May 9, 2014 7:00 pm JST

China squeezes extra profit out of its gold

HISASHI TSUTSUI, Nikkei staff writer

TOKYO -- Global gold production is on the rise, with China leading the way. And while mining costs are also climbing as reserves dwindle, Chinese producers are mustering wide profit margins.

     Worldwide gold output hit 3,022.1 tons in 2013, up 6%. Chinese production expanded at the same rate, according to a survey by precious metals researcher Thomson Reuters GFMS. China, the world's largest consumer of the yellow stuff, extracted 438.2 tons, far surpassing other nations. Second-placed Australia produced 266.1 tons.

     Over the past 10 years, Chinese gold production has almost doubled.

     A two-hour drive from the airport in Qingdao, Shandong Province, lies the city of Zhaoyuan, China's gold hub. Companies based there do more than just mine -- they also produce finished jewelry. Some headhunt designers and metalworkers in Italy. Sales representatives fan out to major international cities, such as New York, to promote the products.

     Besides the do-it-all approach, China's gold industry is known for another advantage: low production costs.

     Typically, gold mines burrow as far as 3,000 meters below the surface. Since the temperature down there is close to 50 C, expensive air-conditioning systems are required. Elevators are also a must.

     In China, on the other hand, gold can be mined at 500 to 600 meters underground. Production costs are estimated at less than $800 per troy ounce. In many other gold-producing countries, the figure is around $1,200.

     Gold trading has been relatively directionless of late, with investors keeping an eye on rising tensions in Ukraine and a possible U.S. interest rate hike. But a recent price of about $1,300 per troy ounce in New York gives China a profit margin of roughly $500, compared with $100 elsewhere.

     To maximize profit, China carefully manages production based on prices, according to Itsuo Toshima, a gold market analyst and independent investment adviser in Tokyo. When prices rise, Toshima said China mines less-profitable ore that contains smaller amounts of gold. When the trend reverses, miners go after the richer ore.

Precious recyclable

China is not the only place turning out more gold. New mines planned in 2011, when gold prices hit record highs in dollar terms, have just started producing, contributing to the global uptrend.

     Experts, however, say it is getting harder to develop new mines. Eventually, production volumes are expected to hit a ceiling. 

     Some 175,000 tons of gold have been mined over the past 4,000 years. Thanks to satellites and other reconnaissance technology, almost all gold mines are believed to have been found. Known gold reserves total slightly less than 50,000 tons; at the current pace of production, it will take about 15 to 17 years to extract the rest of it.

     Unlike crude oil and other commodities, though, gold is recyclable. In 2013, overall global gold supply came to 4,254 tons. That number includes about 1,280 tons that were recycled.

     Toshima said once mines reach their ceiling, trading incentives over the medium and long term will hinge on supply-demand trends in recycled gold.