Flat gold market will encourage consolidation

By Staff -- Purchasing, 4/5/2001

Sustained weak gold prices and lifeless demand will accelerate consolidation among gold miners in the near future, leaving only a handful of firms to dominate global output next decade, suggests Bernard Swanepoel, the chief executive head of South Africa's Harmony Gold Mining Co. The head of the world's sixth-largest gold producer said at a metals conference in Tokyo that "the only way for most mining companies to survive the falling gold price is to consolidate [because] there are too many players." Swanepoel says that 23 producers now produce 40% of the world's gold," commenting that only about four or five producers dominate output at a similar ratio in other nonferrous metals. "It is inevitable that gold is going to be like aluminum or other commodity metals," he says.

Meanwhile, Randall Oliphant, CEO of Canada's Barrick Gold, said at another metals meeting in the U.S. that "the gold industry soon will consolidate further." His reasoning: Gold prices need to rise to $350 for the industry to stay profitable as currently structured. That is a far cry from the early 2001 spot price average of $263/ounce.

Meanwhile, global gold demand remained virtually unchanged year-on-year in 2000 at 3,281 metric tons because of firm demand in India, Turkey and the U.S. "The strong growth in the fourth quarter offset a weaker performance in the first three quarters so that demand for the year as a whole essentially was unchanged," the World Gold Council (WGC) says in its quarterly Gold Demand Trends report. Annual consumption of gold for jewelry set a new record, reaching 2,902 metric tons, up 4% from the previous record in 1999. By contrast, investment demand in 2000 was subdued at 379 metric tons, falling 21% from the 1999 level, which had been exceptionally high due to fears of Y2K disruption. (In 1999, demand had been exceptionally high, particularly in the U.S.) But when Y2K disruption failed to materialize, demand fell sharply in 2000-a fall exacerbated by some of the gold acquired being sold back to the market.

The main issue for future gold demand was whether the U.S. economy faced a gentle slowdown or a hard landing. "Opinion is divided, but there is a distinct risk that any slowdown could reinforce the loss of consumer confidence and translate, given the unprecedented net debt position of consumers, into a sharp cutback in spending," worries the council's chief executive officer, Haruko Fukuda.