High rough prices and flat polished prices has been the bane of the Indian diamond industry of late, eating into the already wafer-thin profit margins. Needless to say, if the current trend continues, a shake-up in the Indian cutting and polishing sector is imminent and some small and medium sized units in the Indian cutting centres may have to close shop. In the event of such a thing happening, will the sector become stronger and more efficient? Considering the market which is currently being plagued by cases of payment defaults, it just might. But one has to just wait and see what the future brings. But market analysts seem more optimistic and see the sector as resilient enough to overcome this difficult time, as the diamond industry on the whole has weathered many a storm in the past and has come out stronger in the bargain.
A recent report, by Antwerp World Diamond Centre (AWDC) and the Bain and Company, which predicted major price increase for rough diamonds for the next five years till 2018 may have many Indian diamantaires concerned about their business. According to the Report, the rate of rough diamond production globally will rise by 4.8 per cent every year between now and 2018. In 2018, production will peak at 169 million carats per annum worth approximately $19.6 billion. But, from then on, global production will fall by 1.9 per cent per year. And five years down the line it will level off at 153 million carats, worth about $18.4 billion.
Should one go into a panic mode now...or is there hope still? A recent Kimberley Process Year 2012 annual report showed that global rough diamond production by volume has increased by 10 per cent year-over-year. Industry members see this as a silver lining which will bring down rough diamond prices over a period of time. Other diamond producing countries like Botswana, Russia and Canada remained at a top three positions in the global diamond industry in terms of rough diamond production. According to the KP annual report, around 127.962 million carats of rough stones were produced worldwide in 2012, and they were sold for $ 12.64 billion, for an average price of $98.81 per carat. So, there is light at the end of the tunnel...
Retracing back, there has been nearly 10-15 per cent hike in rough diamond prices by diamond mining companies in the world since January 2013. The reason why the small and medium diamond companies are badly hit every time rough prices are hiked is because when the rough diamond reaches the secondary market, they have to buy the stones paying premium of 4-5 per cent. The larger companies are able to survive on their strong fundamentals as well as their financial strength. But even they felt there is no profitability on polished diamonds due to weak rupee against the dollar. In addition, the increased rough diamond prices and the 5-6 per cent decrease in the certified polished diamond prices since January 2013 hit all and sundry. So much so, that at one point most of the small and medium diamantaires stopped buying rough diamonds as they could not afford the high prices. Industry watchers even foresee a time when the smaller companies and the thousands of small cutting units will slowly disappear from the scene. In a given situation, as per Gems and Jewellery Export Promotion Council's (GJEPC) figures, India imports $11 billion worth of rough diamonds. Out of this, around 85 per cent of the rough diamonds is shipped to Surat for cutting and polishing; and the rest are sent to other centres like Ahmedabad, Bhavnagar, Rajkot and Navsari, also in Gujarat.
In a classic case of desperation and affected by the diamond prices and weak rupee, a diamond trader in Surat’s Varachha diamond market disappeared in the first week of September, defaulting on payments of Rs 25 crore to over 100 small and medium diamond manufacturers in the city. No, he did not run off with the booty, but instead had recently delivered a parcel through an angadia firm containing 12,500 carat of polished diamonds at the Surat Diamond Association’s (SDA) office. According to SDA, in the history of its existence, this was the first such case. He wrote that the polished diamonds were kept as surety and that the SDA is free to sell the diamonds and pay back the creditors, if he fails to make cash arrangement in 10 days. One last heard that SDA was looking for a buyer for the 12,500 carat of polished diamonds valued at over Rs 15 crore, belonging to the diamond trader. Was he a victim of the market forces? Liquidity has hit the industry where it hurts most. With almost no trading of polished diamonds going on in the market due to the weak rupee, manufacturers felt the pinch of cash crunch when they faced with no hard cash to pay wages and bonus to their workers.
The rupee side is one side of the problem, while high rough prices are the other. The rough diamond suppliers did try to do their bit and in a bid to ease the situation came forward with an offer. In the August 2013 Sight, the Diamond Trading Company (DTC) the rough diamond distribution arm of De Beers group, reduced the prices of roughs between 1.5 and 2 per cent in different categories of rough diamond boxes for its sightholders. But this could not match the Weak Rupee, which was at its record low of Rs.67 against the dollar. So, the reduction in price, albeit small, did very little to bring cheer to the Indian Sightholders who voiced their thoughts candidly that the small price reduction by De Beers was in no way helpful to them. It is said that diamond traders in Surat, who were buying rough diamonds at Rs 54 per dollar in May 2013 had to pay Rs 67 for the same goods in August. So, according to Indian diamantaires, the two per cent reduction by De Beers was not a great help to the industry after all. It should be understood that De Beers helped by reducing rough diamond prices to whatever extend it could, but if the Indian Rupee.
