BACKGROUND

gold south africa

gold south africa

The first publication in this series. Gold in South Africa 2005, was an initial attempt to build a comprehensive picture of the gold value chain in South Africa, making use of data collected for the 2004 calendar year. In collating this initial study, the researchers found that while the first stage of the value chain, the mining industry, was well documented, there was little information available on the downstream industries.

This updated review thus focuses on the sectors of the gold value chain that add value to gold, from refining and recycling to the use of gold in bars, jewellery, coins and other applications. Data gathered on gold usage in the value chain in 2005 and 2006 was analysed along with the 2004 data available from the original study, in order to update information available on the gold industry and start to map longer-term trends in gold production and usage.

AN OVERVIEW OF THE GOLD VALUE CHAIN IN SOUTH AFRICA

There are four legs to the gold value chain:

  • mining
  • refining and recycling
  • fabrication and retail

The following is a summary of the key findings which have emerged from the research in each of these areas.

MINING

South Africa remains the world’s largest producer of gold although its share of global output has been declining consistently for a decade. In 2006, South Africa accounted for 11.8% of new global mine supply, compared to over 20% a decade ago (Figure 1).

From 2004 to 2006 there was a significant drop in mine output. According to the Chamber of Mines, South Africa produced 342mt of fine gold in 2004. 297.31 mt in 2005 and 275.12mt of fine gold in 2006/ a total drop of 19.6% from 2004 to 2006. The scaling down of production can be attributed to increasing mine depth and declining grades, a relatively strong rand which has dampened the effects of an increasing dollar gold price, as well as higher material input costs, though the most recent surge in the gold price (Figure 2) has prompted deepening projects which should reduce the rate of decline.

PRIMARY REFINING AND RECYCLING

There are two types of businesses involved in refining gold: primary refiners and secondary recyclers. Primary refiners take Ciros-mined material and refine it through a series of chemical processes into pure (fine) gold. By contrast, recyclers refine “second-hand” gold, old jewellery, off-cuts, wash-water and other scrap generated during the manufacturing process. Though recyclers are small suppliers of gold compared to refiners they are vital to the downstream fabrication industries, providing much of the working gold inventory for small-and medium-sized jewellery manufacturers.

From 2007 most of South Africa’s primary mining output will be sent to the Rand Refinery Limited (Rand Refinery) in Germiston for refining. However, during the review period a second primary refiner, Musuku Beneficiation Systems (Musuku), was in operation and is also included in this review. Musuku stopped refining in June 2006 and closed operations in December 2006.

The cumulative total of gold refined and recycled in South Africa fell by 4% from 445.30mt in 2004 to 427.31 mt in 2006 (2005:451.53mt). This constituted about 11% of global mine output and scrap production (which amounted to 3(579mtin2006)

In addition to locally-mined gold output, Rand Refinery refines significant and increasing volumes of foreign-mined gold/ 144.67mt of the 427.31 mt refined in South Africa in 2006 was sourced overseas, and the volume of overseas mine production refined in South Africa increased by 44% from 2004 to 2006. Foreign-mined ore comes mostly from Ghana, Mali, Zimbabwe and Tanzania (Figure 3). This reflects an increase in mining output from other parts of the continent as well as the international expansion of South African mining houses. There is capacity for more ore to be refined in South Africa as Rand Refinery operated at only 33% of maximum capacity in 2006.

There are at least seven formal secondary recyclers in the country. Secondary recyclers are characteristically small, family-owned businesses based either in Johannesburg or Cape Town, who primarily serve the local jewellery manufacturing industry. They recycled 2.8mt of gold in 2004, 3.9mt in 2005 and 4.09mt in 2006 (a 46% increase from 2004 to 2006). The growth in 2006 is partially explained by new business following the closure of the Musuku refinery, but is also related to the gold price increase during the period, which led to an increase in the level of gold scrap in the secondary market.

FABRICATION

A high proportion of gold mined and refined in South Africa goes into the production of cast bars.” In 2006,418.54mt (more than 97%) of total refined and recycled output was used in this way; in 2005 the figure was 442.75mt. Most cast bars were exported to international bullion banks and federal reserves, with a small portion allocated to underwriting the local NewGold exchange traded fund (3.87mt in 2006) (Table 1).

Volumes of fine gold consumed by local fabrication industries decreased from 11.24mt in 2004 to 10.2mt in 2005 and to 10.02mt in 2006, a drop of 10.85% from 2004 to 2006.

