Singapore seizes on soaring Asia gold demand

At an industrial zone in Singapore a worker in heat-resistant clothing pours molten gold into rectangular moulds to create shiny new kilobars of the yellow metal.

It is the first time that gold has been refined in the Asian city state since 1998, when a sales tax clobbered the business, shutting down a refinery that had been operated by a German company since the 1970s.

Now Singapore is embarking on an ambitious plan to build itself up as an Asian hub for the refining and trading of gold, having abolished the tax in 2012. The refinery - operated by Metalor of Switzerland - opened last week a day after Singapore's exchange announced plans for a futures contract based on a kilobar - or 25 kg - of gold.

Both moves are part of a two-year effort by the government of the tiny island nation as two trends are emerging: a decisive shift in the pattern of consumption of the metal from west to east; and increasing demand for a gold benchmark in Asia as the so-called London fix comes under regulatory scrutiny.

The region accounted for 63 per cent of gold last year, up from 57 per cent in 2010, according to the World Gold Council (WGC).

But with China and India still the dominant markets in Asia, Singapore is so far limiting its ambitions to Southeast Asia, a region that encompasses Indonesia, Thailand, Vietnam, Malaysia, and the Philippines - all fast-growing gold markets in their own right.

Philip Klapwijk, managing director of Precious Metals Insight, an industry publication, says Hong Kong is unlikely to be dented by Singapore's plans given its entrenched status as the main entry point for gold destined for cities such as Shenzhen.

"I think it's going to be very difficult for Singapore to take much business from Hong Kong due to the sheer critical mass of China. But Southeast Asia is where it could make its mark," he says.

While global consumer demand for gold has increased by nearly 50 per cent over the last decade, demand in Southeast Asia has risen by over 250 per cent in that time, the WGC says.

Metalor estimates that with annual consumption of around 410 tonnes, and supply at 162 tonnes, the region faces an imbalance that justified investing in a refinery - in addition to two it already has in Hong Kong and Suzhou, in mainland China.

The Singapore facility will eventually have 30 per cent more capacity than the one in Hong Kong, says Gilles Robert, the company's Singapore country manager. "We haven't built this without asking what our customers think," he says.

The refinery will provide gold made from scrap sourced from Indonesia and Thailand, as well as gold dug from mines in Malaysia, Vietnam and the Philippines.

The price will be set via the kilobar futures contract on SGX, the Singapore exchange, with physical settlement daily. Four banks - JPMorgan, Standard Chartered, Standard Bank and Bank of Nova Scotia - have signed up as market makers.

There is no guarantee that the futures contract, expected to be launched in September, will succeed.

Yet it comes as there is increasing demand - driven by post-2008 crisis regulation - for financial instruments traded "over-the-counter" (OTC) to be done on more transparent platforms such as exchanges.

Albert Cheng, managing director, Far East, at the World Gold Council, says that recent gold price spikes in Asia substantially above the London benchmark have exposed the difficulty faced by buyers in Southeast Asia of obtaining kilobars of gold at short notice for immediate delivery.

"People have been prepared to pay a premium over and above the London price to get gold. That's why the concept of a wholesale market in Singapore was conceived, to try to group all this liquidity into a market mechanism where the user can buy it whenever they need it," he says.

Singapore's plan will also need to provide a convincing alternative to the bilateral relationships between buyers of gold in the region - such as large Thai jewellery dealers - and sellers, such as banks. This OTC market has long dominated how gold has traded in the region.

"They've got quite a few of the right players here but they need to get the buy-in from these markets and change the way it's historically done business," says Jeremy East, head of commodities for greater China and Northeast Asia at Standard Chartered. "Ultimately, it's going to come down to cost of business."

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