China and India precious metals drive: what’s next?
Vitaly Bouzoveria, Senior Vice President at VTB, Global Head of Fixed Income at VTB Capital, looks at the current gold markets in India and China and how market challenges and opportunities are being met by international players.
For investors in the 21st Century, gold still holds its allure as an asset class which is historically resilient to severe financial market movements, meaning that it’s often possible to hedge other investments in the portfolio by taking positions in bullion.
India and China have established themselves as the largest consumers of precious metals worldwide, shaping the dynamics of global demand for the physical metals market. Gold demand from these countries together accounts for nearly 60% of the annual primary gold production worldwide. As a result, any bank that is looking to work with the asset class must strongly consider how it approaches these two markets.
In fact, Russian financial institutions have been quite active recently in establishing their presence in these regions. Notably, even Russian refiners aim to become full-scale market players through obtaining necessary approvals to directly export gold bullions to China. But India and China are not without their challenges for international players. China’s financial system can be difficult for foreign companies to penetrate as there are various nuances facing entrants to the market. These include gaining the necessary licensing and certificates to be able to sell gold to local buyers and the relatively complicated procedures for registering on the Shanghai Gold Exchange, which VTB Capital joined in 2015.
China has seen stable demand for gold but the anticipated Fed rate hikes have been putting pressure on prices globally and the Chinese market is no exception. However, the market dynamics of China, where it’s very common to hold gold as an antidote to US dollar rate increases—especially when the price of precious metals decreases—mean that physical demand for gold insures against too sharp or profound a fall of prices.
The current market landscape presents several competitive advantages for Russian financial institutions over other international players. Russian gold standard is similar to the preferred gold purity in the Chinese market, which makes working with Russian suppliers more cost effective. The overall sentiment of growing trade and investment relationships between Russia and China also contributes to greater involvement of Russian players in the local precious metals market. In 2016 VTB started direct gold supplies to China, and since the beginning of 2017 we have already shipped approximately 6 tons to the region. VTB is looking to significantly extend our presence in China with an estimated 15-20 tons of gold to be shipped this year subject to market conditions.
Looking at the Indian precious metals market, one of the challenges in terms of entering this region is a well-established international banking community that has been in this segment for some time. It’s not always easy for a new player to gain access amidst this competition. However, due to a traditionally high local demand for gold, there is an opportunity for foreign players with necessary infrastructure to carve a niche even in such a saturated market. By keeping margins competitive and extending favourable lending conditions, VTB has managed to secure a substantial market share in the region and become the only Russian bank to supply gold and silver directly to India.
Recent changes to Indian regulation, including a further customs duty increase of 1% on top of the existing 10% excise tax, have slightly weakened the profitability of bringing gold into the country. This margin squeeze has been a factor in sluggish market conditions in 1H 2016. However, there is a sense that the reforms will be for the best in the long term, and clients will adapt to the new market landscape with precious metals trade volumes returning to sizable levels.
In fact, India’s precious metals trade dynamics in 2017 have already demonstrated pick-up and we expect end of the year volumes to come back to previous years’ figures. In 2016, we have shipped over 12 tons of gold to India, and our projected volumes for 2017 are over 20 tons, with 5 tons already shipped since the start of the year.
While there may have been concerns raised over the last year in regard to the precious metals markets in India and China, the situation is returning to normal and the general market dynamics should be a source of opportunities in both countries. There’s no danger that the metaphorical goldmines are going to dry up soon and there is still significant potential to continue the precious metals drive across Asia and further.