Gold industry shifts east as Dubai plans huge refinery
Gold industry shifts east as Dubai plans huge refinery
Growth in demand for the precious metal is shifting east, to Asia’s fast-growing economies. But key industry activities such as refining and clearing — matching investors’ buy and sell orders — remain dominated by Europe and the US.
The $60 million refinery being built by Kaloti Precious Metals in Dubai is part of efforts to change that pattern, as is a plan by the Dubai Gold and Commodities Exchange to introduce a spot gold contract this June.
“Dubai is already a top global center for gold trading,” Tarek El-Mdaka, chief executive of Kaloti Precious Metals, said.
“The refinery is part of the next stage, making Dubai a top center for physical gold refining and clearing.”
If Dubai succeeds, it will be a new example of how the emirate can use its proximity to top consumers in India and China, low-tax environment and highly developed transport sector to muscle in on industries controlled by others.
Gold imports and exports handled by Dubai shot up to $75 billion in 2014 from $6 billion in 2003; nearly 40 percent of the world’s physical gold trade passed through Dubai last year, according to the Dubai Multi Commodities Center.
But the region’s refining clout has lagged. Annual capacity in the UAE is about 800 tons, including a 450-ton refinery currently operated by Kaloti; Switzerland dominates the industry with over 3,000 tons, accounting for roughly 50 percent or more of global refining.
Kaloti’s new refinery will have an annual capacity of 1,400 tons of gold and 600 tons of silver, making it more than three times the size of any of the UAE’s current refineries.
The project is a bet that gold demand in Asia will grow strongly in coming years. That cannot be guaranteed; last year India, seeking to cut its current account deficit, imposed a record 10 percent import duty on the metal.
Global gold demand shrank 15 percent to 3,756 tons last year, according to the World Gold Council, an industry body.
But Munir Al-Kaloti, president and founder of Kaloti, said he saw little risk of a long-term interruption to growth that has seen the firm’s precious metals output and physical trading grow at average annual rates of 25-35 percent since it was set up 25 years ago, to over $30 billion in 2012.
“This isn’t just about Dubai. It’s about a trend that is bigger,” Kaloti said at his offices on the 35th floor of a skyscraper, the new refinery’s site visible in the distance.
Kaloti, born in Jerusalem in 1943, arrived in Abu Dhabi almost penniless in 1967.
Kaloti started out in Dubai selling foodstuffs to the local armed forces and trading non-ferrous scrap metal.
His conglomerate now contains real estate development, carpet manufacturing and other businesses.
At present, London plays a dominant role in accrediting gold refineries globally; the London Bullion Market Association (LBMA) runs a Good Delivery List of certified refineries. This can be a source of frustration to refiners outside Europe, some of whom feel the system is skewed toward Western firms.
Kaloti has not managed to obtain a place on the LBMA’s List for its current refinery and says it is now waiting to request that status for its new refinery.
“London needs to be more flexible and recognize the trend,” said Kaloti, whose company also plans to open a gold refinery with an initial annual capacity of 50-75 tons in Surinam this August, to tap into business in that region.
Dubai’s drive to develop exchange-based trading may be as important to its growth as a gold center as expansion of its refining capacity. In April the Dubai Gold and Commodities Exchange, which currently trades gold futures, said it would introduce a spot gold contract this June.
The exchange is in the final stages of finalyzing specifications but the contract is expected to be for 1 kg (32 troy ounces) of 0.995 purity gold, the type favored by Indian consumers and investors.
Becoming a top center for exchange-based spot trading of gold would require Dubai to expand its infrastructure in new ways; for example, it might need to host substantial operations of bullion banks, which are investment banks that function as wholesale suppliers to the market.
Mdaka, a member of an advisory committee for the spot contract, acknowledged the challenges but said Dubai would tailor its 1 kg contract to appeal to the jewelry industry and small investors in a way that other centers did not.
Shanghai, Mumbai and Istanbul trade spot contracts but foreign participants can face restrictions there; London’s over-the-counter market involves counterparty risk and trading focuses on 12.5 kg bars, which are ideal for central banks and institutional investors but not for smaller buyers, Mdaka said.
Dubai will aim for delivery of physical gold within two days after a trade, significantly faster than delivery times seen in New York, he added.
Is the Dubai economy turning the corner?
- Expo 2020 expected to boost GDP
- Relaxation of residency rules helps real estate
LONDON: Is the Dubai economy finally turning the corner? At least one major international bank thinks so.
It follows a move by the emirate's leadership to reboot an economy that has been hit hard by corporate job losses, the introduction of VAT and a slowing real estate sector.
The UAE’s non-oil economy is likely to “turn a corner” next year with Dubai’s Expo 2020 infrastructure projects, changes to visa rules and increased government spending set to boost growth, according to a Bank of America Merrill Lynch (BofAML) research note.
Abu Dhabi National Oil Company’s (ADNOC) downstream expansion plans are also expected to drive the country’s non-oil GDP growth, said the note compiled by Middle East and North Africa (MENA) economist Jean Michel Saliba.
The Gulf country’s real GDP growth is estimated to rise to 3.5 percent in 2019 from a forecast 2.8 percent increase this year and a 1.9 percent increase in 2017, said the note published on Thursday.
Buoyed by a recovery in oil prices, Abu Dhabi approved a 50 billion dirham ($13.6 billion) three-year stimulus package in early June, which BofAML estimated could add 0.4 percentage points to non-oil GDP growth.
ADNOC’s $45 billion five-year downstream investment plan — revealed in May — is estimated to add a further 1.1 percentage point to the emirate’s non-oil growth, the report said.
The Expo 2020 event in Dubai could drive up GDP growth by 2 percentage points between 2020 and 2021, the report said, by boosting job creation, consumption and tourist numbers.
Given the improvement in oil prices, the cost of Abu Dhabi’s stimulus spending is considered “financeable” by BofAML, while Dubai’s spending plans are said to be “modest.”
Recent structural reforms, including plans to introduce long-term expatriate visas for up to 10 years, could help to boost the UAE’s population and consumer demand, the note said.
“The new UAE long-term and temporary visa system should facilitate retention of white-collar expatriates,” it said.
“As we expect longer-term visas not to be linked to continued employment, this may increase expatriate incentives to acquire property and support real estate demand.”
The UAE announced in May that it would allow 100 percent foreign ownership of UAE companies in specific industries by the end of the year, a move that could give a welcome boost to foreign direct investment in the country.
A new UAE-wide insurance scheme may provide a one-time boost to corporate profits, the note said.
The UAE cabinet approved plans in June for the insurance scheme to replace the previous system whereby employers had to provide a monetary guarantee to cover each of their workforce.
The move is likely to free up capital that companies could choose to sit on or to reinvest, BofAML said.
“Should corporates invest, we estimate this could lead to a one-off 0.1percentage point boost to UAE non-hydrocarbon real GDP growth,” the report said.