How Free Trade and Warehousing Zone in India Will Change the Precious Metal Trade Dynamics in Future

In early August this year Brink’s India Ltd unveiled their vaulting service for precious metals in the Free Trade and Warehousing Zone (FTWZ) located in Sri City near Chennai. This vault is the first such facility in India. The concept is catching on fast with other logistics service providers already adding this service to their product offering and extending this service to other locations in India. The FTWZ is likely to bring in a host of benefits for the precious metals industry in India and has the potential to change the scope of bullion trade in India for the better.

 

How far can it bring a change to trade dynamics?

India ranks second amongst the top gold importing countries, and in the case of silver, the last three years has delivered consecutive increases to fresh record highs every year. For volumes of such magnitude the importer and suppliers margins can be better managed by keeping a check on turnaround time and cash flows. Feedback from industry sources suggest that using an FTWZ may be an answer to that challenge.

Gold is often imported to India on a consignment basis and then sold outright or leased out. The import volumes are basis orders from the importing agencies’ clients. However there is an element of risk involved in this process and that is the delay in pricing the consignment with the supplier should demand not pick up as expected. This has resulted in cases where the pricing has extended to 45 days and in some instances beyond that.

This could however change in regions where a FTWZ is located near to key demand centres. Suppliers may prefer to vault the gold in a FTWZ and retain the title until it is released and in situations where demand does not materialise as expected, the same gold can be re-exported without the partial loss that is otherwise incurred while claiming drawback of customs duty, not to mention the time consuming paper trail.

 

FTWZ can provide a significant advantage on cash flow.

In essence, the cash flow component gets better managed. Not limiting to that, the days when the supplier markets are shut and Indian markets are operational, it becomes easy to release the metal in India if stored at FTWZ. Additionally in case those holidays coincide with the day of new customs tariff in India (for instance during Christmas and New Year holidays), FTWZ can provide a significant advantage if the price had moved in favour of the importer.

 

The silver trade is likely to be the biggest beneficiary of this service.

Since the second half of last year hundreds of tonnes of silver shipments that arrived by sea were held in ports for many days, either awaiting clearance from customs or to be picked up by the customer. Adding further pain was the process of re-exporting surplus stocks following the sharp drop in demand. Such logistical risks can now be better managed with this facility and it is more likely that volumes of silver stored at such vaulting facilities will increase. Thus vaulting silver at a FTWZ location and then shipping to any other location in India will lead to better inventory management and reduce transit times. Also as this facility becomes more popular we could see part of the stocks vaulted in Europe, Dubai, Hong Kong and Singapore moving to India.

Gold on the other hand is less likely to be a beneficiary while the FTWZ is located at a single location in India. With the current facility it will be of significant benefit to demand locations at its proximity; this is primarily related to the smaller lot size of gold that otherwise gets cleared from a region specific vault on a daily basis. Thus the cost of transportation for instance from a FTWZ located in Chennai to a vault in Lucknow is going to be higher than moving from a vault located at the Domestic Tariff Area in Delhi to Lucknow. This also means an importer may consider importing gold on a consignment basis to Delhi though it may take 48 hours. That said, the equations would change considerably if the government allows clearance from FTWZ all seven days a week, albeit it may come at an additional cost. Nevertheless, such a gap only improves the scope for more opportunities and makes the logistics market more competitive.

Friday, September 16th 2016, Sudheesh Nambiath (GFMS)