Gold refineries diversify into alternative businesses

Low scrap availability, unfavourable govt policy tank their operating performance.

Threatened with several technical hitches in gold concentrate imports and drastic decline in scrap availability, India’s gold refineries have diversified into related businesses that include manufacturing of silver nitrate.

Silver nitrate is used in the manufacture of an eclectic range of products such as mirrors, hair dye, explosives and a number of pharmaceuticals. Photography labs use silver nitrate in the developing process.

“Refineries are adopting various methodology for survival, as scrap availability in the domestic markets have declined dramatically. Many units have started manufacturing other electronic items related to precious metals just to run their business,” said Harmesh Arora, managing director of NIBR Bullion, popularly known as National Refinery.

The World Gold Council (WGC), in its second quarter report, had said gold availability in India through the secondary route, that is by recycling scrap, had declined by half to 10 tonnes in the second quarter this year, as compared to 20 tonnes in the corresponding quarter of the previous year and 14 tonnes in the first quarter of 2011.

“Indian consumers are holding gold for use in next generations. So, scrap supply has been continuously falling. The trend is likely to continue in the future,” said Ajay Mitra, MD, (Indian sub continent), WGC.

Indian gold refineries have cut their operating capacity below the earlier minimum functional requirement of 25 per cent. Over several years, refineries had built huge operational capacity in anticipation of a favourable taxation policy.

But, the government has levied import duty and excise duty on gold concentrates (dores) of Rs 140 per 10g and Rs 200 per 10g respectively. Refined gold attracts Rs 300 per 10g of excise duty, while no import duty is levied on it. This means, import of refined gold is cheaper than concentrates for processing in local refineries. Importers, however, get central credit on customs duty paid.

“A request has been made to the government to reduce excise duty, as margin of Rs 100 per 10g is inadequate to cover transportation, logistic cost of capital, storage, etc. Gold will be sold at market rate, whether imported or produced domestically. Refining will add to the margins of the domestic refiner. The cost savings are in terms of freight, insurance, fabrication costs,” said an official at MMTC.

MMTC is setting up a refinery with Switzerland’s Pamp SA to produce 100 tonnes of gold medallion in the first year. However, the refinery has been delayed due to technical hitches in raw gold imports.

Availability of dore bars and concentrates for refining is limited. Mining companies have invested in development of mines and expect to be paid upfront or at the time of delivery. It is true that refineries are finding it difficult to source raw material, the official added.

Before this financial year ends, the industry needs to resolve these technical hitches for smooth flow of raw material supply. The government has allowed concentrate import with 80 per cent purity. Globally, gold concentrate with over 90 per cent purity is available. Hence, the government’s permission makes no business sense, Arora added.