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Challenges for the gold refining industry

James Jose, Managing Director of CGR Metalloys Pvt Ltd.,

 

In the Union  budget of 2017-18, the Hon Finance minister  Shri. Arun Jaitely, announced the Govt’s intention to formulate a comprehensive gold policy to develop gold as an asset class. The Hon. Minister also proposed the  establishment of a regulatory gold exchange, setting up of a Domestic council for gold industry  and also that  the Gold monetisation scheme (GMS) will be revamped. The gold refiners, bullion traders, commodity exchanges, financial institutions as well as the jewellery industry are eagerly looking forward to the roll out of these inititiatves from the Govt, which may substantially revolutionaise the operations of these diverging segments of the  domestic gold industry.

 

One fundamental infrastructural requirement  tooperationalise these  proposals is the introduction of an India good delivery mechanism for gold ,so that the gold transacted on these platforms are of standardised quality, backed by a proactive regulatory mechanism of  international standards. The national standards body – the Bureau of Indian standards is understood to be in the final stages of the standard formulation for good delivery bars, which shall be at par with the technical parameters of similar international  good delivery standards on bullion. Once the Indian  standard  for good delivery bars is published, then the regulatory frame work for the good delivery eco system needs to be established, for which a steering committee from the various industry stake holders  in India is already formed  for its preliminary groundwork.

 

The  commodity  exchanges launching physicial delivery of bullion at more and more locations and the proposal to commence a spot exchange for bullion augers well for the gold refining industry, in their pursuit to enhance  the availability of quality certified BIS hallmarked bullion. Even  when the  annual gold  demand in India is fluctuating between 575 to 900 tonnes per annum over the years, the domestic gold refining industry has been  consistently enhancing their production capabilities; the 20 gold refineries that are licensed by Bureau of Indian Standards, with gold assay labs accredited by  NABL as per IS 17025: 2005, are now having a combined production capacity of around 1500 tonnes per annum. Over the years, their capacity utilisation too has been steadily growing up,  thereby reducing the depandancy on finished bullion imports. What started off as a meagre  production of two tonnes of bullion  from imported gold dore in 2012, has now gone upto 227 tonnes, out of the total 577 tonnes of gold imports during 2017-18; the share of  domestic  bullion  manufacturing  from imported gold dore has gone up to 40% of India’s total bullion consumption per annum.

 

Over the past two years, the overall  gold  demand in India has been highly cyclical, impacted  by economic factors such as currency demonetisation, PMLA and the  introduction of GST, which has considerably affected the capacity utilisation and supply of bullion from the gold refineries.

 

Another bottleneck impacting the  bullion refining  in India is the supply side constraints on gold dore from the mines abroad, especially from Ghana, whose exports of dore has been considerably lower in the past two years, mostly attributed to  regulatory constraints. Ghana, Peru, and Columbia together account for around 70% of the total gold dore imports into India. The total availability of gold dore world over per annum being in the region of  400tonnes, the Indian gold refineries shall be facing bigger challenges in sourcing dore in the years to come, as well as stiffer competiton from the dore importing gold refineries in Middle East / Asia.

 

Another option for the Indian gold refineries  looking for newer sources of gold dore is canalisingdore from  medium and large scale captive mines  abroad. The association of gold refineries and mints has been requesting the Govt that banks  and other nominated agencies presently importing  bullion may also be permitted to import dore in bulk quantities, on long term contracts, on behalf of the gold refineries licensed to import dore .

 

The next option is to look for domestic sources of gold dore within the country, by granting more and more prospecting licenses. Presently india produces less than two tonnes of gold per annum from its captive mines and another eight tonnes of bullion from the secondary refining of copper and silver producing companies. The country needs to have a robust mining policy so as to ensure that around 100 tonnes of gold can be mined per annum from the various domestic potential mining sites, over a 5-10 year period of exploration  and extraction and the green signals coming from some states like Rajasthan etc are positive harbingers in this direction.

 

Disclaimer: Views are personal and not the views of the publisher.