Inflation ‘Roughing Up’ the Diamond Industry

Inflation is increasing, and it will continue to do so. Like it or not, it is a reality that we all have to grapple with, individuals and organizations alike. The Indian diamond industry will have fewer rough diamonds to process in the coming days as the weakening rupee has drastically reduced the purchasing power of diamond companies. This includes the biggest companies. India imports an average of US$1 billion worth of rough diamonds every month. Industry said that purchasing power of diamantaires, including that of the diamond companies enjoying bank credit facilities have reduced by almost 15 per cent in the past fortnight. By looking at the current industry scenario and listening to forecasts by experts we can get a better understanding of the ‘roughing up’ of the diamond industry in India. Things are not as gloomy as they first appear and should be shining brightly again very soon. Floroscent spoke to some eminent diamantaires and they have given us some valuable insights into the current industry scenario.

Cause for Concern

Over one crore people, who are involved in Rs 250,000-crore domestic jewellery industry is expected to  hit hard by rising in import duties of raw material, volatility in prices raw material and finished goods and depreciation of the rupee against dollar. And it’s not just retail buyers; investors are also adopting a cautious approach.

Prices of polished diamonds continue to rise fed to a great degree by the increase in rough prices. However, demand remains moderate to high, due in large part to the prosperity in Asian markets. Asian markets, especially the two subcontinents China and India are slated to become even greater consumers of diamonds and diamond jewellery, apparently surpassing the United States, which up till now has been the world’s major market for diamonds and diamond jewellery. By 2025, India will be the fifth largest consumer market in the world.

Despite this euphoria, there is real cause for concern. Diamond producers are continually raising rough prices, and polished prices, although they are on the rise, are not keeping up. The margin between rough and polished is narrowing, gradually reaching a danger point, one where manufacturers are not able to make a profit.

Colin Shah, MD of Kama Schachter, said “The diamond industry is a little volatile at the moment. With rupee depreciating and surge in the prices of rough diamonds it has been a little tough for Indian companies to meet the demand and supply chain. However in the coming few months, we are hoping that the markets will be better.”

Lack of Supply of Rough Diamonds Escalates Prices by 10-12%

Surat Rough Diamond Sourcing India Limited (SRSDIL), a diamond consortium started by leading diamond companies in Surat, has run into rough weather on account of increasing rough diamond prices and eroding profit margins. Rough prices have increased by an average 12 percent so far in 2013, while polished prices have been out of step. While the weak rupee doesn’t affect diamond exporters, who buy their rough and sell their polished in dollars, cutters noted that it significantly impacts those who manufacture small goods as these are predominantly sold in Rupees to the domestic market.

Diamond production in the world’s biggest diamond cutting and polishing centre in Surat has declined significantly in the past three months with small and medium diamantaires reducing their manufacturing capacity by almost 50 per cent.

Ghanshyam Dholakia, Founder and MD of Hari Krishna Exports Pvt. Ltd., saidThe fluctuation in Rupee & Dollar rates is also a concern in as much as a depreciating rupee causes temporary liquidity problems. Though rough situation has been a concern, we are sanguine that for manufacturers there will be no problems. If the Rupee depreciates further, the local business will face serious difficulties. The small manufacturers will find it difficult to procure rough, manufacture and sell them further.”

Fall of the Rupee and Rising Prices Diamonds

The sharp decline in the rupee is not because of global forces or U.S. policy, but the result of economic mismanagement, and the inflationary impact of the fall is being felt everywhere. Currently came close to breaching the psychological barrier of Rs.60 to the dollar, and there is fear that even this may not be a real bottoming out for its value.

Prices of polished diamonds continue to rise fed to a great degree by the increase in rough prices. However, demand remains moderate to high, due in large part to the prosperity in Asian markets. By 2016, China is expected to surpass the United States to become the world largest economy, and by 2025, India will be the fifth largest consumer market in the world, replacing Germany. Both countries are developing huge appetites for luxury goods, diamonds included.

