On May 22, Jihai Resources Group Co., Ltd. (hereinafter referred to as “Jihai Resources”) disclosed a prospectus application on the Hong Kong Stock Exchange to analyze the development of the gold industry.
The prospectus shows that, generally speaking, the supply of gold is directly proportional to the price of gold, because when the price of gold rises, gold miners are encouraged to produce more gold. Globally, countries such as China, Australia, Russia and the United States are major gold suppliers. Since 2007, China has been the world’s largest gold producer, accounting for more than 15% of gold supply. From 2017 to 2022, the global gold supply increased slightly. Due to the epidemic and the reduction of China’s gold supply due to the safety accident in Shandong, the supply of refined gold will decrease in 2020 and 2021.
In 2022, gold supply will resume, mainly due to the recovery of the global economy in the post-epidemic period, and the recovery of gold mine production in China (especially in Shandong Province) from the previous safety inspection. Looking forward, against the backdrop of continued global economic recovery, driven by strong gold demand, rising gold prices and advancements in exploration technology, global gold supply is expected to grow at a CAGR of 1.5% from 2022 to 2027.
As far as Chinese gold supply is concerned, Chinese gold production in 2021 will be about 24% lower than 2020 supply levels due to the temporary suspension of gold mining activities for safety inspections following the safety accident in Shandong. The reduction is considered temporary as Chinese gold mining companies resume production from safety inspections, and in 2022, gold production resumes. Looking ahead, driven by the continuous increase in gold production, such as the replacement of inefficient and non-environmental production capacity with innovative technologies and equipment, rising gold prices and the steady growth of gold demand from downstream industries, China’s gold supply is expected to increase by approximately 3.0% from 2022 to 2027 % growth rate.
China’s Gold Demand
China’s gold demand increased to approximately 1,127.9 tonnes in 2021, an increase of more than 30% from 2020, mainly due to the increase in gold demand for jewelry and investment, driven by the improved economic environment brought about by the introduction of vaccines and improved consumer sentiment , jewelry demand has shown a rebound since 2020. In addition, investors paid more attention to gold investment, resulting in an increase in gold investment such as gold bars and coins.
In 2022, China’s gold demand will decline slightly, due to the reduction in demand for gold jewelry due to the country’s lockdown to prevent the spread of the epidemic. In addition, due to the high gold price level in China, gold investment in gold bars and coins and gold ETFs decreased. Lower gold use for technical/industrial purposes in 2022 due to lockdowns and reduced demand. Looking ahead, considering China’s effective control of the epidemic and the resumption of gold jewelry retail activities, as well as the continuous increase in people’s income levels and consumption upgrades, the consumption of gold jewelry is expected to grow.
Gold investment in China is expected to trend upwards, driven by growing demand for gold to hedge against uncertainties ahead of a global recession amid aggressive Fed rate hikes and Russia-Ukraine tensions.
China’s average gold spot price is closely related to the global average gold spot price to prevent arbitrage. The difference between the two prices is mainly attributable to fluctuations in the RMB/US dollar exchange rate and gold import and export controls imposed by the PRC government. The price of gold is mainly affected by the global political and economic situation. When the political or economic environment is unstable or the stock market is turbulent, gold is usually regarded as one of the risk hedging tools, and its price will usually show an upward trend. In addition, the central bank’s monetary policies (such as currency exchange rate fluctuations) and macroeconomic factors (such as interest rates and inflation expectations) are also important factors affecting gold prices. The Shanghai Gold Exchange (“SGE”) was established by the People’s Bank of China with the approval of the State Council. The Shanghai Gold Exchange provides trading, settlement, delivery and custody services for gold, silver and platinum. As far as gold traded on the Shanghai Gold Exchange is concerned, there are different types and respective gold prices according to the type of standard gold (eg Au99.99, Au99.95, Au99.5).
