7: Bullion trade. Wholesale imports and importers

Transcription

1 7: Bullion trade Between 2000 and 2015 India officially imported 10,345t of gold bullion. Following the removal of the 80:20 rule a diverse range of Indian operations can now import gold, including banks, star trading houses, premier trading houses and exportoriented units (EOUs). Despite growth in shipments from a range of countries, Switzerland remains by far the most important source for official bullion imports, with its share rising from around 50% in 2005 to 55% in Gold doré imports have also grown sharply in recent years. In 2014, doré imports accounted for around 10% of total official imports; by 2015 the share increased to 24%. But changes to imports duties in 2016 cloud the outlook for doré inflows. Wholesale imports and importers Imports account for the lion s share of India s gold supply India is one of the largest consumers of gold in the world. But jewellery and industrial manufacturers remain heavily reliant on gold imports (Chart 34). Over the past 40 years, gold has made its way into the country via a number of routes. Between , the Gold Control Act regulated the domestic market. Owning bars was illegal and jewellery fabricators and retailers needed licences to operate. Bullion dealers stopped trading. To meet demand, the gold industry was obliged theoretically to recycle existing gold stocks. 94 Chart 34: Indian official imports of gold (fine gold content) Tonnes 1,200 1, Source: Indian Customs; Metals Focus; World Gold Council 94 World Gold Council, An Introduction to the Indian Gold Market,

2 As we discuss in detail in Chapter 10, this Act was repealed in 1990 and in 1992 the Non-Resident Indian (NRI) programme 95 was introduced. This became the preferred route for bullion imports; upwards of 1,000t of gold was brought in by NRIs between 1992 and In 1997, as part of its programme to liberalise the economy, the government introduced the Open General License (OGL) scheme. Under this arrangement, banks were allowed to import gold into the country. The scope of participants allowed to import bullion has widened over the years and NRIs now officially bring only trivial quantities of gold into the country. A range of companies can import gold Although shipments are no longer restricted, various government agencies, including the Reserve Bank of India (RBI), the Director General of Foreign Trade (DGFT) and the Ministry of Finance, control who can import gold into India. Banks are authorised by the RBI, while agencies are covered by foreign trade policy (FTP) and are licensed by the DGFT. As of mid-2016, bullion can be imported by nominated agencies (including banks) and trading houses; nominated agencies account for the largest share of the bullion import trade. Aside from the companies named specifically as nominated agencies there are two larger groups of importers: Premier Trading Houses (PTHs) and Star Trading Houses (STHs). 97 PTH/STHs are firms that have excelled in international trade and have successfully contributed to the country s foreign trade. Under the new Foreign Trade Policy , Premier Trading Houses and Star Trading Houses have been re-classified as Five Star Export Houses and Four Star Trading Houses. Each are defined by their export performance : specifically, the value of their exports during the current and previous two financial years. According to the new Foreign Trade Policy, Four Star Export Houses should have an export performance of US$500mn in at least two of the previous three years, rising to US$2bn for Five Star Export Houses. There are clear differences in how these entities are allowed to execute gold imports and for what purpose. Banks import gold on a consignment basis, 98 whereas nominated agencies, STHs and PTHs are only allowed to import on a direct payment basis. Table 16: Companies importing gold in India Banks Axis Bank Bank of Baroda Bank of India Bank of Nova Scotia Corporation Bank Federal Bank Ltd HDFC Bank Ltd ICICI Bank Ltd Indian Overseas Bank IndusInd Bank Ltd Kotak Mahindra Bank Ltd Karur Vysya Bank Ltd Oriental Bank of Commerce PNB South Indian Bank Ltd State Bank of Hyderabad State Bank of India Union Bank of India Yes Bank Ltd The Ratnakar Bank Limited Bullion bars. Trading houses/agencies Metals and Minerals Trading Corporation Ltd (MMTC) Handicraft and Handloom Export Corporation (HHEC) State Trading Corporation (STC) Project and Equipment Corporation of India Ltd (PEC) STCL Ltd MSTC Ltd Diamond India Limited (DIL) Gems & Jewellery Export Promotion Council (G&J EPC) EOU and SEZ gems and jewellery units, for their own consumption Premier Trading Houses Star Trading Houses (only for the gems and jewellery sector) 95 This was an initiative of the Ministry of Commerce and Industry, which enabled large quantities of gold bullion to be imported officially. Under this scheme, NRI s were allowed to bring in up to 10kg of gold bars and other approved gold items if they had been away from the country for a minimum of six months. 96 World Gold Council, An Introduction to the Indian Gold Market, STH and PTH are import and export houses, some of which are also manufacturers. All exporters of goods, services and technology with an import-export code (IEC) are eligible for recognition as a STH/PTH. Recognition depends on export performance. In 2015, the government amended the nomenclature of these entities to One Star, Two Star, Three Star, Four Star and Five Star Export Houses. 98 Trade on a consignment basis involves payment being made to the exporter only once the imported goods have been sold to the local customer. The exporter remains the owner of the goods until they have been sold. 56

