Thursday, July 16, 2009

>Weak monsoon rains to choke India's rural gold demand

Mumbai - After high prices and a doubling of import duty choked India's gold imports in the first half of 2009, demand in the world's largest consumer is likely to be further hit by poor rural demand in the second half due to weak monsoons.

Rural consumers, who account for 60%-70% of total gold consumption in the country, rely heavily on June-to-September monsoon rains for the production of summer crops such as rice, oilseeds, cotton, and sugar cane.

Typically, rural gold sales fall whenever there is fear of insufficient rains because that can lead to a squeeze on farm incomes.

According to India's Meteorological Department, monsoon rains are expected to be 93% of the long term average this year. Erratic rains in the past few weeks have already fueled concerns of widespread crop losses and lower output.

Morgan Stanley said in a recent report that there is an increasing risk of India's agriculture growth slowing to 1.5%-2%, from a 3% growth forecast made before the monsoon season.

"As it is, gold imports have fallen this year. Adding to the current weak demand, lower farm realizations will definitely (keep) farmers away from the bullion market," said Harish Galipelli, head of research of Karvy Comtrade.

Upcoming Hindu festivals in the second half of the year, usually the peak time for gold sales, may fail to generate increased buying interest this year amid fears of a drop in rural incomes.

"The Impact of the weak monsoons will be felt strongly on rural demand, unless gold prices fall to INR13,500 levels as Indians are very price sensitive," said Praveen Singh, an analyst with Sharekhan Commodities.

If prices continue to hover around current levels of INR14,500/10 grams, it could be a bad year for gold demand, he said.

In the first half of 2009, India's gold imports plunged to just 61.8 tons, from 139 tons during the first half of last year, according to preliminary data from the Bombay Bullion Association.

"The rest of the year is unlikely to see any surge in demand, despite the peak festival season if prices hover at these levels," said Girish Choksi, a bullion merchant based in Ahmedabad.

"Average sales will continue to be around 30%-40% of last year's sales," he added.

He said weak sales will result in India's gold imports falling below 500 tons this year, compared with an average 700-800 tons in previous years.

Recycled Gold To Dominate Local Sales
"There is increasing amount of recycled gold coming into the market and that is quoting around INR100/10 grams lower than imported gold," said Pravin Mehta, president of the Madras Jewellers and Diamond Merchants Association.

He said with the doubling of import duty on gold bars, the difference in prices will widen, leading to higher preference for recycled gold.

"Right now we are getting 10% more recycled gold than demand in the market," Mehta said.

However, it may still be too early to estimate the extent of demand weakness, said Bhargava Vaidhya, director of Vaidhya & Associates and a leading industry expert.

In addition to agriculture production, overall economic growth in the next few months will be a key indicator of demand, he said.

"Monsoon's failure will affect demand, but it will be limited as the government has a lot of relief measures in place to take care of the rural economy," Vaidhya said.