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The growth dilemma for Indian gold refiners


By Arvind Sahay and Sudheesh Nambiath

India in 2018 produced 281.3 tonnes of fine gold from both gold and silver dore that were imported to the country. It was the highest on record and its share to gross gold imports touched 37 per cent, and it share of total imports for domestic consumption (net imports) touched 55 per cent.

As noted by a refiner recently, at this pace in five years 100 per cent of the domestic supplies are going to be from gold refined by domestic refiners.

Is this something that is achievable and desirable? It may be an achievable target given that at least 130 tonnes of dore are from large and medium scale mines, while rest are from artisanal and small-scale gold miners (ASGM).

The estimates of production from ASGM have varied with agencies and are likely to be in range of 500 to 650 tonnes a year. Out of these Indian refiners imported approximately 150 tonnes.

Further, we calculated the share of Indias imports to total production by the mining countries from which India imported last year.

Going by these numbers if Indian refiners imported all of the gold produced in these countries then Indias total supply would emerge from dore refined in India, our estimate is approximately 786 tonnes of fine gold could be recovered by Indian refiners (see Table 1 below).

Source: Mine production numbers from GFMS, Refinitiv.
*Bolivia production as provided at Global Gold Dore Forum by Bolivian Government.

It is easy to arrive at a number but in practical it may not be possible due two reasons. The first is the contracts that miners may already have with various large refiners in the world. The second is the issue of responsible sourcing that could be concern in quite a few of the countries that dore is imported from. With Indian being a part of FATF and the government committing to OECD responsible sourcing, there will be challenges ahead.

Nevertheless, the optimism stems from countries where the mining is largely unorganized, and the lack of large or medium scale mines in those countries has opened an opportunity for Indian refiners to source more gold. This and supplies from large scale miners could help add at least another 250 to 300 tonnes over the years. Thereby increasing total supply by Indian refiners to approximately 550 tonnes of gold refined from dore; this is as against total import of 512 tonnes (refined bullion by banks and nominated agencies + dore by refiners) for domestic consumption in 2018. Assuming on average a refiner imports at $1 discount to LBMA price, India could have approximately saved $10 million. Is this worth it?

The answer would depend on a larger strategic vision that the government may have. It is no secret that central banks have been accumulating gold. The year 2018 saw a 45 year high of 651 tonnes. There is also the possibility that at some time in the next 5-10 years, the dollars status as the reserve currency will be challenged. Under these scenarios, it would be logical to not only increase refining, but also increase mining of gold in the country.

Policy choices are a trade off and we need to consider the trade off for making a gain of approximately $10 million for an economy which is poised to become a $5 trillion in five years.

Overselling the Make in India claim
At the outset fact that India consumes gold refined in the country may look like a great idea to sell under the Make in India strategy. However, the risk associated with this growth shouldnt be ignored.

Bullion and dore are under restricted list and are subject to RBI regulations, however the procedures to import both are way different, as all it takes is a value addition of mere 0.15 per cent to convert dore to refined bars. While in case of dore one has an opportunity to be involved in trade-based money laundering using transfer pricing mechanism, on the other hand for bullion imports that is not possible due to involvement of banks and nominated agencies.

It has been proven that even refiners following OECDs five-step due diligence guidelines do not have a fool-proof mechanism to detect an incidence of breach at the very moment and is spotted with lag and by that time much damage has already been made to the industry and countrys reputation.

Considering these risks one needs to ask whether allowing refiners or a refiner (irrespective of their accreditation) to hold control of the supply of gold to the vibrant Indian jewellery industry is a systemic risk that can be mitigated to acceptable levels – assuming of course, that jewellery is the “product” that is most likely to drive the gold industry.

Diminishing role of banks
As regards to banks their role in supplying to domestic market has already diminished significantly, from 45 per cent of the total supplies for domestic trade in 2017 calendar year, their share in 2018 was only 35 per cent. In volume terms year-on-year it had declined by 40 per cent to 178 tonnes. From our discussions we understand that the focus of banks is primarily in the gold metal loan and are they are not really present in outright sales, as the latter is being serviced through refiners; our estimate is out of the 178 tonnes approximately 70 per cent were out on GML.

The gold metal loan given by banks may also be under threat if refiners start providing a similar product which is known as “unfixed deferred sales” for 90 days at a premium lower than what banks provide. Such competitive pricing is good but at what cost? And who will regulate their functioning? RBI powers are limited currently only to an extent of payment mechanisms post import.

The situation in India can be put in context to similar developments at one of the prime trading centers in the world where once every international bullion bank operated but overtime with mushrooming refiners and poor due diligence in sourcing, banks lost at both ends- one banks losing comfort to onboard a refiner as the client and secondly not able to source from domestic market, eventually banks closed their operation in the country. Although late, the authorities became more cognRead More – Source