The spot price of gold in China rose from approximately RMB 341.6/g on January 2, 2020 to RMB 392.4/g on December 31, 2020, and further fell to RMB 373.8/g on December 31, 2021. And it will return to RMB 409.9 per gram on December 30, 2022, which is roughly in line with the global gold price change. The average gold spot price in China will increase by about 1.3% from RMB 387.1/g in 2020 to RMB 392.1/g in 2022. The average global gold spot price in January 2022 is US$1,816.8/oz; the average Chinese gold spot price in January 2022 is RMB 372.6/gram. On March 22, 2022, the global spot gold price was US$1,915.25/oz; on March 22, 2022, the average gold spot price in China was RMB 395.48/gram. From 2020 to 2022, the minimum and maximum monthly average spot gold prices in China are RMB 347.0/g in January 2020 and RMB 422.6/g in August 2020, respectively.
Gold Mining Industry in China and Shandong
In China, it is a common industry practice for gold mining and processing companies to outsource the refining process to gold smelting companies and sell the produced gold ingots to the same gold smelting companies. Due to the high cost of obtaining business licenses for metallurgical companies, the number of metallurgical companies in China is limited. The metallurgical industry is highly concentrated. In 2022, there are approximately 27 smelting companies in Shandong Province, and the top five metallurgical companies in Shandong Province account for approximately 93.2% of Shandong’s total metallurgical volume in 2022. In 2022, about 30 gold producers are engaged in gold mining in Shandong Province. The top five gold producers in terms of gold mine production accounted for approximately 84.7% of the total gold mine production in Shandong Province. Certain large metallurgical enterprises expanded their business to metallurgy in search of higher profits and stronger competitiveness. In addition, only mining and/or smelting companies with registered membership of the Shanghai Gold Exchange are eligible to sell gold bullion on the Shanghai Gold Exchange, the only gold bullion trading platform in China. For mining and/or smelting companies that do not have membership of the Shanghai Gold Exchange mainly due to the limitation on the total number of members, they can only sell pure gold to registered members of the Shanghai Gold Exchange for the sale of pure gold.
The total amount of gold resources in China has experienced continuous growth for more than ten years, and exceeded 10,000 tons for the first time in 2015. At the end of 2022, China’s total gold resources were approximately 16,463.1 tonnes, representing a CAGR of approximately 4.5% since 2017. Shandong is the province with the highest amount of proven gold resources in China. Proved gold resources in Shandong will increase from approximately 3,756.6 tonnes in 2017 to approximately 4,703.6 tonnes in 2022, representing a CAGR of approximately 4.6%. Shandong has abundant gold resources and a complete supply chain in China’s gold mining industry.
Competitive Landscape of the Gold Mining Industry in China and Shandong Province
In 2022, China’s gold mine production will reach 295.4 tons. In 2022, in terms of domestic gold mine production, the top five and top three gold producers accounted for 40.6% and 32.7% of China’s total gold mine production, respectively. In 2022, the second and fourth largest gold producers in China will also be the first and second largest gold producers in Shandong Province, respectively. With the continuous asset reorganization and resource integration of gold enterprises, the gold mining industry in Shandong Province tends to be concentrated.
In 2022, there are approximately 30 gold producers engaged in gold mining in Shandong Province. Gold mine production in Shandong province will reach approximately 41.4 tonnes in 2022. The top five gold producers in terms of gold mine production accounted for approximately 84.7% of the total gold mine production in Shandong Province. The remaining gold mining producers accounted for approximately 15.3% of the market share, and the average gold mine production of each producer was approximately 0.2 tonnes per annum.
Among the 30 gold producers in Shandong, only the top two have their own smelting operations. In addition, these two gold producers in Shandong Province have the membership of the Shanghai Gold Exchange due to their scale and cost advantages. There is no competition among gold producers in terms of prices sold to gold smelters, mainly because gold ingots will be sold through the Shanghai Gold Exchange at the same spot price on that day. In addition, differences in the difficulty of processing gold concentrates are a key feature among gold producers, as the processing fees for the smelting process will vary.