Another reason for the Sightholders being unimpressed by the price reduction was that the prices of rough diamonds had increased by 10-15 per cent since January 2013. In addition, the drastic slide in the rupee has resulted in huge loss of profit by the diamantaires, as the polished diamonds have crashed by almost 6 per cent. So, how would a mere two per cent reduction in rough diamond prices in any way going to help the Indian diamantaires? At that time, that is last week of August 2013, the rupee had weakened by almost 19 per cent since June end and profitability was at a dismal low for the average diamantaires.
Many industry analysts suggest a self-disciplinary approach to the current situation in the industry. A major cut or even total stoppage to buy rough diamonds would in a way ease the inventory as well as the liquidity situation. Makes sense as why should they buy rough at high prices when they do not have any profits to earn? Analyst feel that either the mining companies seriously think of reducing the prices or the diamantaires stop importing rough totally for a certain period.
Looking back, one could see that polished diamond prices had remained relatively stable in the first half of 2013. But during may-June period, prices started falling. When the demand from the Asian region dropped sharply in July, there was further decline, pushing the diamond prices further down. But it all began in June 2013 and diamond stockists in Surat began to worry when they realised that prices of polished goods were declining, falling in the range of 3 to 5 percent. The traders who have imported rough at high prices were now forced to sell the polished stones at a lesser price. This fall in polished diamond prices meant a big loss for diamond traders. On an average, diamond prices at this time had fallen by over 2.5 per cent.
It was in June that Surat, which houses around 40,000 small and large diamond units, saw for the first time, that prices of polished stones had fallen. The smaller diamond units especially could not absorb the loss. The diamond units found that rough prices have remained high, but polished diamond prices had fallen. At this time, indications were that in June prices for certified one carat diamond fell to the tune of 9.6 per cent from July last year. Not surprisingly, polished diamond demand remained weak during May-June and July. The drop in diamond prices was attributed by market analysts to reduced demand from key markets such as China, Hong Kong and other Far-East nations.
Polished diamond prices could have brought cheer to the diamantaires with high dollar against the Rupee, but it is not meant to be due to the fall in prices. The Indian industry now looks towards the coming holiday season for a change in tide with a fall in rough prices. Also, demand has been slow from the consuming markets but they look forward for a better quarter, as they see positive indications from the US and European regions. The disappointment comes from weak market situation in China and Japan, which has adversely affected diamond demand. China especially was looked at as a potential market for good demand as the Chinese market is slowly moving towards smaller and cheaper goods, which augurs well for the Indian industry.
The Indian local market too was affected by the rupee slipping to a record low at 58.50 per dollar. Sometime in June 2013, diamonds became a bit costlier for the consumers in India as polished diamonds are traded in dollar value. And if the diamonds are studded in gold, then the cost was even higher due to eight per cent import duty on gold. A 3 carat polished diamond valued at $400 per carat was available for less than Rs 65,000 till May, when the rupee was at Rs 55 against dollar. In June, the same piece was sold priced at Rs 71,000 in the jewellery stores. Most jewellery manufacturers felt that this was not a good sign for the diamond jewellery industry, which is growing at 25 per cent annually as consumers will not be able to absorb such a huge price difference.
It’s evident that the Indian diamond industry is going through a difficult phase right now, but the resilient industry has survived many hurdles in the past. Call it cyclical but challenges never cease to crop up every few years. But, India is a robust growing market and is the world's third largest market for diamond jewellery. According to Bain & Company report, India’s annual diamond jewellery sale is of $8.5 billion or about 12 per cent of the global demand, which is even more than Japan, the European Union and the Gulf. Interestingly, in a gold loving country like India, the diamond's share in Indian jewellery market has grown from 24 per cent in 2005 to 27 per cent in 2011. Studies show that diamond is India's second fastest growing purchase item only after mobile phones but way ahead of packaged holidays, clothing or even motor vehicles.
To address the problems faced by the diamond industry, GJEPC had recently formed a Trade Advisory Committee with prominent diamond manufacturers and exporters, to equip and allow for better understanding of the prevailing conditions in the sector. And also to develop appropriate response to the challenges faced in cutting and polishing of rough diamonds sector, which been recently affecting the profitability and overall growth and business prospects of the industry. But if you are looking for answers as to how soon the Indian diamond industry will make a turnaround... well, only time can tell.
Aruna Gaitonde, Rough&Polished, Mumbai
