Beyond the golden brick road

Gold Investor, October 2018

18 October, 2018

Beyond the golden brick road

China’s “Belt and Road” initiative is vast in size, ambitious in scope and already underway. As the project evolves, it is likely to have a farreaching impact on the gold market, as Xiao Fu, Head of Commodity Markets’ Strategy at the Bank of China International, explains.

Xiao Fu
Xiao Fu
Head of Commodity Markets’ Strategy
Bank of China International

China’s “Belt and Road” (B&R) initiative is a long-term development campaign to boost trade and stimulate economic growth across Asia and beyond. The B&R region is rich in mining resources and accounts for a significant share of global gold supply and demand.

As such, gold mining investment has played a leading role across the region, with a number of projects and joint ventures taking place between China and certain B&R countries. Looking ahead, we expect further indepth cooperation to emerge in gold exploration, mining, processing, consumption and trading.

Infrastructure facilities are well developed in Europe but are much less so in Southeast Asia, South Asia and the Middle East, so railways and bridges are being planned between Asia and Europe to help boost trade. This should also enhance gold mining investment and reshape the world map for gold mining.

Naturally, there are risks attached to the B&R initiative, including government changes, rising geopolitical tension globally, project delays and the difficulty of debt collection. Overall, however, we believe the initiative is a meaningful long-term strategy that can widen and deepen China’s connection with the rest of the world. And we are confident that the benefits will outweigh the risks or potential losses.

The Belt and Road initiative covers 68 countries or regions, which house half the world’s population and comprise almost one-third of the global economy.

Investment is expected to be split 60/40 across the 21st Century Maritime Silk Road and Silk Road Economic Belt (Figures 1 and 2)

Figure 1: Reviving the Silk Road

Reviving the Silk Road

Source: BOCI, 2017

Along the Silk Road Economic Belt, Russia and Central and Eastern Europe are likely to be the biggest recipients of investment spending. Along the Maritime Road, funding could be split evenly across South Asia, Southeast Asia, the Middle East and Africa.

Figure 2: Six economic corridors

Six economic corridors

Source: BOCI, 2017

Gold mining investment plays a leading role in China’s B&R initiative

The B&R region plays an important role in the global mining demand and supply system (Chart 1). Different countries have different commodities reserves, economic structures, industry development levels and value chains, so economic and industrial cooperation is a necessity. In terms of gold, the region accounts for 80% of global gold consumption and 25% of global gold supply. Central Asia and Russia in particular have rich deposits of gold, which will remain a priority in terms of investment.

China currently produces around 13% of the world’s gold and, according to the China Gold Association, has about 13,000 tonnes of gold resources and reserves. But there are huge opportunities across the Central Asian region, with Azerbaijan, Kazakhstan, Kyrgyzstan, Mongolia, Pakistan, Tajikistan, Turkey, Uzbekistan and Russia all possessing sizeable natural gold deposits (Figure 3). This is where the B&R initiative can help develop deposits and accelerate economic growth and wealth.

To support development in Central Asia and Russia, China’s state-run Gold Investment Fund was set up in May 2015 with an initial amount of US$16 billion. The two largest investors in the fund are China’s largest gold companies, Shandong Gold Group (35%) and Shaanxi Gold Group (25%). Gold companies have also taken the opportunity to do business across China’s Silk Road. China’s leading gold miner, Zijin Mining Group Co, for example, embarked on a “go global” strategy in 2005, has projects in three countries along the Silk Road – Tajikistan, Kyrgyzstan and Russia – and already produces half of gold production abroad and generates half of its profits (all commodities) abroad.

