Indian Diamond Industry Stands Above The Others

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The global economic crisis seems to have acted as something of a refining fire for the Indian diamond industry, which today sees itself further ahead of the competition than it has ever been. Vinod Kuriyan reports.

Global economic crisis helped push it further into the lead

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A remarkable thing happened over the past year. First, the global financial crisis seared the diamond industry worldwide and the Indian industry had to cope with bewilderingly painful combination of plummeting consumption in their major export markets, primarily the United States, and a consequent staggering number of job losses. Then, to compound matters, the price of diamonds plummeted and the industry was left holding huge amounts of inventory that it simply couldn’t sell. That’s when the Indians took a step that brought about a remarkable turnaround. In January of 2009, they sold their inventory for what prices they could get and booked their losses.

While this put them all in the red, it freed up the industry to start buying rough again at the new, lower prices, and sell the polished that came out of it at the correspondingly low prices that prevailed then. It helped the industry move forward again and most significantly, it helped the industry grow, because it was now able to buy and process the rough that other centres, primarily Israel, were not buying because they were still trying to unload old inventories at 2008’s high prices.

Looking around today, it appears that there isn’t really any question of which centre is the most dominant in the global diamond processing industry. India has grabbed the lion’s share of the market and there seems to be no stopping the Indian behemoth. But this isn’t simply because of what happened last year. “This dominance you see today is not simply a result of the economic crisis and the fact that the Indians were willing to book their losses and move on,” says Russell Mehta, chief

operating officer of diamond processing giant Rosy Blue. “The crisis may have accelerated it, but the process has been steadily taking place for the last decade or more. One of the key factors in this success has been the Indian industry’s huge risk-bearing ability. Nobody else has taken on the kind of business risk the Indians have. We’ve believed in the industry and we’ve put our money down with our belief.”

“Indians are ready to take up challenges – both positive and negative,” says Anil Shah partner in Venus Jewel, “It’s part of our ethos. A villager who lives just 100km from Chennai might never have seen the city, but will have a son who now works in Intel. Another in south Gujarat, might never have visited Mumbai, but might now have a son in NASA. Indians take up challenges both as individuals and as organisations.”

The global economic crisis, according to him, played its part in helping India pull ahead. “Not just the Indian diamond industry, but Indian industry as a whole – garments, pharmaceuticals, software – came out much better because of some fundamental differences in the way we do business. We don’t speculate as much as others. We’ve never really had a debt culture. If you look at most Indian enterprises, the debt-equity ratio is usually in favour of equity. That’s how we’ve always done business in this country and that’s our greatest heritage. This helped us stay steady in the storm because our roots were strong. We have never seen such an economic crisis as we saw last year, but most Indians didn’t close shop. They sought solutions instead,” Shah said.

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Anil Shah

Russell Mehta

One industry source noted, “Those who actually continued manufacturing between March and September 2009, made good margins. Rough prices fell up to 65 per cent (starting with the BHP tender in October 2008), but polished prices didn’t fall more than 25 per cent at most. Only relatively few people had the courage to continue manufacturing, however. Today, while many more are now manufacturing diamonds, rough prices today are double 2009 levels in some categories.”

This ongoing process of moving forward, catalysed by the events of the economic crisis, had resulted in the Indian diamond industry standing clearly above most of the competition. A leading Indian diamantaire, who asked not to be identified, told Solitaire, “The single easiest way to check on how

the Indian industry is doing today is to look at all the online diamond trading systems – Idex Online, Rapnet etc. – to get an idea of who is generating the maximum business. You’ll find the vast majority of these people are Indians. They’re the only ones with competitive prices and the goods in any quantity.”

He added, “Another indicator is the huge increase in certified stones coming out of the Indian industry. A check with all the major laboratories like the Gemological Institute of America (GIA) will show that in the space of two years, there has been a 100 per cent growth in the stones being submitted for certification. Many of the allegations of unfair grading of stones by the GIA – all conclusively disproven now – have grown out of the success of the Indian industry in this sector and

The single easiest way to check on how the Indian industry is doing today is to look at all the online diamond trading systems – Idex Online, Rapnet etc. – to get an idea of who is generating the maximum business

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the inability of the other processing centres to compete, resulting in a loss of market share.”

