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Indian Silver Imports Surged By 90% Last Year - Will The Market See A Repeat In 2018?

January 09, 2018


 Last year, Indian silver bullion imports jumped by 90% to an estimated 5,750t. Although this performance was flattered by an exceptionally weak 2016, last year’s total was still the third highest this decade. However, during this time, Indian imports have been notoriously volatile, with an average year-on-year change between 2011-17 of around +40%. Even though another surge in imports in 2018 may appear unlikely, given the extent of last year’s rise, we should still see these shipments rise over the next 12 months.To help understand how the Indian silver market may develop in 2018 it is worth revisiting some recent key developments. One of the most striking trends in the Indian market this decade was the dramatic rise in imports, from just 1,942t in 2012 to a record high of 7,570t in 2015. This was driven by a huge rise in physical investment, which rose by 1,750t over these three years, followed by jewellery fabrication, which grew by 1,050t. Silverware offtake also improved, albeit by a more modest 600t, while industrial demand actually slipped by 260t between 2012 and 2015.


Focussing on physical investment, much of the above-mentioned increase was driven by bar demand (as opposed to coins). This reflected two themes, the trend in rupee silver prices and silver’s role as a vehicle for unaccounted money (especially following the clampdown on gold). In terms of the former, after peaking at almost Rs.70,000/kg in early 2011, local prices weakened, but also remained quite volatile. This encouraged bargain hunting among investors who believed that silver was increasingly undervalued. This buying was further supported by the spread between spot and futures prices, which allowed for arbitrage trading. With regards to the second driver, given its low price point, ownership of silver bars has for many years been a popular home for unaccounted money. More recently, the government’s ongoing crackdown on cash transactions (and its drive for greater transparency across the economy) led to a ramp-up of unaccounted flows into the silver market.


However, in 2016 as rupee silver prices broadly stabilised, the far more subdued trading pattern discouraged investors from further buying into silver. There was also an element of market saturation, which limited fresh inflows of investor bargain hunting. More important though was the impact of the Indian government’s drive against the shadow economy, which culminated in the late-2016 demonetisation. As a result, flows of undeclared money into silver dried up, a situation which also continued last year. Furthermore, as the Indian authorities continue with their anti-money laundering drive, there seems little prospect in the future of silver acting as a vehicle for undocumented money.


In spite of the weak investment trend in 2017, bullion imports still enjoyed a strong recovery last year, thanks to improved jewellery and silverware fabrication. Both segments benefited from an improving Indian economy and the impact of broadly stable local prices. An added driver for jewellery was the jump in finished exports. Available data for January to October points to a 39% y/y rise in the value of jewellery exports, led by Hong Kong, the UAE and the US. Aside from the improvement in demand the rise in bullion imports was fuelled by trade restocking as lower imports in 2016 saw inventories depleted. There was also some buying by the supply chain ahead of the introduction (last July) of the Goods and Services tax.


In terms of this year, even though we expect silver prices to strengthen (as discussed in last week’s release of our latest One-Year Forecast), this should be offset by the positive impact stemming from a still relatively healthy Indian economy. However, we have to allow for the prospect that jewellery exports fail to grow and so remain close to 2017’s strong performance. This follows strong gains in the previous three years (overseas shipments rose from $983m in 2013 to $3.3bn in 2016) which, going forward, may limit the potential for a further rise in Indian silver jewellery exports.


Overall therefore, following an estimated 7% rise in total Indian demand last year, we are forecasting just a 3% lift in 2018. As a result, Indian imports should improve further this year, albeit modestly.



Market Developments



Italian export data and field trip point to firm consumption in many key regional markets


The most recent trade data for Italian gold jewellery exports (up to September 2017) points to notable gains since June. This was no statistical quirk as a field trip to Italy in December confirmed strength in that period and its continuation through to year-end.


As can be seen in the chart alongside, growth returned to the largest regional market, the Middle East. Much was down to a swing to double-digit y/y gains for shipments to the United Arab Emirates for each month from June onwards. This does not resonate with the health of local jewellery consumption and, instead, we are advised that the gains are the result of higher onward shipments to markets such as Iran and Russia. It is also possible that there is an element of market share loss, as exports to the Lebanon (which used to act as the main regional wholesaler) are up by two-thirds (although total volumes are still less than 10% of Italian shipments to the UAE).


Shipments to the second largest regional market, East Asia, primarily go to Hong Kong and from there to mainland China. The 7% y/y rise in exports to that hub are illustrative of more recent strength in Chinese jewellery consumption, in particular its 18-carat segment.


The 8% rise to the EU is misleading, however, as that largely reflects the re-routing of shipments by key brands. Instead, while improving, our research suggests consumption in the region is best viewed as broadly stable, certainly in the mass market, although the top-end continues to strengthen. More obvious export growth are visible in the US and this helps explain the 18% jump in exports of Italian product to that market. Such growth continues to run ahead of consumption gains and it remains unclear why; possible suggestions from our contacts include higher transshipments to Latin America and ongoing stock building.


The strong rise for countries included in the graph’s “other” category is primarily down to higher shipments to Switzerland and Turkey. The former supports the above comments about top-end jewellery consumption performing well, while it has been suggested, as with Dubai, that buoyant onward shipments to Russia and Iran explain much of the gains for Turkey. An interesting footnote emerged during the recent Italian trip; it was felt that the rise of online jewellery buying, with the electronic trail this creates, is curtailing the scale of the unofficial sector in some markets. It may therefore be that gains for total jewellery exports are less robust than the above official segment’s rise of 7% may suggest