India’s diamond trade is cautious about the year ahead, says Avi Krawitz in an article published by the www.diamonds.net portal. By default, so is everyone else, given the country’s dominant position in the market. It is therefore worth taking note that many in Mumbai and Surat are anticipating a challenging first six months in 2012 before the market may pick up in the second half — the reverse of what happened in 2011.
Their outlook is influenced by industry-related and economic concerns, both domestic and foreign, that will impact trading, if they haven’t already.
High inflation and a large fiscal deficit in the latter half of 2011 put the brakes on India’s fast-growing economy. Gross Domestic Product (GDP) is expected to grow by 7 percent in fiscal 2011-12, down from 8.5 percent growth last year. Significantly, these macroeconomic factors have put pressure on the rupee and the currency has depreciated by more than 15 percent since the beginning of August.
The weak rupee was foremost on local trader’s minds at the Signature IIJS show in Mumbai this past week [January 6-9]. While the show is aimed at catering to the exclusive business-to-business trade and is considered a niche local buyer’s show, many pointed to sluggish consumer confidence resulting from the weak rupee as reasons for its unremarkable outcome.
Faced with the rising cost of living, coupled with increases in gold and diamond prices over the past year, Indian consumers have less money to spend on the jewelry that they love so much. Increasingly price sensitive, they have reduced their volume of purchases and shifted to lighter weight jewelry.
For the local diamond manufacturing sector, the currency depreciation is less dramatic, especially for the larger exporters, who in fact, stand to gain from a stronger dollar as they mainly export their goods. It may mean, however, that small- to- medium-sized operations will find it more difficult to compete as they are being squeezed by the rupee exchange. Some rely on the domestic market and sell in rupee, while others do not have dollar accounts and are forced to convert to the local currency. For them, while rough prices have softened since August, in rupee terms, prices have increased.
Like it or not, the new availability of rough from Zimbabwe’s controversial Marange mine offered them a beacon of light. The Marange stones, which entered Surat with Kimberley Process certificates in late 2011, proved to be a profitable source. They became available at below market value and could be sold cheaper to local consumers, particularly in North India, which includes Delhi, where price is said to matter more than quality.
While most exporters who spoke with Rapaport News seem to be aware of keeping these goods separate from stones that are suitable and legal, for their U.S. and European clients, there appears to be a strong enough market for the Marange output in India and the Far East.
One consequence is that there is currently sufficient rough supply in Surat. No one complains about shortages. If anything, there is a sentiment that the new source of Zimbabwe goods will result in an oversupply of rough, which might lead to a softening of the market, given that global polished demand remains relatively sluggish.
For now it seems that some equilibrium has been reached with Diamond Trading Company (DTC) goods selling at around box price on the secondary market, and in some cases at slight discounts, while ALROSA goods, which are considered the most expensive at the moment, are selling at deeper discounts. More will be revealed over the next two weeks at the respective ALROSA and DTC sights, as well as at various tenders and the upcoming launch of tenders by Surat Rough Diamond Sourcing (India) Limited.
Most are hoping the mining companies will show restraint in their supply levels. An excess may renew India’s liquidity concerns, which have been in check since the October Diwali season. In addition, while manufacturing levels remain below capacity, they are steady and few feel a need to raise the manufacturing bar.
Similarly, while many still regret the workers that left the industry and didn’t return in 2008, there is currently no need for a major recruitment drive in Surat. That is not to ignore the fact that the local industry needs to address that it is becoming increasingly difficult to recruit young workers to Surat diamond factories. Many opt for higher paying corporate structures or better opportunities and benefits in the local textile sector. This may well be detrimental to Surat’s diamond trade in the long term. For now, the city’s relatively smaller workforce, estimated to be around 600,000, appears to be contributing to keeping factory inventories in check and avoiding an over-supply of polished.
The result is that India’s rough and polished inventories seem to be at relatively healthy levels. Similar to their wholesale and retail clients, diamond manufacturers are carefully monitoring their inventories, avoiding any excesses and reluctant to gamble on near-term market movements. They are encouraged by reports of a better-than-expected U.S. holiday season and hopeful that the Chinese New Year will bear similar good news. But they are also mindful that economic and financial trends could still affect those markets in 2012, as they have India.
The dichotomy is telling and indicative of the post-2008 environment. Even as Indian diamond traders are optimistic by nature, they appear to be treading carefully at the moment, unsure of what 2012 will bring. Others should probably take note. India has the numbers and buying power to exert a great deal of influence on the market and ultimately, sentiment in Surat and Mumbai spreads to other centers. By their standards, trading is low, while the market is stable. But for now, the Indian mood is one of caution.
