Bullion traders examine eased import norms

The shocking move of scrapping the 80:20 rule was an encouraging move to help the gems and jewellery industry. However, the traders are examining the move to understand the impact of this on the bullion industry.

The stringent gold import norms introduced by Government of India last year has adversely affect the gems and jewellery sector. However, on November 28 Government eased import norms for gold by abolishing the rule that mandated traders to export 20 per cent of all yellow metal imported into India, a move that has potential to cut smuggling, enhance a local supplies and temper down prices.

The “80:20 import rule” tying imports to exports was introduced last year to discourage inward gold shipments, stem dollar outflow, narrow down the current account deficit and help the rupee that had hit record lows. “There is still a lot of confusion. A lot of that has to do with the fact it has been such a repressive environment over the last year that people second guess everything,” said Sunil Kashyap, managing director at bullion bank Scotia Mocatta in Hong Kong.

“I think the immediate reaction will be that imports will stop for the time being. Imports in the first couple of weeks may be curtailed because of discounts and stock liquidation,” he said, adding that the market was currently oversupplied. A trader in Mumbai said he would wait for local premiums to spike before importing in big quantities as that would guarantee better incentives. Despite weaker imports, consumer demand could remain strong, according to retailers.

Gold extends losses post the announcement

“It is good news for the industry and we will now see a drop in premium charges,” said All India Gems and Jewellery Federation chairman Haresh Soni. “If premiums come down, prices too soften.” Gold imports had surged in September and October by 450% and 280%, respectively, prompted by festival-driven demand and speculation that it might get costlier if the government imposed import curbs.

Post the announcement of scrapped rule, gold prices declined by `200 at `26,200 per ten grams in the national capital on December 1 amidst weak trend overseas and increased supplies in domestic spot market. Besides, fall in demand from jewellers and retailers at prevailing levels on expectations of further drop in precious metal prices in coming days dampened the trading sentiments, traders said. The sentiments are expected to turn weak after gold prices slumped in global markets as well.

Further, pick-up in supplies supported by RBI easing curbs on import of the precious metal by scrapping 80:20 scheme also put pressure on gold prices, traders said. “Gold may see further fall in its prices in coming days and is likely to touch ` 25,500-mark as supplies started picking up after the RBI move,” All India Sarafa Association Vice-President Sureinder Kumar Jain said.

Exporters are no longer privileged

Though the sentiment of domestic jewellers has been lifted with the removal of gold import curbs, exporters are bound to lose the privileged treatment they were enjoying for the last one year under the 80:20 scheme. Banks and star trading houses, authorised to import gold, have been offering exporters special treatment in order to sell 20 per cent of their gold shipments, and were pushing the remaining 80 per cent of the consignment in the domestic market at a premium.

Pankaj Parekh, Vice-Chairman, Gem and Jewellery Export Promotion Council, said in the last 10 years, very few banks were comfortable with lending gold to exporters, because of the tight trail of records they had to keep on shipments and payment received. Exporters borrow gold from banks based on the bank guarantee they produce, and have to ensure that they receive the payments within 90 days after shipment. If the criterion is not met, banks have to pay the custom duty and applicable VAT (value added tax) by dipping into the bank guarantee provided by the exporter.

If exports happen in a staggered manner, then banks have to set a 90-day alarm for receiving payment for each shipment. It becomes a tedious job for banks, said Parekh. However, he added, the removal of import restriction would improve domestic supply and bring down the premium on gold to $1-2 an ounce from $18 an ounce. This would not only lead to lower price for domestic consumers, but also discourage hoarding, he said.

Jewellery shares spike on announcement

Jewellery stocks such as Titan, PC Jewellers and Tribhovandas Bhimji Jewellers (TBZ) outpaced the S&P BSE Sensex in early trading hours on December 1. The stocks were up 5.3%, 7.9% and 13.3 per cent, respectively versus a flattish S&P BSE following the scrapping of gold import curbs and removal of the 80-20 scheme on Saturday. The latter mandated jewellery companies to export 20 per cent of the gold they imported before importing further gold shipments.

These norms were introduced in August 2013 and hit the jewellery companies’ financials in multiple ways. One, the premium on gold shot up sharply due to reduced supply of the yellow metal, making gold sourcing an expensive and difficult task for the jewellery companies. Second, the gold import curbs also restricted these companies’ ability to buy gold-on-lease from banks. Thus, interest costs surged while margins of jewellery companies took a beating. Third, companies went slow on their expansion plans given that it had become an expensive affair post these norms. Fourth, the companies had to resort to the more expensive method of hedging on international commodity exchanges in absence of gold-on-lease scheme.

With the removal of these bans, gold prices have already started correcting and the companies will gradually witness an easing of sourcing pressures. The jewellery players’ volumes could also get a push as they can meet the increasing demand for gold jewellery in the on-going wedding season. “Titan could increase the quantum of gold-on-lease post these measures. This would be a key positive for Titan as gold-on-lease is a low cost effective hedging tool and will bolster Titan’s ability to expand without resorting to debt,” analysts at MOSL wrote in a recent note on Titan.

Interesingly, Titan being a leading player and with its ability to import gold directly from the international market, was relatively less impacted by the sourcing curbs vis-à-vis peers such as PC Jewellers and TBZ. PC Jewellers, on the other hand, already had export revenues. Abneesh Roy of Edelweiss Securities says, “PC Jewellers had exports revenues while Titan and TBZ had negligible exports at the time of imposition of the curbs. Thus, PC Jewellers was able to manage better on that front. The removal of curbs is positive for all jewellery players as gold premium which is very volatile will be minimal if at all it exists from here on. This will aid quarterly numbers of all companies and improve their cash flow as well as margins.”

Removal of import curbs to spur hope of recovery

The Special Economic Zones (SEZs) in Surat and Mumbai, dedicated to jewellery manufacturing and export, which had lost a major chunk of business to units outside (Domestic Tariff Area) are hopeful of making a recovery with the Reserve Bank of India ( RBI) removing the 80:20 gold import scheme. The scheme allowed the traders to export 20% of all gold imported and locally use the remaining.

According to the GJEPC data, between April-October 2014, the export of gold jewellery from SEZs stood at Rs 13,000 crore against Rs 16,290 crore during the same period in 2013. Similarly, the export of gold jewellery from DTA in April-October 2014 was Rs 21,000 crore as against Rs 10,473 crore during the same period in 2013. “The gold supply from DTA was restricted since the introduction of the 80:20 rule (whereby a fourth of jewellery export value would be made available for domestic sale).

Jewellers preferred to execute all orders from the DTA as jewellery manufactured in SEZ attracts 15% duty, which is equivalent to import duty on the jewellery articles,” said an office-bearer of GJEPC. Ajay Sharma, deputy CEO, Surat Special Economic Zone, told TOI, “The scrapping of 80:20 rule is going to increase gold jewellery export from the SEZ. The jewellery manufacturers were at the receiving end and many had started exporting from their units in the DTA.”