Gold refining gains ground as prices surge

India has emerged as the world’s fourth-largest gold recycler with the organised refining capacity increasing to an estimated 1,800 tonnes against 300 tonnes in 2013. The informal sector accounts for an additional 300-500 tonnes, said the World Gold Council in a report on Tuesday.

While the capacity addition has been robust, the amount of gold recycled last year dropped to a four-year low of 75 tonnes against 96 tonnes logged in the previous year. This had dragged India’s position to fourth position from second due to weak bullion price.

The scale of unorganised refining has fallen as the government has tightened pollution regulations resulting in the closure of many local melting shops. Also, more retail chain stores have begun to recycle old gold engaging organised refineries. Over the last five years, the ₹44,000-crore industry accounted for 11 per cent of the country’s gold supply. The number of formal refiners operation increased from less than five in 2013 to 33 in 2021. India accounts for about eight per cent of the global scrap supply.

Dore imports

The import duty differential on dore (unrefined gold) over refined bullion has spurred the growth of organised refining in India. Share of gold dore in overall imports has risen from just seven per cent in 2013 to 22 per cent in 2021.

Old jewellery scrap accounts for 85 per cent of overall recycled gold, while old bars and coins that people either sell or exchange for jewellery make up about 10-12 per cent of scrap gold supply.

The expansion of the Indian refining sector has slowed in recent years as GST eliminated the advantage enjoyed by EFZs (excise free zone) and led to a cutback in new capacity within these zones. Duty differential in EFZs had encouraged many companies to start refineries but once those advantages disappeared, many closed, leaving only genuine operations in existence.

Some refineries importing dore were unable to meet the accreditation standards set by the Bureau of Indian Standards and the National Accreditation Board for Testing and Calibration Laboratories, and they too were forced to shut.

The almost persistent gold market discount – due to slowing economic growth, weak gold demand and the pandemic – meant that some dore imports became unprofitable even with the duty differential.

The fresh capacity addition would have withstood weak domestic demand, if they had been allowed to export bullion bars and able to reclaim custom duty and GST on exported bullion bars.

Challenges ahead

Despite the gradual move towards a more structured and process-driven industry, the majority of gold recycling trade remains unorganised as accredited refineries need to show from where they had sourced the scrap and have to leave out small jewellers, who prefer cash transactions.

Though many refineries have opened additional scrap collection centres, they are often located in bigger towns or cities.

The GST regulations do not allow consumers to reclaim the three per cent tax they pay when they initially buy their jewellery. This loss could be a barrier to consumers looking to create liquidity by selling old gold.

Somasundaram PR, Regional CEO (India), World Gold Council, said the country has the potential to emerge as a competitive refining hub if the next phase of bullion market reforms promotes responsible sourcing, exports of bars and consistent supply of dore or scrap.

The holding period of jewellery will continue to decline as younger consumers look to change designs more frequently leading to higher level of recycling, he added.

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