Singapore’s rapidly growing precious metals trading industry offers tremendous opportunity for industry players, writes Richard Hartung.
The precious metals industry is being driven by investment and consumer trade flows, with Asia accounting for more than 60% of global gold demand today and the requirements in Asia for other precious metals, such as platinum and palladium for manufacturing, also increasing rapidly. Swiss Customs figures from January 2014 alone show that more than 80% of the demand for gold and silver bullion from Switzerland came from Asia.
It is no wonder, then, that Singapore has taken big strides in recent years to position itself as a global trading hub for precious metals. While Singapore has long been a trading centre for commodities ranging from rubber to oil, precious metals previously played a much smaller part until recent developments.
MAKING SINGAPORE MORE ATTRACTIVE
Rewind just a few decades and the situation was quite different. In 1983, according to Singapore’s Business Times, German multinational Degussa set up a gold refining operation to help companies recover gold from electronic scrap and cast its own kilobars for sale to local banks. With the introduction of a new Goods & Services Tax (GST) in 1994 and less interest in gold as an investment asset class, the Singapore gold market slowly declined and the refinery closed in 1998.
The situation began to change in 2012, when the government enacted changes that exempted investment precious metals (IPM) from the 7% GST. Recognising that IPMs are essentially the same as other actively-traded financial instruments that do not incur GST, the government decided to treat IPMs the same way. There are also no licensing requirements for the import or export of these metals, ensuring the free flow of IPMs through Singapore. What’s more, approved refiners or consolidators do not have to pay GST on imports that are used for processing of IPMs.
The reason for the shift, as International Enterprise Singapore (IE Singapore) said at the time, was “to capitalise on growing demand for precious metals as global economic uncertainties spur interest in an alternative asset class and the desire to keep those assets close to home”. For Singapore, trade has traditionally been an important economic sector, and trade promotion agency IE Singapore had been looking at new clusters of growth. IPM was a possibility given the country’s proximity to both demand and supply in Asia.
As such, that one change in taxes unleashed a wave of investment in the precious metals industry in Singapore.
Banks such as Credit Suisse, DBS, Deutsche Bank, ANZ and UBS began to set up dedicated gold vaults in Singapore, with the UBS vault being the bank’s first ever outside of Switzerland. Part of the reason the bank vaults are so important, as ANZ co-head of fixed income, currencies and commodities Eddie Listorti told The Australian when ANZ opened its first gold vault in Singapore, is that “Asians like to walk in and actually see the gold they own, to actually say ‘no, you can’t touch it – it’s mine’”.
To support industrial gold users as well as other companies, secure logistics providers such as Malca Amit and Brink’s set up vaults in the Singapore Freeport. These companies provide customised logistical solutions for shipping and storage of precious metals for banks, bullion dealers and other companies. Brink’s, for example, says it can take gold and silver shipments from Singapore, Malaysia, Brunei and Indonesia to more than 110 countries worldwide, along with offering an inventory service that includes weighing, document preparation, storage, acceptance, release of shipments and daily reporting on stock positions.
Industry professionals and other investors have also stepped in to set up companies that support the industry.
As an example, a group of precious metals industry veterans set up BullionStar in 2012, to combine a “local physical presence in the world’s best jurisdiction for bullion storage” with the firm’s proprietary trading and storage platform. The move was specifically “in the light of the GST exemption for investment precious metals coming into effect in Singapore”, the company said. This year, the company opened new premises with a bullion shop, showroom and vault for customers to view, buy, sell, deposit, withdraw, store and audit bullion.
To facilitate trading in precious metals, a group of experienced industry professionals came together in early 2014 and launched the Singapore Precious Metals Exchange (SGPMX). “In recent years we have seen players open storage vaults, start delivery services for precious metals from mints and open new trading desks for gold,” CEO and founder Victor Foo said at the launch. “What makes us unique is that the exchange brings together all elements under one platform.” SGPMX is described as a retail operation that sells gold or silver to those who want to buy it, a storage facility that holds gold or silver in vaults in partnership with Certis Cisco, and an exchange that enables individuals as well as institutions and national mints to sell gold and silver.
Additionally, three mining industry professionals set up the Singapore Mining Club in 2014 to encourage cohesiveness in Singapore’s growing mining industry and promote the development of Singapore as a regional hub for the management and financing of mining enterprises.
Local brokerages also support trading, with Phillip Futures, for example, offering online trading in gold, silver, platinum and palladium futures contracts around the clock.
A NEW GOLD CONTRACT
In June this year, Singapore made another leap forward when Lim Hng Kiang, minister for trade & industry, announced a new exchange-traded Singapore Kilobar Gold Contract. The contract will enable centralised trading and clearing of a physically-delivered gold contract in Singapore and allow global suppliers of gold to connect more effectively with their Asian clients. The contract comprises a series of six daily contracts, which will give physical users access to competitively-priced kilobars. Lim said that the World Gold Council (WGC), the Singapore Bullion Market Association (SBMA), the Singapore Exchange (SGX) and four leading bullion banks – JP Morgan, Scotiabank, Standard Bank and Standard Chartered – will join forces to create the contract, which will be listed on the SGX. The new contract, the first wholesale 25-kilobar gold contract globally, is expected to go live as early as September.
