Gold demand in China stagnant, imports shackled despite lower prices

Otmane El Rhazi from The Bullion Desk.

Physical gold premiums in Shanghai remain flat while Chinese demand is significantly weaker than expected, sources told FastMarkets.

With spot gold on international markets at $1,162.10/1,162.90 per ounce, near the April 2010 hit last week and down significantly from its 2014 peak of $1,388, many had expected China, the world’s largest consumer of gold last year, to return to the market in force to pick up metal at bargain prices.

But spot premiums on the Shanghai Gold Exchange SGE are now at $1 over spot for 1kg bars, having fallen from as much as $6 at the start of October, although up from level last week.

A price nearer $1,100 would be needed to really spur buying and push up SGE premiums, sources suggested last week.

A continued clampdown on commodity imports for the purpose of financing has choked off local demand, they said this week.

“Instead of borrowing Renminbi, it was much cheaper to borrow on a commodity such as gold, which explains the large imports, but a clampdown this year has really affected that,” one source said.

After imports into China last year of 1,108 tonnes, the physical market is amply supplied, with imports for 2014 expected to be lower.

Chinese jewellery demand fell 39 percent year-on-year in the third quarter to 147 tonnes, the World Gold Council (WGC) said, although this remains broadly in line with the five-year average of 154.9 tonnes.

In India, premiums have remained high, with buying for the wedding season moving into full-flow. Premiums in Mumbai were quoted around $18 over spot for 1kg bars, unchanged from the previous two weeks, which suggests solid demand.

Indian demand in the third quarter rose 60 percent 183 tonnes, the WGC said, although the year-ago figure may have been distorted by import restrictions and higher duties imposed by the government that discouraged buying.

India’s gold imports in October were again higher than this year’s average at around 70-80 tonnes, sources suggested, albeit below the September total of 120-130 tonnes.

October’s higher imports were a knee-jerk reaction to the traditional buying ahead of Diwali but also because the government is apparently looking to tighten import restrictions once more, sources suggested.

This comes despite calls from some quarters on the Indian Finance Ministry to loosen the import curbs, which New Delhi introduced to narrow the country’s ballooning current account deficit (CAD) – it hit $87.8 billion in the 2012-2013 fiscal year.

The CAD narrowed to $7.8 billion in the three months to June 30 from $21.8 billion a year previously, which the Reserve Bank of India attributed largely to a rise in the import duty to 10 percent and a rule requiring 20 percent of all bullion imports be re-exported.

But the festival-related surge in gold imports in September has pushed the country’s trade deficit out to $14.25 billion from $10.84 billion in August, making an easing or a withdrawal of the rules unlikely – despite the general consensus that Prime Minister Narendra Modi would do so when he took office earlier this year given his pro-business stance.

In other locations, the Hong Kong rate is down fractionally at $1.10-1.20, Singapore was also lower at $1.20-1.50 and Dubai retraced to $1.

(Editing by Mark Shaw)

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