Chart 1: Mining demand and supply of B&R region

Chart 1: Mining demand and supply of B&R region ZH

Source: American Enterprise Institute; BOCI Research, 2017; Heritage Foundation

Data as of

Figure 3: Commodity resources are abundant along B&R routes

Country Natural resources
Kazakhstan Crude oil, natural gas, coal, iron, copper,zinc, other mineral and forest resources
Uzbekistan Gold, oil, natural gas, coal, uranium, copper,tungsten, etc.
Kyrgyzstan Coal, mercury, antimony, etc.
Turkmenistan Crop oil, natural gas, salt, iodine and other mineral resources; crops such as wheat and cotton
Tajikistan Lead, zinc, tungsten, antimony, mercury, coal, natural gas, uranium, etc.
Saudi Arabia Petroleum, natural gas, silver, copper, iron, bauxite, phosphorus, etc.
Iran Crude oil, natural gas, silver, copper, zinc,chromium, gold, manganese, antimony, lead, marble, etc.
Georgia Crude oil, natural gas, manganese, coal,copper, other mineral resources and forest resources
United Arab Emirates Crude oil, natural gas 
Jordan Phosphate, potassium, copper, manganese, shale oil, etc.
Kuwait Crude oil, natural gas
Oman Crude oil, natural gas, fisheries, copper, gold, silver, chromium, iron, manganese, magnesium, coal, limestone, marble, gypsum, phosphate, salt, quartz, kaolin, etc.
Qatar Crude oil, natural gas
Azerbaijan Oil, natural gas, mineral water, iron, molybdenum, copper and gold and other mineral resources and animal and plant resources
Vietnam Offshore crude oil, natural gas, coal, iron, aluminium, manganese, chromium, tin, titanium, phosphorus and other mineral resources and marine and forest resources
Malaysia Crude oil, iron, gold, tungsten, coal, bauxite, manganese and other minerals and rubber, palm oil and pepper and other natural resources
Indonesia Crude oil, natural gas, tin, coal, uranium, copper, other mineral resources and marine and forest resources
Thailand Crude oil, natural gas, coal, oil shale, tin, tungsten, antimony, lead, manganese, iron, zinc, copper and molybdenum, nickel, chromium, uranium, thorium

Source: BOCI, 2017

Infrastructure facilities to enhance mining investment and boost metals demand

The B&R initiative is designed to deliver increased connectivity through major infrastructure, construction and mining projects, in order to foster trade and economic cooperation. We expect infrastructure development in the B&R region to boost demand for steel, aluminium, iron ore, copper, nickel and zinc.

Improved transport infrastructure will also increase the accessibility and deliverability of commodities. There are three major railway lines, for example, connecting China to Europe via the ancient silk route. The investment in this infrastructure should make it easier to transport materials and commodities from mines to markets, supporting the further development of mining projects.

Gold mining investment has played a leading role across the B&R region. Looking ahead, we expect further in-depth cooperation to emerge in gold exploration, mining, processing, consumption and trading.

Building a financial cooperation network

The huge trade and investment demands from the B&R area cannot be satisfied by a single nation or even several countries. Instead, financial cooperation is needed to leverage global capital. So China has committed vast amounts of money to the new Asian Infrastructure Investment Bank (AIIB), the New Silk Road Fund (NSRF), the Shanghai Cooperation Organisation (SCO), the Silk Road Gold Fund and the Mining Industry Development Fund. It has also made numerous bilateral arrangements with countries. Meanwhile, capital markets can offer other fund-raising options, such as flotations, M&A, project finance, etc. Direct capital market investment can also help to reduce reliance on traditional credit markets and support projects with longer-term, sustainable funding.

This should provide opportunities for the further development of China’s gold market. Market infrastructure providers, such as the Shanghai Gold Exchange, could develop its value proposition to meet the needs of banks, mines and refiners looking to sell their output in China. Over time this could boost the depth of liquidity in China’s gold market.

Risks vs. benefits

The B&R initiative brings both opportunities and challenges. Regional political and social instability can be an obstacle, including border clashes and resource nationalism. Many countries in the region are also characterised by frequent political change, which can impact the implementation of certain policies and projects.

For Chinese companies looking to expand overseas, many still need to gain more experience. Legal or cultural differences may result in projects starting late and, in the long term, debt collection may prove challenging. Furthermore, China’s moderate GDP growth rates may limit the acceleration of outward mining investments, as investors become increasingly cautious of sovereign risks in developing countries.

Overall, however, we believe the B&R initiative is a meaningful long-term commitment, which can deepen China’s connection and bring wealth along the B&R region. The benefits from improving economic ties along the B&R region and promoting sustainable global growth, in our view, should outweigh the risks or potential losses. And gold can play an important part as the initiative unfolds and develops.

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