Industry Analysis "I would classify the problems
faced by the diamond industry as structural and situational," said
Neelesh Hundekari, principal, A. T. Kearney Ltd., a global management
consulting firm. "While no one anticipated the current financial
crunch/meltdown/downturn in the global markets, which exacerbated the
situation drastically, some of the structural problems already were
known."
G603
Sharing his observations on the diamond market
over the past two years in an interview with RDR, Hundekari suggested
that "The origins of many of these current problems can be traced back
to what happened between 2000 and 2005. While diamond jewelry worldwide
has grown by less than 5 percent in value terms between 2000 and 2005,
rough production grew from $7.8 billion to $12.7 billion and rough
prices grew at a compound annual growth rate (CAGR) of 9 percent plus
over the same period.
Polishing capacity kept pace with rough production
and greater polishing capacity kept driving the demand for rough to
almost irrational levels. This led to a significant accumulation of
polished inventory in the pipeline. As a consequence, since 2005,
credit terms for polishers have been increasing until they extended
beyond 180 days. Some industry observers expected that polished
inventory levels would become unsustainable by 2008, leading to
consolidation," which is precisely what has happened.
Hundekari feels that overdependence on the U.S.
market all these years also has contributed to the current crisis.
"With 45 percent of the diamond jewelry sales coming from the U.S.,
where domestic consumption has reached peak levels (meaning consumption
exceeds savings at a national aggregate level) the industry was
susceptible to even a slight reduction in the U.S. market. The moment
growth in the U.S. market began to stagnate, the upstream industry
started having problems."
In terms of correction, Hundekari mentioned that a
correction was expected in rough prices in the 2008/2009 period, which
is, of course, currently happening. "Reduction in employment in the
diamond industry in India was also expected," he said, "which is now
visible. However, in the absence of the global downturn, this
correction would have helped the industry consolidate, flush out the
old inventory, bring rough prices and production more in line with end
jewelry demand and make the portfolio of markets more balanced.
However, the downturn is going to delay the recovery of the global
industry easily by 12 to 18 months."
Hundekari added that the core strengths of the
Indian industry(mass production at inexpensive labor rates and timely
delivery) "have not disappeared and they will help the industry emerge
stronger from this crisis. Capacities will get balanced, consolidation
will happen, the bargaining power relative to the miners will increase
and productivity/efficiency will become an important differentiator."
From the GJEPC Since Vasant Mehta took over the
reins from Sanjay Kothari as chairman of the Gem & Jewellery Export
Promotion Council (GJEPC) in October 2008, he has faced a tough time
with the market. Speaking with RDR, Mehta expressed his wish to see an
additional 2 percent credit on interest (in addition to the 2 percent
already granted) along with expanded dollar availability and greater
gold supplies in remote parts of India, where consumers who cannot
afford jewelry might purchase gold as an investment.
Mehta said, "We expect the industry in India to
take a positive U-turn in another four or five months, considering
production already has been reduced by almost 60 percent. That will
help to stabilize the demand/supply ratio in the coming months, which
will in turn help stabilize prices and help clear the inventories." In
a way, the economic downtown is an advantage to India because it has
increased demand for less expensive goods, which India is capable of
producing.
In regard to displaced workers in Surat, where
most of India's diamond processing is headquartered, Mehta said the Gem
and Jewellery National Relief Foundation (GJNRF) has authorized
donations to help pay school fees for diamond workers' children in the
area, as well as other miscellaneous expenses. In February, The Times
of India also reported that the Indian government and industry
entrepreneurs had joined in recruiting jobless workers from Surat's
diamond industry for subsidized training and positions in the garment,
embroidery and power-loom manufacturing units, where workers are in
short supply.
The Marketplace • Domestically, movement has been
seen in light brown (LB) goods. • In terms of clarity, the greatest
movement domestically is in VS1. Overall, domestic demand is not good
for VVS. • Internationally, business with the U.S. is showing no
positive signs. • For the export market, VVS goods are in short supply
at current market prices, resulting in increased demand. •
Manufacturing in India is down by almost 30 percent but this is
considered a prerequisite to bringing the demand/supply ratio into
balance.
