The biggest curse in gold refining biz

In 2019, the Kansara family of Ahmedabad exited its gold refining business after running it for nearly 28 years. At its peak, Gujarat Gold Centre — helmed by Anil Kansara and his three brothers — posted a trading turnover in excess of Rs 1,200 crore, refining nearly 30 kg of gold a day. But the constant need for exceptionally high working capital, excessive borrowing cost, low margins and the dwindling supply of domestic scrap gold forced the Kansaras out of business.“I was not happy exiting the business I built from scratch. It was like selling my own child,” says Kansara, a metallurgy engineering graduate of the mid-70s from NIT-Rourkela. “You’ll not be able to operate a gold refinery profitably if your only source of raw gold is from dore imports. You cannot survive by just refining scrapped household gold either. You’ll need a good mix of both to get a fair chance of survival. And to be really profitable, you may have to bend yourself to market forces and give into unfair trade practices.”Raw material supply is the biggest curse in the gold refining business. The 30-odd accredited gold refineries in India battle it out every single day to get their share of dore (imported impure gold ores) and scrap household jewellery from jewellers who receive them as “exchanged gold” in lieu of fresh purchases by customers. The refineries melt and purify raw gold (both dore and scrap) to refinement grades as high as 99.99%, and sell them back to jewellers, banks, commodity exchanges and even to asset management companies that run gold-backed exchange traded funds.78973157“This industry has a fast turnaround time,” says James Jose, MD of CGR Metalloys and secretary of the Association of Gold Refineries & Mints. “In peak sale season (October-May), refineries may have to churn out large quantities of pure gold every day. But during slack season, especially during rains, we operate at 20% capacity.”The industry faces a lot of supply-side constraints, he explains. “This business cannot be done only by relying on dore imports – which can get prohibitively expensive when gold prices are high. Scrap gold supply is very cyclical in nature — and almost all the time, a large chunk of it goes to unorganised refiners who do not ask for any purchase papers or bills.” Such deals remain out of the tax purview.To understand the importance of scrapped household gold in the refining industry, one has to know more about dore imports. Gold miners (or their representatives) do not ship dore to importers without getting full payment first. So if a mid-sized refinery relies only on dore imports as the raw material source, it will have to shell out about Rs 10-15 crore every day to ensure continuous raw material supply. After refinement, the refiner has to wait 7-10 days before getting his money from the buyer of pure gold. Lack of option to purchase raw material (dore) on credit and delayed buyer payments often land gold refiners in a tight spot. When gold demand drops suddenly, refiners are forced to deal with unsold inventories of pure gold. In such times, if the refiner is cash strapped, he is forced to sell his stock at a loss.78973166Anil Kansara decided to import dore when his supply of scrap gold dropped to a trickle in 2013. “We needed capital to import dore. So we inducted an equity partner. But even after that, the nature of the joint venture did not give revenue to the company as expected. That is when we exited the business,” he elucidates.Using scrap household gold as a raw material source gives more control and manoeuvrability to the refiners as these come with easier payment terms and buyback guarantees. Indian jewellers collect nearly 100 tonnes of scrap gold every year. But nearly 60% of that lands up in unorganised “street-corner” refineries located in almost all Indian cities and villages. Gold Refineries Association data suggests that the informal sector processes over 200 tonnes of scrap gold every year.“Scrap gold has always been a dicey matter in India,” says Somasundaram PR, MD (India), World Gold Council. “It becomes even more suspect when scrap gold goes to the unorganised sector for refinement. You can never be sure of its source. It could even be smuggled gold.”The gold industry India still has antiquated practices. Jewellers sending their share of scrap gold to street-corner refineries is one such practice, he says. “And it is done to escape a minor tax incidence. Such cheap practices prevent the industry from bringing progressive reforms.”78973173There is a 3% charge on gold ornaments under the goods and services tax regime (this is over and above 12.5% import duty). In case of scrap gold, the seller of old jewellery will have to buy new gold to offset the tax incidence. Many jewellers help customers circumvent this levy by buying old gold off-the-book and passing it to unorganised refiners. The refined gold comes back to the jeweller without any tax payout.“Such practices erode the trust quotient of the Indian gold industry. Gold is an international product, and if we’ve to be in business, we’ll have to adopt international standards,” says Somasundaram. “There’s no guarantee of purity of gold refined by unorganised refiners. Millennials are already walking away from gold and jewellers. It is high time, the gold jewellery industry walked on the right path to regain buyers’ trust.”The last few months have seen a significant buildup of scrapped gold in the Indian jewellery market, probably because of the cash shortage at households caused by the pandemic. A bulk of it has come from NBFCs, which offer loans on gold jewellery (pledged as collateral). Jewellers, however, are also seeing renewed buying interest from customers ahead of the upcoming festival and wedding season.