3 Up until the RBI lifted the restriction in February 2015, PTHs and STHs were prohibited from delivering imported gold to firms serving the domestic market, while banks and nominated agencies were not. Now, as their name would suggest, only export oriented units EOUs are prohibited from selling gold into the domestic market. Key importing cities All of the gold officially shipped into India is by air, with 11 points of entry into the country. These airports are typically close to key manufacturing and trading hubs, namely: North: New Delhi West: Mumbai, Ahmedabad, Jaipur South: Bengaluru, Chennai, Cochin, Coimbatore, Hyderabad, Trivandrum East: Kolkata. In 2015, 85% of gold imports came through airports located in northern and southern India, with the remaining 15% coming through airports in the East and West. The imported gold flows from these airports into the country s network of storage facilities. India is home to 11 bonded customs warehouses, one at each of the 11 points of entry, and around 30 gold vaults. Official import trends There has been little change in the main countries shipping gold bullion into India In 2015 India imported around 939t 99 of refined gold bars and doré (officially) from over 30 countries; % came from just two countries Switzerland and the UAE. The top five exporters to India have remained largely constant in recent years, even though new sources have emerged (Chart 35). 101 In the main, these countries export 1,000g cast, 995 and 999 fineness bars from refineries such as: Asahi Holdings (US and Canada), Rand Refinery (South Africa), Valcambi, PAMP, Metalor, Argor-Heraeus (all Switzerland) and the Perth Mint (Australia). 102 Chart 35: Top gold exporting countries to India during Tonnes 1,200 1, Switzerland United Arab Emirates South Africa Australia United States Ghana Dominican Republic Others Source: GTIS; Metals Focus 99 Of which around 710t is refined gold and 229t is gold dore (fine gold content). 100 GTIS. 101 Indian Customs, GTIS. 102 Gold Bars Worldwide, Grendon International Research. 57

4 Gold doré imports have undergone significant change in recent years An interesting development in recent years has been the rapid growth in gold doré shipments (Table 17). One factor that triggered this growth was the import differential between refined bullion and gold doré. Up until 2016 the import duty on refined gold was 10% whereas headline import duty on doré was 8%, creating a duty differential of 2%. Although importers also end up paying other taxes, making the net duty differential less than 1%, there was a clear incentive to import doré. The path to expanding doré imports has, however, faced a series of challenges. (For more detail on the tax incentives to import doré, please see Chapter 8). Table 17: Top countries of origin of gold doré imported by India 103 (tonnes) Country Ghana USA Dominican Republic Tanzania Peru Other Total Focus: Gold pricing in India Price discovery in India is less transparent and efficient than other markets, such as London or Shanghai, which have either a formal gold exchange (SGE) or a structured OTC market. One reason is that, unlike London, India does not act as a global trading hub. The market is relatively closed: trading entities and refineries based in India are not allowed to export bars. Equally important is the fact that the Indian gold market is heavily regulated by the government. Two important factors help determine the gold price at which bullion is sold in the domestic market. The first is the landed cost of gold and the second, the premium or discount prevailing in the local market. The landed cost is determined by spot dollar gold prices, the US$INR exchange rate, and the custom tariff rate. The custom tariff is set by the government every fifteen days depending on the price of gold in the global market. The customs duty should not be confused with the tariff rate the customs duty is levied on the tariff rate. This is to help maintain the uniformity of the duty value and to avoid under-invoicing. The illustration below shows how the landed cost of gold was determined on 1 March 2016, using the prevailing gold price and custom rates: Table 18: Gold price in India Stages in determining landed cost of gold a LBMA AM Price (US$/oz) for 995 purity 1,240 b Bank Charge (US$/oz) assumed at 0.25% (a*0.0025) 3.1 c Total 995 price (US$/oz) (a+b) 1,243.1 d Conversion to US$/kg (c* ) 39,910.6 e RBI Referrence Rate (USD/INR) 68.2 f Conversion to Rs/kg (d*e) 2,720,226.7 g Custom Tariff in Rs/kg 2,751,105 h Custom duty (g*custom duty rate at 10%) 275,110.5 i Landed Price in Rs/kg (f+h) 2,995,337.2 Landed Price in Rs/10g 29, GTIS, Indian Customs, Metals Focus. 58

