San­jiv Arole: Solv­ing The Sil­ver Mys­tery

Solitaire - - CONTENTS -

Sil­ver im­ports peaked at 5,000 tonnes in 2008 and again at 5,800 tonnes in 2013 even as the de­mand stayed flat in the in­terim years from 2007 un­til now. Gold and sil­ver an­a­lyst SAN­JIV AROLE plays de­tec­tive to un­ravel the mul­ti­ple rea­sons be­hind the ar­rhyth­mic im­port graph of sil­ver.

T he genre of spy thrillers, sus­pense dra­mas and mur­der mys­ter­ies have en­chanted all and sundry. Be it an Agatha Christie novel or Sher­lock Holmes solv­ing a mur­der mys­tery, there are the usual sus­pects (the but­ler, the cook or the driver) be­fore the plot takes sev­eral twists and turns and the real cul­prit is fi­nally re­vealed. There is some­thing sim­i­lar about sil­ver in re­cent years. Back in 2008, sil­ver im­ports sud­denly jumped from around 2,500 tonnes in 2007 to around 5,000 tonnes in 2008. How­ever, what was in­ter­est­ing was that the sil­ver im­ports dur­ing 2009 were just around 1,200-1,300 tonnes. What were the rea­sons for these sharp swings in the sil­ver off­take? Like­wise, in 2013, sil­ver im­ports crossed 5,800 tonnes, sharply up from the pre­vi­ous year im­ports of 1,900 tones and in the cur­rent year the im­ports to date are around 2,000 tonnes.

Why has the dog barked twice? Of course, the usual sus­pects are the de­mand seg­ments like sil­ver­ware, sil­ver jew­ellery, in­dus­trial and in­vest­ment de­mand for the white metal. Merely ap­por­tion­ing the sup­ply num­bers to the var­i­ous de­mand seg­ments would be too sim­plis­tic. It would be naïve to be­lieve that de­mand for the white metal would swing so wildly in a set of three years, twice in a mat­ter of just 5-odd years. What is the mys­tery be­hind these de­mand swings? There is def­i­nitely some­thing (fishy) about sil­ver. Let us try to un­ravel the ‘Mys­te­ri­ous ways of sil­ver’.

If one were to com­pare the years 2008 and 2013 and the cir­cum­stances that led to the record high sil­ver im­ports, then and only then, could some light be thrown on what re­ally could have hap­pened dur­ing the two years.

The sil­ver mys­tery in 2008

In­dia’s ag­gre­gate sil­ver im­port for the cal­en­dar year 2008 was close to 5,000 tonnes. In the last five months of that year alone, In­dia had im­ported over 4,500 tonnes at least. It was in stark con­trast to the av­er­age im­ports of 2,000-3,000 tonnes per an­num in the pre­vi­ous 5 years prior to 2008. So what trig­gered this tremen­dous surge in sil­ver im­port dur­ing 2008? Was it a sud­den surge of pent-up de­mand or was there any­thing else to the sil­ver story?

There were sev­eral fac­tors that stood out af­ter Au­gust 2008 that in turn con­trib­uted to the ex­cep­tional level of im­ports. (a) In the first 7-8 months of the year till Au­gust de­mand was very poor due to the price rise and price volatil­ity. The sil­ver mar­ket was in a slump. In fact, till July of the year, In­dia im­ported only around 200-odd tonnes. In the 7-8 months prior to Au­gust 2008, the im­ported sil­ver price (landed cost) was at a huge pre­mium to the lo­cal mar­ket. At times this pre­mium was as high as R2,000 per kg and much above that as well. That re­sulted in very lit­tle im­ports. All this changed when the landed cost of sil­ver went at a dis­count to the do­mes­tic mar­ket in Au­gust. If one looked at the sil­ver price, it was over R26,000 per kg in July. It fell to below R20,000 lev­els in Au­gust and fell to even in the R16,000- 17,000 lev­els in the sub­se­quent months. This pos­si­bly trig­gered off pent-up de­mand for sil­ver and In­dia im­ported close to 4,800 tonnes in the re­main­der of the year. (b) The strik­ing fea­ture of the im­ports dur­ing the months of Septem­ber, Oc­to­ber and Novem­ber 2008 was that in each of these months, im­ports crossed 1,000 tonnes, un­heard even when In­dia reg­u­larly im­ported around 3,500-4,000 tonnes per an­num in the late 1990s and early 2000s. Novem­ber im­ports were well above 1,500 tonnes. The other strik­ing fac­tor was that al­most all the im­ports were shipped by air and not the reg­u­lar ship­ment by sea. The higher cost of air freight plus the pre­mium of 50 cents to a dol­lar also meant that sil­ver was de­liv­ered quite quickly to the im­port­ing cen­tres. More­over, the im­ported sil­ver was de­liv­ered to the par­ties al­most on the same day it landed in In­dia. It hardly re­mained in the vaults of banks (Sco­tia, etc), agen­cies (MMTC, etc) or the se­cu­rity agen­cies (Brinks, G4S, etc).

So, where did all the sil­ver go? Was it con­sumed in sil­ver­ware, sil­ver jew­ellery or hoarded by in­vestors? Was in­dus­trial de­mand for sil­ver high in spite of the slow­down in the man­u­fac­tur­ing sec­tor? The com­mon re­frain be­ing: Did the de­mand com­men­su­rate with the high im­port num­ber? (a) Al­most all mar­ket par­tic­i­pants then opined that the huge im­port of sil­ver was for de­liv­ery on the com­mod­ity ex­changes. As was ex­plained by in­dus­try sources, the landed cost was cheap­est fol­lowed by the ex­changes and sil­ver was costli­est in the open mar­ket. It also im­plied a fairly ro­bust de­mand for sil­ver af­ter a pro­longed and sharp de­cline for sil­ver­ware and jew­ellery dur­ing the rise in the sil­ver price in the last 5-odd years, prior to 2008. Most of the play­ers were short on sil­ver and when the price fell and there was im­port par­ity, both these fac­tors com­bined and con­trib­uted to the ex­cep­tional level of im­ports. (b) The pace at which the im­ported sil­ver went into the mar­ket sug­gested that there was real ur­gency to de­liver the sil­ver. There­fore, the high pre­mium and air freight, too, did not mat­ter. It meant that the sil­ver price was so low that the higher ad­di­tional costs were eas­ily ab­sorbed. If one looked at de­mand at the re­tail level it sim­ply was not in tune with the level of im­ports. All of which sug­gested that there was a des­per­ate need to de­liver the sil­ver to meet some com­mit­ment. This dra­matic fall in price could have pro­vided im­me­di­ate relief for those spec­u­la­tors who held po­si­tion around the high­est price and ex­pected the price to go higher. For them, sil­ver at such low lev­els was the op­por­tune time to de­liver it to the other party. The ex­changes also re­ported record de­liv­ery of sil­ver. How­ever, it too was not to the lev­els of im­ports seen. But, In­dia also has an un­of­fi­cial spec­u­la­tive trade in sil­ver (gold as well) that con­tin­ued all the years even when hedg­ing was banned. The main cen­tres be­ing In­dore and Jodh­pur. How­ever, one of the main fac­tors was that there was no de­liv­ery

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