Lim said at the launch that Singapore has been actively exploring new and high value-added clusters to grow the trading sector, with gold as a clear choice. “Our vision is that Asia can be a driving force to continue the growth of the bullion industry, and be a global leader in areas fundamental to the demand and trade in this region.” Along with facilitating storage by bringing in the Singapore Freeport, he said Singapore has also been working with key industry partners such as the WGC to deepen market development. Singapore has also engaged the SBMA closely, as it represents the bullion trading community in Singapore and serves precious metal companies coming to Singapore.”
Moreover, the contract builds upon growing disenchantment in Asia with pricing set in the west, and a preference for pricing references that better reflect the growth in the region. Lim said at the LBMA Market Forum Conference in Singapore in June that the contract would create a transparent form of pricing.
THE METALOR STORY
While not having a refinery had been a gap in the Singapore market for nearly two decades, that issue was resolved in June when Metalor opened a new refinery in the country. “The refinery forms a key part of the precious metals ecosystem in Singapore, complementing the community of bullion banks, trading houses and secure logistics providers here,” says Gina Lim, the trade services and policy group director at IE Singapore.
Metalor, founded in Switzerland in 1852, runs electro-technical, refining and precious metal plating businesses that provide materials for everything from jewellery and electronics to power distribution and switches in homes. It has been running an advanced coatings business in Singapore for more than 30 years.
The company built its refinery over the past two years and, says Metalor Singapore country manager Robert Gilles, the launch of the refinery in June “turned the trade office into a real operation”.
The process for refining, Gilles explains, is to receive scrap, homogenise it through melting, do an evaluation, settle with the customer and then refine it through an electrochemical process, or a purely chemical processes for lower grades. “What comes out is 99.99% gold grains, which we sell to jewellers to make jewellery, or use for banking or bullion customers to make bars.” Metalor is producing one-kilogram bars, which is the standard of exchange in Asia, and 400-ounce bars. It will also produce 100-gram bars soon. The refinery has a capacity of 50 to 150 tonnes per year, Gilles says, though it currently produces just 25% of its potential.
Along with gold, Gilles says “we are going to add silver refining by the end of the year”. The refinery also plays a role in other metals such as platinum and palladium by evaluating them before sending them to Switzerland for refining.
The reasons for setting up the refinery in Singapore, Gilles says, are multifaceted. For one, Southeast Asia has a large gold market, producing 160 tonnes and consuming 400 tonnes. “All this gold was going out of the region and then coming back in bullion. That was not efficient. Singapore is the most efficient place to serve the Southeast Asia region.”
Additionally, he says a refinery needs to be in a highly stable location with a strong credit rating so it can obtain the high amounts of working capital it needs at lower costs. As such, Singapore’s stability and high credit rating are quite attractive.
A significant part of building the infrastructure has been ensuring that the company uses best practices for air treatment, wastewater treatment and other environmental requirements.
Sourcing well is also essential, Gilles says. Metalor was one of the first to introduce KYC practices, about 10 years ago, and it uses the same processes in Singapore as in Switzerland. “It is expected and it is also a part of the added value. The people who refine with us – banks, consolidators, mines – work with us because we are a reputable company.” Metalor Singapore also takes part in initiatives for fair trade to make sure gold is mined, sold, exported and refined properly. “Ensuring our customers are reputable is a very important part of our business,” Gilles says.
Metalor is an approved refiner with the Inland Revenue Authority of Singapore (IRAS), and it received accreditation by the LBMA in July.
“We are part of the ecosystem in Singapore for gold trading and we are excited about the development,” Gilles says. With demand growing rapidly and developments such as the new Singapore Kilobar Gold Contract potentially driving growth even faster, it’s easy to see why Gilles is so excited.
The broader context for the growth of trading in Singapore is an increasing demand for precious metals all across Asia. The demand is driven by a multitude of factors, including increased consumption by China and India, growing private investment demand across the region, and a need by technology companies to use platinum or other precious metals to produce display screens and other components for mobile phones and tablets.
That demand has attracted companies like Japanese non-ferrous smelting firm Dowa Holdings, which set up a recycling plant in 2012. Industrial waste from factories across the region is loaded into containers and then repeatedly soaked in a chemical bath so that the gold coatings on the components eventually leach off, enabling Dowa to collect the gold.
Singapore clearly sees economic as well as job opportunities in growing the industry. Senior Minister of State for Trade and Industry Lee Yi Shyan says Singapore expects the growth of the gold sector to add US$500mn to the economy, as well as 1,000 professional, managerial, executive and technical jobs by 2020.