Industry experts put India’s leadership position today down to a combination of several factors – a competitive cost structure, global marketing ability and cutting skills. “Despite the adoption of technology,” said one diamantaire, “cutting skills are very important. It is a necessary ingredient for a winning formula. If you take simple sawables, you can process them anywhere in the world – China’s gains in manufacturing have been here. It doesn’t require much human skill. A Sarin machine determines the best ways to cut it and automated machinery, with minimum human input takes care of the cutting and polishing. In the small and low quality goods segment, where stones have to be cleaved or sawn several times – or a combination of both – straightforward automation and low-level human cutting skills can’t handle it.

“Even big stones that require business decisions in how they should

be cut, need the kind of high-level industry skills that India has. A one-carat piece of rough could quite easily be placed in a Sarin machine for process planning. But when the machine gives you several cutting options, it takes marketing and distribution savvy to decide whether the stone should be made a 1-carat round or a 1.3-carat princess, for example,” he notes.

Assessing the global diamond pipeline, the diamantaire observes, “If you look at total rough production, in value terms, roughly between 30- and 40 per cent is constituted of small and low end goods that require considerable cutting skills; between 30- and 40 per cent again is made up of larger or better stones that require business decisions in their cutting; and just between 20- and 25 per cent is made up of simple sawables that don’t require complex industry input but only good, repetitive manufacturing skills. The segment with the larger and better stones that need business decisions is the band with the highest value, outstripping the simple sawables. The smalls segment, while

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Industry experts put India’s leadership position today down to a combination of several factors – a competitive cost structure, global marketing ability and cutting skills

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constituting the lowest value, makes up by far the largest band in terms of volume, which ensures that these goods reach the most consumers all over the world.”

All this, according to industry watchers, means that the Indian industry beats in skill, the African centres that are seeking to develop cutting industries of their own through the beneficiation process; beats China in marketing savvy and business decision making in the cutting process and finally, beats Antwerp and Israel in having a competitive cost structure. So it’s worth noting that despite much of the hoopla about their advance in the industry, unless it makes huge advances in cutting and global marketing skills, China’s share of the diamond processing industry will be limited to the 20- to 25 per cent of simple sawables. India on the other hand, has dominance in the highest-value band as well as the band with the maximum consumer reach.

Over 20 years, the Indian industry’s ability to source rough has really increased tremendously, but this follows India’s success and is not a deciding factor in the success itself industry players say. “Today, rough suppliers come to India seeing our success,” notes one diamantaire.

The Indian domestic consuming market is certainly an advantage, but again, not a deciding factor, according to analysts. The Indian market is nowhere near taking up the slack left by the fall in consumption in the US. It has been the success of the Indian industry in diversifying its exports to a variety of other markets – most of which are still developing as consuming centres and require building up with supplier support – that has ensured that the Indian industry continues to succeed.

Note: Data shows higher rough imports by India and higher rough exports by Israel,

revealing that most of the cutting and polishing takes place in India.

2007

2008

2009

570.83

3,865.20

789.34

3,875.4

686.18

2,170

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

Gross Rough Exports (US$million)

IndiaIsrael

2007

2008

2009

9,585.66

5,376.81

9,750.57

4,799.16

7,020.05

2,650.19

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

9,000.00

10,000.00

Gross Rough Imports (US$million)

India

Israel

Gross rough exports (US$million)

Gross rough imports (US$million)

“India as a centre will continue to do well. I don’t see any medium term threats from competition,” says the diamantaire who declines to be named. “Global economic conditions and consumption patterns will determine more of the future than what the competition will do. The industry as a whole will also have its future determined by the consuming markets and by how much rough comes into the system.”