“People have again started making smallticket purchases like bangles, pendants and even diamond-studded jewellery,” says Kumar Jain, the promoter of Umedmal Tilokchand Zaveri, one of the oldest jewellery shops in Mumbai’s Zaveri Bazaar. “There’s a fair bit of scrap gold supply as well. We send our share of scrap gold to accredited refiners only.”The promoter of a prominent South India-based jewellery chain says on condition of anonymity: “Quite often, we don’t get the desired level of purity and fineness from even accredited refiners. So we send a part of our scrap gold to our in-house refining unit. We’re scared to try out new refiners because many of them deal in smuggled gold. We do not want to get associated with such entities.”78973183Gold refining yields just 0.1-0.2% of the scrap value. So to widen their revenue streams, large players like MMTC-PAMP (a venture between the Switzerland-based bullion brand PAMP and the Indian government’s MMTC) have started offering retail products such as gold coins, bars and even an option to buy digital gold.“Our digital gold product is doing extremely well,” says Vikas Singh, MD & CEO of MMTCPAMP, which also operates 12 retail-specific stores in 9 cities. “Purity and trust is very important in the gold refining business. You’ve to keep high standards to meet the expectations of buyers. Digital gold helps us forge a relationship with buyers directly.”Singh says demand for gold will pick up soon. “Demand was low in the initial months of the lockdown as there were practically no walk-ins at jewellery shops. But that is changing. It is not going to be a bad Diwali, for sure,” he reassures.Even though the jewellery market is hopeful of better times, gold refiners continue to scramble for their precious raw material. Well-established players like Bangalore Refinery still rely on scrap gold to fire up their melting pots and crucibles. Ketan Dhruv, a director at Bangalore Refinery, affirms that it is not financially viable to import gold. “Mid-sized refiners like us cannot send unending cheques as advances to miners for dore,” he says. “The government should work on a policy that allows refiners to import dore from small-scale artisanal miners. There are many small private mines in Canada, Australia and Africa. These mines also supply to buyers in Switzerland and Dubai. We’ll be able to negotiate favourable terms of trade with small mine-owners.”There are just about 20 accredited gold refiners who are active in business currently. It takes Rs 20-150 crore to set up a modern gold refinery. An unorganised refinery can be set up in a day for about Rs 50,000.It is unfair that organised refiners — particularly the law-abiding ones — are on the losing side. Experienced players like Kansara have already bowed out because they do not want to engage in “under-the-table trades” to increase profits. They still believe gold is a “noble” metal.Not to own precious metals is to trust politicians, central bankers: Swiss investor Marc FaberAbout 20 years ago, Swiss investor Marc Faber had correctly predicted a bull run in the oil and commodities market. Now, Faber expects gold prices to remain firm over the next few months. The author of the widely followed Gloom Boom & Doom Report tells Shailesh Menon gold will outperform the equities market in the near- to mediumterm. Edited excerpts of the email interview:Gold prices have firmed up over the past six to eight months. What reasons would you allocate for this trend?Gold prices have been rising since December 2015, following price corrections between 2011 and 2015. This year, gold is up 26% and silver 33% in US dollars. The reason precious metals are up is endless money printing by the US Federal Reserve and exploding US fiscal deficits, which will continue forever. Not only the US Fed, central banks around the world are printing money to infuse liquidity into the system. If all these monetary authorities are printing money like drunken sailors, the value of money will diminish. And when currencies collapse, the value of gold will skyrocket. Many central banks have started shoring up their gold reserves. So the price of the yellow metal will remain firm.78973198What is your medium-term outlook for gold?Not to own any precious metals is to trust politicians and central bankers. Just look at the two US Presidential candidates and the case for owning gold is clear. I expect prices to move up — at irregular intervals.So, will only investment-led demand for gold drive prices up? Do you foresee a pickup in demand for gold jewellery as well?I expect that more and more people and institutions will allocate some money to gold and silver especially if, as I expect, the US dollar declines sharply. Demand for jewellery will also increase marginally over the next few months.Will gold outperform asset classes such as equities and debt?Yes, that is quite possible, as it had for brief periods since 2000 and 2015. Gold and silver have done well since 2015, and many global stock indices have managed to outperform gold this year.What is the trend with other precious commodities such as silver and platinum?Silver and platinum are far less expensive and could outperform gold significantly. Platinum, especially, has a great chance to move up in value.India’s gold imports have risen in the last couple of months. Will this create a balance of payment crisis?No, this is not a problem I would worry about.

from Economic Times https://ift.tt/3jMlld2