Utilisation of gold refineries shrinking due to lack of scrap gold

Less than 400 tonnes of gold are being refined a year, against all-India capacity of 1,700 tonnes

Poor response of the Gold Monetisation Scheme (GMS) has come as a double whammy for organised gold refiners like MMTC-PAMP India and BSE-listed Shirpur Gold Refinery Limited, which are already reeling under huge shortage of gold scrap from both domestic and international sources. In recent times, with global standards being adopted by mine dore exporting nations, availability of standardised gold scrap had been shrinking for refining companies. A dore bar is a semi-pure alloy of gold and silver, usually created at the site of a mine. It is then transported to a refinery for further purification.

"Proper supply of gold scrap is necessary, which is not in a queue at this time. We were expecting the GMS to increase the availability of gold scrap, but that has not happened so far. On the other hand, getting dore from the international market is also a big task, which not every player in India is likely to achieve. As a result, utilisation of installed capacity has been limited," said Rajesh Khosla, managing director of MMTC-PAMP India Private Limited, a joint venture between PAMP SA Switzerland and MMTC Limited.

However, these firms which had been banking on GMS to access domestic supply of gold scrap, have been left disappointed. According to players like MMTC, fear of the Income Tax Department's scrutiny has led many people to shy away from parting with gold under GMS, resulting in poor response to the scheme. This has resulted in hardly 100 tonnes of domestic gold scrap coming in for refining through GMS.

As a result, less than 400 tonnes of gold are being refined a year, as against a total refining capacity of over 1,700 tonnes in the country. The rest of the gold scrap is obtained through mine dore imports from other countries.

Somasundaram PR, Managing Director, India, World Gold Council (WGC) said, "The organised refining landscape has grown sharply from a mere three or four refineries in 2013 to 30 in 2015, taking the total capacity above 1,450 tonnes. But much of this additional capacity remains under-utilised, largely because of the difficulty in sourcing dore and the limited availability of recycling material. It is likely Indian refineries are operating at only 15-20 per cent of their capacity."

According to the gold industry, GMS has not been successful yet due to limited consumer touch points.

"GMS has not yet taken off as it should have been. This is mainly because of lack of credible end-consumer touch points where customers can come and have their gold tested and deposited. Also, the commercial terms between testing centers, refiners and banks have not yet been fully agreed upon," said Keyur Shah, chief executive officer of precious metals business division, Muthoot Pappachan Group.

Refineries set up in excise-free zones (EFZ) have profit margins of 1.25 per cent, while those based in domestic tariff area (DTA) have just 0.65 per cent profit margins, down from about 1.35 per cent in 2012. Refineries based in DTAs are liable to pay both countervailing duty (CVD) and excise duty, whereas those in EFZs just pay the CVD.

Anil Kansara, Gujarat Gold Centre Private Limited said, "Lower margins and shortage of gold scrap may build more difficulties for gold refiners in coming days. Looking at the margins it is not much profitable business and in this scenario gold refiners may utilise less."