The story so far: The World Gold Council accorded India as the fourth largest recycler of gold, having recycled 75 tonnes of the valuable yellow metal in the previous year. As per the report titled ‘Gold refining and recycling’, India’s gold refining landscape has changed ‘notably’ in the past decade with formal operations increasing from less than 5 in 2013 to 33 in 2021. The import duty differential that gold doré has enjoyed over refined bullion has particularly accelerated the growth of organised refining in India. Helped by these tax incentives, about half of India’s new refining capacity opened up in Excise Free Zones (EFZs) in Uttarakhand since 2014.
China topped the list having recycled about 168 million tonnes of gold in 2021. Italy stood second having recycled 80 million tonnes of gold in 2021, followed by the United States (78 million tonnes).
For perspective, gold dorés are metal bars with high gold content. They are composed of a mixture of precious metals but majorly containing gold and silver. They require further treatment before they can be used as raw material for producing gold items. Dorés can be created from scrap gold. Bullion refers to gold and silver of high purity kept in the forms of bars, ingots or coins.
The report states that as India’s demand for gold outpaces its supply from mines, it is being met by imports alongside locally recycled gold. The World Gold Council estimates that the gold recycling in India is a Rs 440 billion industry making up 11 per cent of the average local annual supply.
What is gold recycling?
The World Gold Council defines recycled gold as gold that is sold for cash either by consumers or others who are part of the supply chain (such as jewellery manufacturers who may sell old stock). It does not include the exchange of gold for gold, such as when retail customers exchange old jewellery for new.
Gold is a soft and malleable metal. It is alloyed with other metals, such as copper, silver, nickel, palladium and zinc, to make it hard and fit for use.
‘Recyclable’ gold may either be derived from old jewellery, referred to as high-valued scrap – which roughly accounts for 90 per cent of the total supply of recycled gold globally — or industrial scrap material – primarily consisting of waste electrical and electronic equipment such as computers, tablets and mobile phones. Although used in small amounts, gold is used in printed circuit boards, among other things.
What needs to be remembered is that gold does not tarnish or decay and therefore, all the gold that was ever mined still exists and can be recycled. Gold recycling has also been favoured in place of gold mining because mining, particularly at the upstream stage of ore extraction, generates a huge amount of toxic waste and gases which have profound effects on the ecosystem.
How is gold recycled?
Recycling jewellery and industrial scrap entail different processes.
For jewellery, some refiners separate metals by heating and melting the alloy – this can be done by jewellers on a small scale, since it does not require any specialised equipment or knowledge. However, the process is not adequate for obtaining higher levels of purity that can be deemed industry-ready.Therefore, refiners may resort to dissolving the alloy in strong acids before recovering the gold through electrolysis.
The value chain with respect to jewellery recycling is less complex and comprises fewer market participants with processing periods shorter in comparison to that of industrial gold. The latter also has to go through additional processes such as disassembling, pre-processing and smelting. Industrial recycling also requires large sites and complex equipment – the reason sites are concentrated in a particular region.
What are the broader features of gold recycling in India?
As per the World Gold Council’s latest report, India accounts for 8 per cent of the global scrap supply. At approximately 85 per cent, old jewellery is the most recycled gold product in India. The industrial segment accounts for less than 5 per cent of the total Indian scrap supply.
Factors such as current price movements of the yellow metal, future price expectations and the overall macroeconomic scenario primarily determine the level of recycling activity. When the price of gold increases, a common impulse among consumers is to sell their gold to gain from the price rise or avoid additional spending on new gold jewellery. Financial crises too spur recycling – this is because people put their gold as collateral or completely sell it off to raise cash for daily needs. In both scenarios, there is an increase in the supply of gold eligible for recycling.
Jewellers derive their ‘recyclable gold’ from individual customers or collect scraps from moneylenders (or pawnbrokers) and gold loan companies. The latter is a non-banking financial institution that grants loans to customers who pledge their gold – another popular ‘safety net’ to raise cash. If the customer defaults, the pledged gold is auctioned to jewellers, scrap aggregators or refineries. The WGC observed that the share of gold exchanges for cash has remained broadly steady, despite the slowdown in 2012-14 and the COVID-19 pandemic. This exhibits the vibrance of the gold loan industry in the country which makes it plausible to lend with gold as a mortgage than selling it entirely to raise cash.
The industrial segment’s lower share results from the largely unorganised nature of the scrap market and limited capability to refine industrial scrap. Only a small proportion of industrial scrap actually reaches the refineries.
It is estimated that refining capacity increased more than six times by 1,500 tonnes between 2013 and 2021. However, the majority of refiners possess an annual capacity of less than 50 tonnes. The informal sector accounts for an additional 300-500 tonnes.
The role of custom duties and taxes
Traditionally, the industry has particularly benefitted from the favourable differential custom duty regime that the doré has had over bullion. In 2016, the duty on gold doré imports for refineries in the Excise Free Zone (EFZ) and Domestic Tariff Area (DTA) was 8.75 per cent and 9.35 per cent whilst the customs on bullion was 10 per cent- a differential advantage of 0.65 per cent and 1.25 per cent. It was these incentives that led to new refining capacities opening in the EFZs, mostly in Uttarakhand. The introduction of the GST subsumed all local levies (including excise duties), meaning that EFZs now faced the same tax burden as DTAs (at 9.35 per cent) though they continue enjoying the 0.65 per cent differential.
“Duty differential in EFZs had encouraged many companies to start refineries but once those advantages disappeared, many closed, leaving only genuine operations (refers to an actual refining setup and not an establishment disguising as a refining operation to avail tax benefits) in existence,” the WGC’s report on India states.
What are the broader challenges faced by the gold recycling industry as per the WGC?
Much of the problems in the recycling industry stem from its unorganised nature. Moreover, considering that gold has a sentimental and religious value, it is deemed to be an inter-generational asset. Further, there is a lack of awareness of the value of gold in electronic gadgets. These factors mean that much of the stock is unlikely to come back into the market.
Refiners have opened additional scrap collection centres over the years; however, they are few in number and mostly located in bigger towns and cities. As a result, the process of sending scrap to a refinery can be cumbersome and time-consuming. Instead, refiners opt to melt them at a local establishment or a small-scale unorganised refinery, which have faster turnaround times. This alternate mechanism is particularly beneficial to jewellers with small scrap volumes – freeing them from the obligation to accumulate meaningful volumes for sending to refineries.
Other than this, the prevalence of cash transactions among jewellers in the scrap market, particularly those in rural areas, does not bode well for accredited refiners. Refiners are expected to document clearly the sources of the scrap they buy, therefore, they opt to work with organised jewellers and bullion dealers instead of purchasing scrap from small jewellers in cash. The entire scenario, as per WGC, results in refiners’ inability to source meaningful quantities of scrap from jewellers.
As for the consumer, current GST regulations do not provide for them to recover the 3 per cent tax they would have paid when they had initially bought their jewellery. The suggested loss, which would differ according to the weight and quantity of the item, could disincentivise customers from moving away from the “safe haven” possibility ofselling the gold to raise cash.