Of the 10.02mt going to local fabrication in 2006. 7.18mt went into jewellery manufacturing, 2.16mt went into coin manufacturing, 0.6mt into dental products and 0.08mt into industrial products. A similar split applied in 2005.

Jewellery fabrication

Jewellery fabrication is the largest gold fabrication industry in South Africa, as is the case worldwide. There are an estimated 500 gold jewellery manufacturers in the country. The vast majority of these are small enterprises using tiny amounts of gold. Sizeable usage is consolidated in only a dozen or so firms. In fact, in 2006. three firms accounted for 65% of fine gold consumed in jewellery manufacturing, while the top 13 firms accounted for 84%.

While refiners and recyclers reported fine gold sales to jewellery manufacturers of 7.52mt in 2005 and 7.18mt in 2006, manufacturers reported actual output to be slightly higher (8.68mt in 2005 and 7.87mt in 2006). In other words, in both of the review years, jewellery manufacturers made use of more fine gold than was made available to them from local sources. This suggests that some manufacturers are importing semi-fabricated gold. It is difficult to say what the precise import figure is as the official import data are inconclusive” and not all manufacturers were willing to deal with this question in interviews. Industry estimates put imports of semi-fabricated gold at approximately 0.7mt in 2006.

The volume of fine gold used in local jewellery manufacturing increased slightly from 2004 (8.26mt)6 to 2005 (8.68mt) but fell again in 2006 to 7.87mt (an overall decrease of 4.7% from 2004 to 2006) (Figure 4). This represented less than 0.5% of global gold jewellery output in 2006.

There are several possible explanations for the fall from 2004 to 2006:

From 2004 to 2006. the price of gold increased by nearly 58% (Figure 5). As the biggest input cost for manufacturers is buying (or financing) working gold, the increase in the gold price dampened the ability to expand production by increasing the costs of acquiring and holding working inventory.

The higher gold price reduced demand for gold product, a trend which is borne out by global figures which also show a drop in global gold jewellery sales from 2005 to 2006 (Figure 6).

In South Africa, some manufacturers reported an increase in demand for 9 carat gold jewellery over higher-caratage products. This trend was probably also linked to the higher gold price, indicative of a drive to maintain prices at retail level despite an increased gold price.

A number of manufacturers reported a structural shift in local demand away from gold towards platinum-based products.

Manufacturers interviewed were asked to name the main obstacles to growth. The results, while anecdotal, shed some light on the issues currently facing the major players. The most commonly cited barriers were:

  • the high cost of financing working gold;
  • a shortage of skilled labour;
  • the small size of the local market;
  • the poor performance of the category at retail level in both the South
  • African market and the major export markets served by South African manufacturers; and o an inability to compete on the basis of labour cost with Chinese, Turkish,

Thai and Indian producers; and with Italian producers on quality of design.

Of the 7.87mt fine gold jewellery produced in 2006, about 3.86mt (or 49%) was exported, with 4.01 mt (51 %) sold to the local retail market. These figures are skewed somewhat by the activities of the country’s largest gold manufacturer who uses more than half of all gold and exports 70% of output. When this producer is removed, the data show that 75% of product sold to the local market while 25% is exported. In other words, the bulk of South African producers aim for the local ratherthan export market.

Of the gold used in jewellery manufacture, just over half was produced as machine-made chain (see Figure 7).

Coin fabrication

The second largest fabrication industry after jewellery is coin fabrication. Like jewellery fabrication, this sector also saw a drop-off in gold consumed. Coin accounted for 2.93mt of fine gold in 2004, 2.03mt in 2005 and 2.16mt in 2006 (a fall of 26.28% from 2004 to 2006).

Dental-use fabrication

The use of gold in dentistry remains limited. 0.58mt of fine gold was used in 2005 in dental products and 0.6mt in 2006. Dentistry is not regarded as a growth sector for gold use for two reasons: fashion is turning away from the use of gold in dentistry and local medical schemes do not. as a rule, cover the cost of gold in dental treatment.

Industrial-use fabrication

Gold is used in a variety of industrial applications, though the quantities used are extremely small. No more than 0.09mt of fine gold went into industrial end-use in each of 2005 and 2006. Interviews with circuit board manufacturers revealed they are using less gold and more copper in circuit board fabrication.

The tables and flowcharts which follow show the data on gold usage in the value chain, from 2004 to 2006 and the flow of fine gold in the value chain in 2006.

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