What’s Behind This Sudden Drop In China’s Gold Production?

I wrote a few weeks ago about the lack of knowledge around China’s gold mining sector.

But this past week, a new report from within the country provided a rare glimpse into China’s gold production. Showing some unusual patterns in output and consumption — that could have major implications for the global gold market.

That report was released Friday from the China Gold Association, as reported by Platts. Detailing gold mining output, demand and imports for the first quarter of 2017.

Here’s the most interesting thing about the data: China’s Q1 gold production saw a significant drop. With the country’s mined output falling a full 9.3% during the January to March period — to 101.2 tonnes (3.25 million ounces), down from 111.6 tonnes during Q1 2016.

The reason for the production decline isn’t clear. With the report noting that Chinese gold miners have reduced output due to low prices.

That explanation however, makes little sense — given that gold prices during the past quarter have averaged around $1,200 per ounce, almost exactly the same as the same period of 2016. 

So why is output falling? The report gave one clue, saying that gold miners have been phasing out some older production — part of Beijing’s plan to overhaul the mining sector in general. 

If true, the shutdown of old and unprofitable gold mines could see China’s production reduced for a prolonged period. Great news for the global market, as it would mean Chinese buyers will need imports to fill the supply gap. 

In fact, the Q1 numbers show a rise in imports already happening. With incoming shipments during the three months increasing 64.5% as compared to Q1 2016 — to 10.5 tonnes. 

Even with that jump, the report said overall Q1 gold supply in China was 5.9% lower than a year ago. Suggesting that more supply is needed to fill the gap left by shuttered domestic mines. 

That’s especially true given that Chinese gold consumption saw a big jump during the quarter, with demand rising 14.7%. Keep an eye on these critical trends — if production stays reduced while demand stays strong, we could see increased imports here giving a lift to global prices over at least the next few months. 

Here’s to filling the gap,

Dave Forest

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