Despite this euphoria, there is real cause for concern. Diamond producers are continually raising rough prices, and polished prices, although they are on the rise, are not keeping up. The margin between rough and polished is narrowing, gradually reaching a danger point, one where manufacturers are not able to make a profit.

“The diamond industry is a little volatile at the moment. With rupee depreciating and surge in the prices of rough diamonds it has been a little tough for Indian companies to meet the demand and supply chain. However in the coming few months, we are hoping that the markets will be better. 2013 has seen been a good year so far. We are optimistic the rest of the year will be rewarding as well”, says Colin Shah.

The recent JCK Las Vegas show indicated that the US is recovering as there was good demand for diamonds. Though rough situation has been a concern, we are sanguine that for manufacturers there will be no problems. The fluctuation in Rupee and Dollar rates is also a concern in as much as a depreciating rupee causes temporary liquidity problems. The solution to exchange rate fluctuation affecting profitability is proper hedging.

Many manufacturers, especially those who are not sightholders, are saying that it does not make sense to buy rough at today’s prices. Some prefer to case their manufacturing operations for a while, selling off their polished stocks. Others say that if tenders become the main system of rough trade they will have to close their plant, since they won’t be able to attain a steady rough supply. These are important issues and they threaten the long term wellbeing of the diamond industry all over the world.

Overall, 2013 is expected to be better than 2012. If the rupee depreciates further, smaller local business will face serious difficulties. “The small manufacturers will find it difficult to procure rough, manufacture and sell them further”’ says Ghanshyam Dholakia, Founder and MD of Hari Krishna Exports Pvt. Ltd.

The Primary Reason for the Burgeoning Price of Rough Diamond

Mining disruptions in South Africa led to high to a huge scarcity of low-end rough diamonds in India, and this has resulted in a rise of 10 to 12 per cent in prices in the last two months. The segment hit the hardest is diamonds of size 10 to 50 cents, which saw robust consumer demand during the wedding season. After a staggering 57 per cent rise in the import of rough diamonds in December 2012, imports fell sharply in the three subsequent months. However, in April, imports rose 18.48 per cent, as Indian jewellers rushed to bridge the deficit created by the robust demand. Now, there is a shortage of rough diamonds. But looking at the lean season ahead, the shortage is unlikely to affect jewellers’ business.

According to Aniruddha Lidbide, a diamond analyst, ”Forget about the purchasing power, the diamantaires will not be able to buy rough diamonds in the coming days if the rupee does not recover against the dollar. As of now, the import of rough diamonds has completely stopped in the country.” Only the diamond mining companies like De Beer and Alrosa, which controls around 60 per cent of the rough diamond supplies in the world, could bail out the Indian diamantaires by reducing the prices and offering more discounted goods in the tender auctions to the non-sightholders.” Manish Shah of Cappuccino Collection said that polished diamonds margins are narrowing because of continually rising prices of rough diamond. There is more supply and less demand, which is one of the main reasons for narrowing margins.

Although the prices of rough diamonds are rising, polished diamonds prices will be stable as long as the demand supply chain is met. “We agree that margins are declining with the continuous rising prices of rough diamonds. The time lag between increase in rough prices and corresponding increase in polished prices has increased. Diamond being a luxury item, nothing much can be done about it”, says Ghanshyam Dholakia.

Liquidity Concerns, Price and Demand

De Beers rough prices have increased by mid- to high-single digit percentages since the beginning of 2013, says Varda Shine, De Beers executive president of global sight holder sales. She added that certain categories of rough have seen double digit percentage growth so far this year. “We’re seeing that retail sales are better, inventory levels at the cutting centers have gone down, U.S. economic indicators are improving, and we’ve seen the public listed retailers – Tiffany, Sterling, Zale, Blue Nile – have all done well in the first quarter. So this year is looking like a good year,” Shine said. Shine reported that De Beers price increase at the March sight was generally well received by the market, while the increase at the most recent May sight was considered a bit more than it really was. De Beers expects that consumer demand for diamonds in 2013 will out -pace the reported 3 percent growth experienced in 2012. Shine noted that while the pace of Chinese demand is expected to slow, it is still expected to post double digit increases this year. Shine added that other key markets, including India and the U.S., are showing steady growth. “Overall, diamond demand is still growing and it’s a matter of managing expectations,” she stressed.

