India's Gold Bullion Refineries "Near Closure" After Huge Investment

Gold bullion imports & scrap flows collapse, leaving refiners at start-2012 capacity use after $350m investment...

 

GOLD BULLION refining in India, the world's heaviest end-buyer of physical gold, is running at only 25% of capacity according to industry data.

 

The same percentage of gold refining capacity as India's industry reported in early 2012, this level of gold bullion refining now threatens to shut major plants, senior figures warn. Because after encouraging a swathe of new investment and capacity over the last two years, the government has imposed such strict anti-import measures in 2013 that the whole industry is suffering a lack of supply, whether of bullion, mined dore, or scrap jewelry.

 

Falling gold prices in India have also crimped local supplies of so-called "scrap" gold for recycling.

 

"Gold refineries are on the verge of closure due to non-availability of used jewelry," the Business Standard quotes Harmesh Arora, managing director of NIBR Bullion. "Melting of jewelry scrap to convert into 24-carat gold has become a loss-making process and operational capacity has declined to an alarmingly low level."

 

Gold imports to India fell to 6.7 tonnes in September, reckons French investment bank and bullion dealers Natixis, "well below the 69 tonnes imported during that month last year."

 

Domestic supplies in India – which has no gold mining output – meantime fell to just 10 tonnes of gold during the second quarter of 2013, says the Business Standard, with estimates for July to September coming lower still because of falling gold prices.

 

"Indian authorities’ efforts to reduce the trade deficit are paying off," says Natixis, pointing to September's merchandise trade deficit of $6.8 billion, the "lowest since March 2011, with as much as half of the improvement caused" by falling gold bullion imports.

 

"Domestic demand," says James Jose, managing director of Chemmanur Gold Refinery, "albeit weak, was met [over the last 2 months] only through existing inventory and recycled gold. But with the stagnation in gold price, scrap sales have declined dramatically in the last few weeks."

 

The drop has been so sharp, says Jose, it is "posing a threat for refineries."

 

India's 2012 budget gave an advantage to domestic gold refineries, as it held import duty on so-called "raw" or unrefined metal below the rate for finished gold bullion. That saw new refining capacity costing 1,000 crore Rupees of investment ($185m) come on-stream last year, Rediff reported this February, including the government's own tie-up with Switzerland's MKS Pamp through its MMTC operation for a joint venture at the Haryana plant.

 

A further 900 crore Rupees of investment ($167m) was slated for 2013. Only this May, MMTC said it would increase its capacity to 100 tonnes per year, more than 10% of India's full-year gold demand in 2012. But then the Reserve Bank of India raised both gold bullion and raw gold duties dramatically, and imposed strict quotas which saw legal imports collapse over the summer.

 

Import duty on unrefined gold dore was hiked sharply in August. Finally, in a bid to defend domestic jewelry manufacturers, the government in September raised gold jewelry import duties to 15%, higher than the 10% charged on gold bullion and almost twice the 8% now charged on raw gold.

 

As a result of tightened supply, "Gold jewelry sales were lower by 30% as compared to last year for Onam," LiveMint quotes Mehul Choksi, chairman of Gitanjali Gems Ltd., who expects sales volumes for the entire festive season to be lower by 30% this year from a year earlier.

 

"Sales in the September quarter have been slow," agrees Sanjeev Bhatia, chief financial officer at PC Jewellers Ltd, also blaming the anti-import rules imposed in 2013 and aimed at reducing India's trade deficit.

 

Starting with Onam, the post-harvest festive and wedding season in India accounts for between one-quarter and one-third of India's total gold demand each year, peaking with Dhanteras and Diwali in early November.