Keeping pace with changeSays Rosy Blue’s Mehta: “Mumbai is now a trading

market with more width and depth than any other centre. We have established export markets and now India itself is a huge and growing consuming market as well. Nobody else has the bandwidth to handle it all. Even in terms of diamond finance, the handful of banks that were dominant in the industry some years ago are now vastly reduced in scale, some on the verge of exiting it altogether. In India though, there are literally dozens of banks now involved in diamond finance. The economic crisis separated the men from the boys, so to speak and the bankers too now know whom they can reliably do business with. So even the financial engine for growth is now largely in India. In terms of the industry, therefore, there’s pretty little left outside India right now.”

But Shah of Venus cautions, “We can’t rest on our heritage or our performance during the crisis. There are developments in the industry that are not good news at all. True, we didn’t have as many bankruptcies as expected through the worst of the crisis, but we have to ask ourselves, ‘are those who survived as healthy as they should be?’ We have to be very careful. We’ve adopted too much of the debt culture. It isn’t good for us.”

Shah wants structural changes to be put in place to ensure the long-term health of the industry. “India should now have financial norms for giving long-term credit specified by the finance ministry. The Indian industry has changed now and almost no one gives the crazy long credit terms that were a feature of our industry some time ago. But we need structural changes to ensure that the way we do business from here forward is set solidly in a system if we want to ensure the long-term health of the industry.

“Debt-based activity pushes you in the wrong direction. Debt for specific projects is okay, but it can’t be the basis for business. You have to use debt like a taxi – get to where you’re going and then pay it off. While most of us did the right thing through the financial crisis, many of us haven’t

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changed some of the root mistakes we’ve made in adopting a debt-based system. If India was affected to the extent of 20 per cent this time, next time round we won’t be so lucky. You can’t mix our core value systems and today’s technologies and methods of doing business.”

Shah would also like to see changes in the way rough is fed into the processing pipeline. “Mining companies would get the maximum price if they sold directly to manufacturers and not to dealers. Today’s manufacturers can take all of today’s $11 billion rough supply – and more. We are willing to pay more for rough if we see we’re likely to make a bigger margin on the finished product. Likewise, we also have to make sure that people downstream from us also make a decent profit from doing business with us.” According to Shah, where goods are supplied is far more important than the mode of supply. “I know people worry about rough diamond tenders,” he says, “but they have a legitimate place as a price discovery mechanism, and in the end, even tendered sales are okay if they’re to the right people – the manufacturers themselves. You won’t see these dangerous, speculative bubbles if the actual manufacturers get the goods.”

Add value to surviveAccording to Shah, every business

has its ebbs and flows and various factors affect profitability. What is necessary is to carry on with business. “Lower margins in the industry are a result of manufacturing overcapacity. You can’t hold on to yesterday’s margins forever. So any centre that held on to yesterday’s higher margins and tried to push business through, simply lost market share.”

But margins are also determined by what the industry itself does, Shah notes. “The key to today’s business is value addition. The Indian industry must always remember this. If we don’t continue to add value, someone else will take our business away from us. The competition today is not between us and South Africa or Botswana, who want to cut the diamonds they mine themselves. The competition today is between those who add value to the rough they handle and those who don’t. So India has to keep improving and adding more value until the difference between us and any other centre is too big to bridge. Now is not the time to sit back and savour our success. Now is the time to move forward more aggressively.”

Citing the example of Venus Jewel itself, Shah says, “During the crisis, we never reduced production and we didn’t retrench a single person. We had our highest ever production for the March and April in 2009. But we are now conducting a full review, rechecking all our systems, noting where weaknesses showed up, where we could improve. We want to be even better prepared when the next crisis comes around.”

Rosy Blue’s Mehta echoes Shah’s sentiments on the subject of value addition. His take on the situation: “While almost everything now comes to India, strategically Antwerp has historically been a financial and distribution centre and mining companies have been more comfortable selling there. However, the key today is to add value to the product. Those who don’t add value will die. The Indian government along with the rough sourcing initiatives of Diamonds India Limited (a rough-sourcing firm set up by a consortium of Indian diamond

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Today’s manufacturers can take all of today’s $11 billion rough supply – and more. We are willing to pay more for rough if we see we’re likely to make a bigger margin on the finished product

manufacturers) have been pushing very hard for more direct rough supplies to India. There are several factors right now – primarily taxation – that have probably been a deterrent to this happening in a major way. But the Indian government is already looking at the industry proposal for presumptive taxation as well as a host of other structural issues. So we’re getting there and it won’t be long before these impediments are gone. The rough will come to those who add value.”