Similarly, after declining 3 per cent in March, India’s gems and jewellery exports witnessed a robust growth of about 33 per cent to US$3.38 billion in April 2013. Spokesperson of GJEPC said “These exports saw a very healthy growth as demand is rising not only in American market, but also in emerging markets like China, Russia and Latin America.” But, he said, the European market is still sluggish. The major markets for the country’s gems and jewellery exports include the US, the UAE, Hong Kong and Europe. After lacklustre performance in exports in 2012-13, the Indian diamond industry is likely to achieve 20 per cent growth in 2013-14, riding on the increased demand for polished diamond and jewellery from the US, Japan, China and UAE.

According to the April 2013 export data, gem and jewellery exports had increased by 32 per cent at US$3.38 billion as compared to the same month last year. Export of cut and polished diamonds in April 2013 witnessed an impressive 37 per cent rise at US$1.83 billion as compared to US$1.33 billion during the same month the previous year.

Production of polished diamonds in Surat has increased with the country importing nearly 168 million carats of rough diamonds valued at US$2 billion in April 2013. In the current financial year, the total import of rough diamonds in the country is set to increase by around 25 per cent. GJEPC has proposed to the union government to set up a special notified zone with tax benefits to attract diamond mining companies from all over the world to set up offices and sell rough diamonds through tenders.

Narrowing Profit Margins

According to Colin Shah, There is more supply and less demand, which is one of the main reasons for narrowing margins. Although the prices of rough diamonds are rising, polished diamonds prices will be stable as long as the demand supply chain is met.

 “We agree that margins are declining with the continuous rising prices of rough diamonds. The time lag between increase in rough prices and corresponding increase in polished prices has increased. Diamond being a luxury item, nothing much can be done about it,” claims Ghanshyambhai.


Rough prices have been on an increasing spree & will constantly rise year on year. The Argyle mine may mitigate the prices of smaller goods up to certain extent, but overall the price situation will go north, asserts Ghanshyambhai

Strategies and Measures for a Turnaround

It is very easy to suddenly think of these knee-jerk measures. But if we are talking of having confidence in our economy, then we need to also demonstrate that confidence. Diamond companies are adopting various measures to combat the present dismal scenario. Identifying synthetic diamonds is the need of the hour. Using advanced technology and machines to identify lab grown diamonds is a challenge not all miners can overcome. Manish Shah is concentrating on marketing through specialization in a unique product.

We have undertaken appropriate hedging methods to cover currency exposures and have been doing this since many years, now. Regulation of credit sales, evolving appropriate systems & meticulously following them, and constant vigil on Inventory position are the needs of the day, says Ghanshyam Dholakia.

Conclusion

The situation is looking a little grim in the Indian diamond industry but as we can concur from facts, figures and expert opinions, not all is without hope. This seems to be more a temporary setback, bound to bounce off in the coming months. Mr. Manish Shah speculates that the situation can get better only when profitability increases and rough prices to stabilize in 2016. Colin Shah is of the view that August – September should see a better light for the industry. He expects rough prices to potentially increase by 4 – 5% every year.  Dholakia maintains a very positive outlook towards the situation by quoting that, “The depreciating rupee is a temporary phenomenon and India has the wherewithal to bounce back. I don’t think that the control on QE, FED has been talking about, will have a long term impact on India as our deficit is hardly 1% of QE and with prudent policies it would possible to overcome the impact. I have faith in RBI.” He also believes that rough prices have been on an increasing spree & will constantly rise year on year. The Argyle mine may mitigate the prices of smaller goods up to certain extent, but overall the price situation will go north. He also says that the retailer responds to consumer demands where consumer is the King, for manufacturers & wholesalers the retailer is the king. We have therefore, to find ways & means of keeping pace with the requirements of the jewelers. There cannot be a general solution as one size cannot fit all.

Let us hope that the current situation sorts itself out soon and it is business as usual! Glittering, Shining and Magnificent

 

 

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