grades at Kyrgystan’s Kumtor mine drove a 21% y-o-y fall in production and Egypt saw 25% lower mine production after the Sukari open pit operation implemented a revised mine plan after pit-wall instability was detected.
Despite higher production, costs have increased in 2021. In Q1 – the latest data available – quarterly average all-in sustaining costs (AISC) rose to US$1,048/oz, 6% higher y-o-y, primarily due to higher total cash costs (TCC) and increased sustaining capital expenditure. TCC rose 4%y-o-y to US$769/oz, driven by lower grades, rising labour and energy costs and additional COVID-19 related costs.
In the absence of a resurgence of COVID-19 disruptions, annual mine production looks set to recover from the decline seen in 2020.
Net producer hedging
It is estimated that gold miners reduced their aggregate hedged position by 20t in H1 on a net basis. The US dollar gold price was marginally higher in Q2 – up 1% q-o-q – and this near-stability is believed to have contributed to de-hedging in Q2, as producers appear to prefer to keep production exposed to the spot gold price. Revised data shows that the most notable hedges during Q1 occurred in Australia, where Northern Star Resources executed a significant transaction, and other companies added new positions associated with debt finance for projects. Initial estimates for Q2 show 29t of net de-hedging, however this is subject to future revision as more information is published by mining companies.
Recycled gold
Recycling, strongly affected by lockdowns in 2020, remained depressed in H1 amid a global economic recovery. Recycled gold supply amounted to 545.5t in H1, 5% lower y-o-y. In Q2 specifically, gold recycling fell 2% y-o-y, to 276.6t despite the 6% increase in the US dollar gold price y-o-y.
Alongside economic growth, price is a strong determinant of recycling. But as we noted last quarter, it is 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 3% quarterly increase alongside a 1% increase in the average gold price from Q1 to Q2 2021.
The data underscores what econometric modelling tells us: that changes in the gold price have an immediate, but temporary, effect on recycling.1 Consumers are encouraged 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. And once those easily available supplies have been sold, it generally takes another upsurge in the price to flush out further items for scrap. The H1 y-o-y decline in recycled supply 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.
Looking at country specific data, it quickly becomes apparent that there was no single trend around the world in the second quarter. Whether recycling increased or decreased versus the comparable period last year depended on factors such as restrictions from the coronavirus, the timings of waves of COVID-19, different levels of government support for those hit by the pandemic, local currency price changes, etc. Thailand saw the largest single country swing y-o-y as it saw exceptionally high recycled supply in 2020 compared to near-normal sales in the most recent quarter. Stripping out this fall in recycling in Thailand, global recycling volumes increased 3% y-o-y, with the largest contributor to this increase being India.
The ferocity and spread of the second wave of COVID-19 throughout rural India impacted income levels during the quarter. Many consumers in rural India used gold to meet medical expenditures during the pandemic forcing distress selling of gold. The second wave of the pandemic, combined with the 17% drop in gold price by end of Q2 from the all-time high last year also impaired the ability of gold loan borrowers to meet repayments, with some reports emerging of higher gold loan defaults.2
There has been evidence of distress selling elsewhere too. Lebanon, for example saw a doubling of recycled supply y-o-y due to economic and currency weakness. Although many Middle Eastern countries saw double digit increases in volumes, the region as a whole was flat y-o-y, due to greatly reduced recycling supply from Turkey.
In contrast, only modest increases have been seen in other markets. In the US, caution around travelling during the pandemic last year, especially in New York and Los Angeles – both important collection centres – kept recycling supply constrained. Even as sellers have regained their confidence, there is little evidence of distress selling, probably due to government support programmes – something also seen in the UK. Lower EUR-denominated prices, together with government support, also limited European recycling volumes.
China saw slower y-o-y gold recycling volumes in the second quarter compared to the large volumes of consumer and retailer sell-backs seen last year. Cases of COVID-19, albeit minor, in Shenzhen in Q2’21resulted in strict restrictions, limiting fabrication and also associated recycling.
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. In H1, the y-o-y fall in recycled gold reduced the impact of record mine production, highlighting the importance of this component of the gold supply/demand balance.