All this is not to say that the Indian industry is moving back towards the way it operated two years ago. Diamond broker Vinay Parekh says major changes are evident in the Indian diamond market since the economic crisis of last year. “A significant change is that today, people manufacture only what they know they can sell. Earlier, they would buy whatever rough they could get their hands on. Today, they make sure they have a client lined up for the polished they will produce before even

buying the rough for it. Inventories today are also sharply less than what they were last year.”

Credit norms have changed too, says Parekh. “Nowadays, you can get between 60- and 90 days’ credit in the polished market. Very rarely will you hear of deals going through with 180-day terms (and these are for very solid parties), while 200+ days credit, which was a feature of the Indian industry in the past, is now practically non-existent. By and large, long-term credit for exports has stopped,” he says.

Other changes, according to Parekh, include a change in marketing focus. There’s a much greater concentration on the domestic market, he says. “When you look at the market today,” he says, “much of the sales attention is focussed on India, followed by China and Russia. The US, which used to be a market mainstay, comes a pretty distant fourth today.”

According to Parekh, domestic demand began to take off from April 2009 when prices from new production

Nowadays, you can get between 60- and 90 days’ credit in the polished market. Very rarely will you hear of deals going through with 180-day terms

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Type of Ro PercentageSegmentSimple saw 25% Middle valueLarge stone 37.50% Highest valueSmall and lo 37.50% Lowest value

Rough Diamond Segments

25% Middlevalue

37.50% Highestvalue

37.50% Lowestvalue

Simple sawablesLarge stones requiring business decisionSmall and low end stones

out of cheaper rough came onto the market. Interestingly, he observes, the crisis got people focussed on doing what they do best. “You’ll find fewer diamond manufacturers today who are diversified into jewellery production as well. It pays to concentrate on what you do best.”

Not so bad after allSomething to note, Parekh adds,

is that there were fewer bankruptcies in 2009 than there were in the boom period preceding it. Fiscal prudence and cautious, selective marketing are the main causes for this very positive change, according to him. While concurring with most industry watchers’ estimates that the Indian industry is today operating at 65 per cent of its peak production in 2008, Parekh reports feedback from the market indicating that India has emerged a significantly stronger manufacturing centre after the economic crisis. The Indian industry is looking at an increase in workforce over the course of 2010, he says, noting that in the event of any sudden economic dips or upheavals, the worst case scenario foreseen is that it will maintain current staffing levels.

The Indian diamond industry’s future looks good too. “This industry has a great future – we’re lucky we’re working with such a great product,” says Shah of Venus. “We should take the maximum advantage of the diamond’s attributes, but as an industry, we’re not doing so at all. The diamond is the best product there is for the luxury industry, fantastic for investment and really great for trading. We should cater to these three great attributes with three separate marketing and promotional approaches. The diamond is unique

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in that it possesses all these attributes together, but we as an industry, have never considered this fully. You don’t buy a diamond, you just convert your wealth when you acquire one. We have to communicate this clearly.”

Shah also thinks the industry should push harder to ensure that its product gets to more markets around the world if it wants to sustain value growth. “If we look at maximising our distribution to every single market in the world, targeting to all of the sectors that the diamonds various attributes cater to, we could have a price increase of between

7- and 9 per cent annually without a problem if we attend to this. Diamond prices will beat inflation regularly.

“Right now, we shouldn’t take much credit for the diamond’s performance in the marketplace. It sells today, not so much because of our efforts but because consumers want it. We have to tread carefully going forward. We have to take another look at our distribution system and maximise our distribution to every corner of the world. We have to open up the industry with much more transparency in everything including pricing.”

The industry should push harder to ensure that its product gets to more markets around the world if it wants to sustain value growth

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