5 Focus: Gold pricing in India continued The final selling price is the landed cost plus the premium or discount in the local market, which can lead to some large variations. There are several factors that can determine premiums and discounts. Most important is the interplay between international prices and domestic demand. For example, weak demand can push the market into discount. Premiums and discounts are also affected by factors such as inventories held by bullion dealers, manufacturers or retailers, and changes in the tariff rates (Chart 36). India s diversity plays an important role, with each region characterised by different seasonal patterns of demand and consumer tastes. And taxes vary across states. As a result, it is hardly surprising that India does not have a uniform gold price, with different trading centres each capable of creating their own gold price at any given time. For example, it would be a rare event to find that the gold price in Mumbai, New Delhi, Kolkata and Chennai were the same on any given day. The prices for 22k and 24k gold are usually notified by the local bullion association in each major trading hub, e.g. the local gold price in Kolkata (the capital city of the state of West Bengal) usually comes from the price published by the West Bengal Bullion Merchants and Jewellers Association (based in Kolkata), and the price in Chennai comes from the price published by the Madras Jewellers and Diamond Merchant s Association. Chart 36: India's gold price can differ greatly from the LBMA Gold Price (previously the LBMA fix) US$/oz January 2013 Import tax increased to 6% from 4% July 2013 Introduction of 80:20 policy August 2013 Import tax increased to 10% from 8% 28 November 2014 Removal of 80:20 policy 1 January 2016 PAN card mandatory on jewellery purchases above 2 lakhs Period of weak demand June 2013 Import tax increased to 8% from 6% -100 March 2013 June 2013 September 2013 December 2013 March 2014 June 2014 September 2014 December 2014 March 2015 June 2015 September 2015 December 2015 March 2016 Source: World Gold Council 59

6 Limited availability and competition are key roadblocks to sourcing gold doré According to Metals Focus, in 2015, globally, only around 1,600t of gold doré was available on the open market for export and refining, well below what was needed to satisfy demand. Of total global gold mine production of 3,211t, some 15% of this was recovered to concentrate, leaving around 2,600t mined in doré or gravity concentrate form. 104 But an important share of global doré can be defined as captive it does not reach the international market. 105 This covers doré mined in China (460t), Russia (263t), South Africa (166t) and Ontario in Canada (73t). 106 This leaves around 1,600t of doré on the open market; significantly less than 2015 s global mine supply total. The second challenge facing Indian refineries concerns the growing competition in sourcing this limited amount of doré. Global refining capacity has grown in recent years through a combination of new plants and upgrading of existing installations. And global recycling has declined sharply, from a record total of 1,728t in 2011 to an estimated 1,127t in Competition for doré is fierce. As is the 2016 change in import duties Beyond the challenges of sourcing the raw material, in the 2016 Budget, duties on doré imports were changed. This narrowed the differential between bullion and doré, thereby reducing the incentive for refineries to spring up and import gold doré. Indeed, the pressure in India s refining industry is such that some refineries are now shutting up shop and doré imports have already started to shrink. Smuggling Bullion import regulations have, at times, encouraged unofficial flows into India Given India s insatiable appetite for gold and the restrictions the government has placed on imports, unofficial flows have often been an important, if problematic, source of gold supply for the Indian market. The Gold Control Act created a lively market in smuggled gold, but its repeal in 1990 saw unofficial imports collapse as the market liberalised. Fast forward to 2013 and the government introduced several measures in an attempt to control gold imports, which had ballooned. This began with a gradual rise in the import duty which eventually reached 10%. This was followed by a ban on coin and minted bar imports, and the 80:20 rule, under which 20% of imported gold had to be re-exported as finished jewellery. These measures created significant market distortions, which resulted in a surge in domestic gold premiums at times during early 2014 exceeding US$100/oz. All of a sudden it became very profitable to smuggle gold into India (Table 19). Table 19: Unofficial gold bullion imports in India (tonnes) F A variety of routes are used to smuggle gold into India. The majority around 65 75% comes in by air, around 20 25% by sea, and 5 10% by land. 107 Most of the gold flown into India comes from the Middle East, notably the UAE. Smuggling is usually carried out by low income workers returning home; they receive carrier fees as well as a sponsored air ticket. Smuggling via land or sea routes tends to occur through the relatively porous borders that India shares with its neighbours, notably Pakistan, Nepal, Bangladesh and Sri Lanka. In the first half of 2016, in response to the newly imposed 1% manufacturing excise duty, smuggling activity from Thailand also increased. Outlook Imports will remain the critical source of supply to India s gold market for many years. In the short-term, the removal of some import restrictions will have two main benefits. First, nominated agencies will be better able to source bullion with which to meet the apparently ceaseless appetite for gold in India. Second, this increased flow of gold will likely make the environment less attractive for unofficial gold imports. That said, for 2015 our estimate for gold smuggled into India is not insignificant: we estimate 119t of gold landed in India through unofficial channels. And we expect 2016 gold smuggling to be higher, because of the 1% manufacturing excise tax. The outlook for doré imports is less certain. Indian refineries already face challenges in sourcing doré, and the reduction of the doré/bullion differential in the 2016 Budget has reduced the incentive for refineries to source doré. The huge excess refining capacity in India will come under further pressure in years to come, and we may see closures and consolidation in the industry. 104 Metals Focus. 105 Where the export of doré is prohibited, such as in China or Ontario, or where an export duty makes it uneconomic to export the doré, such as in South Africa. 106 Metals Focus, Gold Focus Metals Focus. 60