GOLD CRASH CAUSES COLLATERAL DAMAGE IN ZAVERI BAZAAR

Su-Raj Heading for Darkness as Gold Loses Shine Across World

Bullion banks invoke letters of credit worth . 4kcr on Mumbai jeweller's import

One of the biggest gold bets that has backfired involves a mid-sized jeweller, Winsome, with leading international bullion banks who dealt with it gunning for the company. It's understood that Standard Bank of South Africa, Standard Chartered London and Scotiabank have invoked letters of credit (LCs) worth more than . 4,000 crore after the company, formerly Su-Raj Diamonds, failed to cough up a smaller amount. 
Zaveri Bazaar, the country's jewellery hub, bullion traders in the city, and diamond houses in Mumbai and Ahmedabad — which got a whiff of the default — are trying to figure out how Mumbai-based Winsome Diamonds & Jewellery deals with offshore banks and a string of local lenders. 
Around a dozen banks in India had issued LCs favouring the three bullion banks that belong to the elite club of gold suppliers from whom Winsome imported the bullion. 
Letters of credit, a simple promise to pay, are issued by the banks of the buyers to comfort sellers that they will be paid as long as the terms of trade are fulfilled. 
The overseas banks pulled the trigger on Winsome following the devolvement of LCs worth about . 500 crore. Bullion Banks Play it Safe with Winsome 
"Of the . 4,000-odd crore worth of LCs, many are yet to reach the due date. Some were issued for a few group firms of Winsome. But the bullion banks are unwilling to take chances with the price of gold falling sharply," said a person familiar with the development. Banks have the right to invoke LCs before maturity if they fear the buyer may default. 
The buzz in the market is that the company, having contracted imports at a higher price, is backing out with gold falling unexpectedly. Sections think there could be more than what meets the eye and the drop in gold price has only compounded the problem. Since January 1, gold has fallen by almost 14% to $1435.31 an ounce through Monday. 
Ramesh Parikh, director (finance) at Winsome, denied market rumours. "We did not speculate on gold...our customers are taking time to pay," Parikh told ET minutes before his meeting on Tuesday with the consortium of local banks that issued the LCs. He hoped the banks would be "supportive" and the company would be in a position to meet all its commitments. Parikh refused to discuss the matter further as Winsome has moved the Bombay High Court to stay the invocation of LCs by Standard Bank. Scotiabank's India head Rajan Venkatesh did not respond to a text message while ET's email query to Standard Chartered Bank remained unanswered till the time of going to press. The local banks Winsome dealt with include Punjab National Bank, Canara Bank, Vijaya Bank, Central Bank, Bank of Maharashtra, Syndicate Bank, Bank of India, Axis Bank, State Bank of Hyderabad, State Bank of Mauritius, Union Bank, Oriental Bank of Commerce and Standard Chartered India. The extent of hit some of these banks take would depend on the margins they have collected from Winsome to part-cover their LCs, future recoveries and relationships with the client. Crisil has downgraded Su-Raj's rating to 'A4' and the company continues to remain on the rating agency's 'Watch Negative' list. This is not the first time Winsome (or Su-Raj) has hit the headlines for the wrong reasons. In 2012, the company, in its earlier avatar Su-Raj, came under the glare of US investigative agencies following allegations of undisclosed sale of synthetic diamonds. In the same year, the listed entity rechristened itself Winsome. Months later, chairman Jatin Mehta stepped down and Madan Khurjekar, a former Central Bank of India employee and an independent director in the company, took charge as non-executive director. Mehta, who holds shares in Winsome, is no longer on the board. He was unavailable for comment. 
The promoters of Winsome hold 25.21% while foreign portfolio investors have 58.6% shareholding. Of these, Passage to India Master Fund holds 9.55%, Sparrow Asia Diversified Opportunities has 9.4%, and Davos International Fund owns 8.02%, according to quarterly filings as on March 31 with the Bombay Stock Exchange. The share price of Winsome has remained relatively steady at . 23.5 over the past month through Tuesday.

Cotton: Stable in the coming year

However, the government decision on offloading stocks from state reserves will be key in driving domestic prices.

Asurplus situation for the third consecutive year in a row has led cotton markets across the globe to remain under pressure over the past oneand-a-half years. However, despite sufficient availability, prices have shown signs of recovery since the beginning of 2013 due to the robust demand from the largest consumer, China, and expectations that the US may witness a sharp fall in cotton acreage in 2013. In the domestic market, too, cotton prices have been on an upward trajectory for a couple of months due to dwindling supplies and expectations of higher exports amid sharp recovery in the global prices. 
    Cotton prices in the global markets are largely influenced by the demand-supply situation in three major producing and consuming countries — China, India and the US. According to the latest data released by the International Cotton Advisory Committee (ICAC), cotton production is likely to fall by 9.7% to 23.47 million tonne in 2013-14 starting 1 August this year. Global consumption will reach 23.71 million tonne in 2013-14, marginally higher than 23.41 million estimated for the 2012-13 season and, hence, stockpiles will fall next season to 16.44 million tonne from record high levels in 2012-13. 
    China is central to any discussion on cotton markets since it is the world's largest producer (27% share in global production), consumer (40%) and importer (38%). Another reason for China's commanding influence in the market has to do with government policies, which have seen it buy about 10 million tonne or 60% of the world's cotton stocks since 2011, when the country started building its reserves. The Chinese cotton policy functions through government reserves and import quota. However, the introduction of higher minimum guaranteed price in March 2011, which coincided with peak global cotton prices, resulted in a huge gap between the Chinese and global cotton prices. This led the Chinese spinning mills to become uncompetitive in the global markets, resulting in a sharp drop in consumption. Its production, 32 
    million bales (1 bale = 480 
    pounds) in 2009-10, rose 
    to 35 million bales in 2012-13. On the other hand, its consumption declined by 28% in the same period to 36 million bales. According 
    to China Cotton Association, the nation will continue its controversial cotton stockpiling policy this year, which will continue to boost the imports. 
    The US, which is the largest supplier of cotton to China and the global markets, may see a drop in acreage and output next year beginning August 2013. According to USDA's National Agricultural Statistics Service (NASS) report, the decline is because of the price slump and demand erosion, which has pushed the growers to shift to more remunerative crops. Based on a survey of 83,500 farmers, the USDA estimated upland cotton plantings would drop by 19% to 4.1 million hectare. With the expected drop in the US acreage, the world acreage and output may be adversely hit in 2013-14. 
    India commands importance in the global markets as it is the second largest producer, consumer and exporter of cotton. In fact, market participants across the globe are eyeing the cotton trade policy developments in India as it supplies a significant part of its produce to the global markets. It witnessed a sharp rise in yield after the introduction of genetically modified cotton seed, BT Cotton, in 2002-3, which altered the country's status from net importer to net exporter. In the past 10 years, domestic production has surged dramatically by around 153% and stood at 35.5 million bales (1 bale= 170 kg) or 6.03 million tonne in 2011-12, while the consumption has increased by 54% to 26 million bales or 4.4 million tonne, leaving a big scope for exports. 
    After exporting a record 12.95 million bales in 2011-12, the exportable surplus in India is estimated at 8 million bales by the Cotton Advisory Board. This is due to the 7% decline in production to 330 lakh bales in 2012-13. The current estimates for production, consumption and exports point to stable prices in the crop year 2012-13. However, exports are set to cross the surplus levels and the government decision will be key in driving domestic prices. If it considers offloading stocks from the state reserves, the prices may face downside pressure in the short term.

The writer is Associate Director, Commodities & Currencies, Angel Broking