Saudi Arabia and Sudan lead growth in gold production. Published in MEED, 4 January 2015
In mid-November, Iran began operations at what it claims is the Middle East’s largest gold mine. The Zarshouran facility near Takab, in the West Azerbaijan province, is expected to produce about 3 tonnes of gold a year, as well as 1,250 tonnes of silver and 0.5 tonnes of mercury.
The mine is estimated to hold a total of about 110 tonnes of gold and its output marks a significant increase in Iran’s overall production levels. But while the quantities involved may be significant for the Islamic Republic and the Middle East more generally, in global terms they are far less important - the world’s largest gold deposit is Grasberg in Indonesia, where 31 tonnes were dug out of the ground last year.
Gold is mined in 96 countries, in quantities ranging from just 2 kilogrammes a year in Burundi to more than 400 tonnes a year in China, according to World Mining Congress data for 2012 (the most recent year available). After China, the biggest producers were Australia, with 251 tonnes, the US (230 tonnes), Russia (170 tonnes) and Peru (162 tonnes).
In all, some 2,700 tonnes of gold were mined in 2012 and it is the second-most commonly mined precious metal after silver. The Middle East and North Africa region provides a small fraction of global supply, at about 2.5 or 3 per cent. However, production has been rising at a decent pace in recent years, thanks to increasing output in Sudan and Egypt.
Sudan alone accounts for two-thirds of the region’s production, although seven other countries also mine the precious metal in reasonable quantities. In 2012, Sudan produced just over 46 tonnes. The next most important producer was Egypt, with 8.2 tonnes. After that come Mauritania with output of 7.6 tonnes and Saudi Arabia with 4.3 tonnes. Other significant producers include (in descending order of importance) Iran, Morocco, Algeria and Oman.
Production in some of these countries is likely to increase in the coming years. In Saudi Arabia, gold mining at Mahd al-Dahab dates back at least 3,000 years. That site is still being mined by Saudi Arabian Mining Company (Maaden), which also operates gold mines at Al-Amar and Bulgah, as well as a processing plant at Sukhaybarat. The company is currently developing new mine projects at Al-Suq and Al-Duwayhi. Maaden’s production in 2013 was 3.8 tonnes, but it says it plans to increase annual output to as much as 14.2 tonnes by 2017.
Other countries are still in the process of looking for gold deposits worth exploiting. In Lebanon, there have been studies into the potential for gold mining at Zibdine in the south and at Hermel in the north. There are also some promising geological structures in Libya that could hold gold as well as iron ore and base metals. In Yemen, companies prospecting for gold include the UAE’s Thani Dubai Mining and the UK’s Volrock Mining.
But gold supply is not just about digging the ore out of the ground. Mining accounts for about two-thirds of the global gold supply, according to UK consultancy PwC, with the remainder coming from gold taken from previously fabricated products and recycled back into bars.
Demand for gold around the world is concentrated in a small number of sectors. The biggest source of demand is for making jewellery, which accounted for 59 per cent of all demand in 2013, according to the World Gold Council. It is followed by investment in gold bars and coins (21 per cent), technology uses (11 per cent) and central bank purchases (10 per cent).
It will not come as a surprise to many that the Middle East buys far more gold than it produces. Consumer demand across the region in the 12 months to the end of September 2014 was 218.6 tonnes, according to the World Gold Council. That is equivalent to more than three times the region’s annual output.
Consumption is concentrated in a just a few countries, notably Saudi Arabia and the UAE. In recent years, the UAE has overtaken its neighbour as the biggest market for gold, with demand reaching 70 tonnes a year, against 68 tonnes in Saudi Arabia. Egypt is the third-most important market, with demand at 57 tonnes a year, followed by the other GCC countries, with 24 tonnes combined.
The Middle East’s share of the global market has varied quite a lot in recent years, accounting for 7.3 per cent of total demand in 2010 before falling back to 5.8 per cent in 2011 and 2012, and then rebounding to 6 per cent in 2013 and 6.5 per cent in the 12 months to the end of September 2014.
It is not just consumers who are keen purchasers. Governments and central banks also often invest in gold. Official holdings are largest in Saudi Arabia, which has 323 tonnes, equivalent to 2 per cent of its total reserves. Other countries hold less in absolute terms, but gold accounts for a far larger proportion of their overall holdings. In this respect, Lebanon is most committed, with gold reserves of 287 tonnes making up 23 per cent of its total reserves. Other countries keen on the metal include Algeria, Libya, Kuwait and Egypt.
The other important element of the gold market in the region is trading, which has grown with remarkable speed in recent years. In 2003, some $6bn-worth of gold was traded in Dubai, but by 2011, the figure had reached almost $56bn. According to the Dubai Multi Commodities Centre (DMCC), the value of trade reached $75bn in 2013. Speaking at the Dubai Precious Metals Conference in April, Ahmed bin Sulayem, chairman of the DMCC, said 40 per cent of the world’s physical gold trade now passes through Dubai.
Growth has continued in 2014. Trading volumes for gold and other metals were up 10 per cent year-on-year in October, according to the Dubai Gold & Commodities Exchange (DGCX), which is majority owned by the DMCC.
These trade volumes are still rather small compared with what happens in the global centre of gold trading, London. Data on just how much is traded in London is hard to come by, but a 2011 survey of the members of the London Bullion Market Association, which includes trade in silver as well as gold, found that the total turnover in the first quarter of that year alone was $15.2 trillion, an average of $240.8bn every day.
While Dubai is clearly a long way from that scale, the prospects for further growth look promising. However, they are to some extent dependent on demand continuing to rise in Asia. “Dubai is a distribution point to all parts of Asia and that level of flow is dependent on the prosperity of the emerging middle classes in various Asian economies,” said John Hathaway, a portfolio manager for US-based Tocqueville Asset Management, at the Dubai Precious Metals Conference. “So, as long as that continues, I can’t see anything stopping that flow.”
The DGCX has sought to bolster its ties with partners in key Asian economies. In February 2014, it announced that UOB Bullion & Futures, a subsidiary of Singapore’s United Overseas Bank, had been approved as a clearing member of the exchange. More recently, in December, the DGCX signed a memorandum of understanding with the China Financial Futures Exchange to cooperate on derivatives markets.
However, continued growth may also rely in part on Dubai being able to maintain a positive reputation. That came into question in early 2014, when the sector was hit by allegations in the international media that local refiner Kaloti Group had bought gold without checking its provenance, thereby allegedly flouting rules designed to restrict the trade in what is known as ‘conflict gold’. Kaloti has vigorously denied the allegations, describing them as “false”.
Dubai has been trying to tighten up its procedures to deflect further criticism, with the DMCC launching an accreditation scheme to certify the quality of gold and silver produced in local refineries and, in the case of gold, to certify that the metal is sourced responsibly.
In January 2014, Fujairah Gold Refinery became the first, and so far only, firm to complete the Market Deliverable Brand accreditation process, according to DMCC. Other local refiners such as Al-Etihad Gold, Al-Kaloti Jewellers Factory and Emirates Gold are part of the Dubai Good Delivery standard and say they also have strong due diligence processes.
What is not in doubt is the strength of demand in the region for the gold coming from such refineries. And there is little reason to think Middle East consumers will lose their taste for the precious metal any time soon.