China Gold Output to Beat U.S., Challenging S. Africa (Update3)

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By Feiwen Rong

Nov. 6 (Bloomberg) -- China will probably overtake the U.S. as the world's second-biggest gold producer this year and is moving closer to ending South Africa's century-long dominance, the country's industry association said.

Production may rise 8 percent to a record 260 metric tons from 240 tons in 2006, Hou Huimin, deputy head of the China Gold Association, said in an interview in Shanghai yesterday. U.S. output should be about 250 tons this year, he added.

Increased production will help companies including Zhongjin Gold Corp. and Zijin Mining Group meet China's surging demand for gold as jewelry and as an investment, reducing the need for imports. Output doubled since 2002, accelerating this year as prices climbed above $800 an ounce to a 27-year high.

``There's actually a good chance that Chinese gold mine production will surpass South Africa's in 2007,'' Philip Klapwijk, executive chairman of London-based researcher GFMS Ltd., said today by e-mail. ``It's going to be a close call.''

Global gold production fell to a 10-year low of 2,477 tons last year, according to GFMS. South Africa's production, 134 tons in the first six months of 2007, has dropped by almost a third since 2002 as workers dig deep underground in aging mines.

``Given the trend of declining gold production in South Africa and rising output here in China, the country should be able to become the world's No. 1 producer in less than 5 years' time,'' Hou said.

Companies Prosper

China's production of gold grew at its fastest pace in 10 years in the first half of this year, according to the association, which represents miners, refiners, jewelers, banks and brokerages, and advises the central bank.

The government relaxed its grip on the industry, which was once entirely dependent on state funding, by freeing prices, setting up the Shanghai Gold Exchange in 2002, and encouraging overseas investment. The Shanghai Futures Exchange won regulatory approval to trade gold in September.

Output, centered in eastern provinces, increased by 13.1 percent to 191.5 tons in January to September, from a year earlier, the government's top planning body, the National Development and Reform Commission, said in a statement Oct. 30.

Chinese gold miners have all raised production this year, and profits have soared. Hong Kong-listed Zijin Mining, which runs the country's biggest gold mine, increased profit by 81 percent in the first six months of this year, it said Aug. 16. Its shares have more than tripled in the past year.

Zhongjin Gold, China's largest publicly traded producer of the metal, plans to sell as many as 130 million shares to buy mines from its parent, China Gold Group, and to raise funds to boost its reserves and output. Its shares have risen more than six-fold in the past year.

Overseas Partners

Bullion, which climbed 28 percent so far this year, is heading for its seventh straight annual gain as the dollar's slump against the euro and crude oil's rally to above $96 a barrel have boosted its appeal as an alternative investment.

Gold for immediate delivery gained as much as $8.70, or 1.1 percent, to $815.20 an ounce, its highest since January 1980, and traded at $814.99 at 3:51 p.m. Shanghai time today.

Gold could rise to a record above $850 an ounce next year on strong demand, the gold association's Hou said. ``There should be more potential for prices to go up in the long term.''

Higher prices have encouraged overseas mining involvement in China. Sino Gold Mining Ltd., the Sydney-based owner of China's second-largest gold mine, increased production at the Jinfeng project and is looking for acquisitions, it said Oct. 16.

Sino Gold plans to start production at a second mine in the Asian country late next year after winning approval to develop the deposit, it said yesterday.

China Demand

China's demand is expected to rise ``significantly'' this year from 350 tons in 2006, Hou said.

``The Chinese have always favored gold as a store of value,'' he said. ``With rising disposable income in China and budding global inflation, people increasingly look to gold as an investment.''

China will probably be the second-largest gold market by volume this year, overtaking the U.S. and clinching the No. 2 spot after India, GFMS's Klapwijk said.

``I cannot give you a Chinese jewelry consumption figure yet, but there will be strong double digit growth this year in volume terms,'' he said.

To contact the reporter on this story: Feiwen Rong in Shanghai at frong2@bloomberg.netLast Updated: November 6, 2007 02:53 EST

China Gold Output to Beat U.S., Challenging S. Africa (Update3)

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