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| Martin Rapaport |
It was with good reason that the Rapaport Group held its
annual International Diamond Conference (IDC) in Mumbai for the first time this
year. The all-day conference on August 29 recognized India’s massive
manufacturing sector, growing domestic market, its challenging regulatory
environment and its huge impact on the global trade.
“As diamond demand and prices go through a boom-bust cycle,
India is the market to watch,” said Martin Rapaport, chairman of the Rapaport
Group. “While the U.S. and China are important sources of demand, how India
handles rough supply and polished demand will determine short-term recovery
opportunities.”
In opening the conference, Shri P.M. Saleem, Mumbai’s
commissioner of customs, discussed the tremendous potential to grow India’s
diamond industry by capitalizing on the country’s expanding domestic market and
easing the regulatory hurdles to encourage trade. He stressed that the customs
authority has transformed itself from being an enforcement agency to being a
facilitator of trade.
As recently as a year ago, India, along with China, was
being heralded as the sparkling hope for both the short-term and long-term
future of the global diamond industry. But both countries hit a few speed bumps
in recent months that have dimmed their short-term forecasts a bit. For India,
the new developments are the 2 percent import duty on polished diamonds
introduced in January that devastated export totals, new regulatory
requirements, rising inflation and a rupee depreciation that has weakened
domestic demand, all coupled with the decline in global demand as economic
uncertainty spread to emerging markets.
With production and trading volume down, Avi Krawitz, a
senior Rapaport Magazine editor who addressed the conference in addition to
authoring this article, said that the amount of goods working through the
diamond pipeline has decreased in all centers and throughout the entire
industry pipeline this year, while India has been particularly hard hit.
Still, there is no denying India’s overall diamond industry
strengths, most notably well-developed manufacturing capabilities, a huge labor
force, an expanding middle class and a cultural love of jewelry and luxury
goods. Against this backdrop, representatives of a cross section of the Indian
diamond industry presented to approximately 300 conference attendees their
assessments of the challenges and potential going forward.
New taxes and import duties, new regulations on money
laundering and foreign investment and tighter credit by banks have had a
negative impact on India’s dominant diamond industry and have dampened the
double-digit growth that was the envy of its global competitors.
• Taxes. The panelists agreed that new taxes should be based
on turnover rather than profits. Sanjay Kothari, vice chairman of India’s Gem
and Jewellery Export Promotion Council (GJEPC), said that the council has been
lobbying government to implement a tax rate of 3 percent on turnover, rather
than basing the tax code on profits. While the government initially responded
that 8 percent was a fairer reflection of diamond industry margins, its view
has since dropped to a 6 percent base. GJEPC is still in talks with government
on the issue and Kothari noted that the country’s tax policies should be viewed
from a nationalist Indian perspective. “We are Indian first and then
businessmen,” he said. “We have to assess how much tax we’ve paid to the
government in the past and what our commitments are as Indians.”
• Import duties. Discussion also centered on the negative
impact on trade of the new 2 percent import duty on polished diamonds that took
effect in January. It replaced a 0 percent duty that businesses took advantage
of by exporting and immediately re-importing the same goods in an effort to
artificially inflate their export volume and thus qualify for additional bank
financing. While many foreign traders have criticized the duty for discouraging
business in India and diminishing the country’s competitive edge, Kothari
stressed that the local industry supported the duty and that India’s current
lowered foreign trade is more reflective of reality.
• Regulations. Nishant Shah and Ajit Tolani, partners at
Economic Laws Practice (ELP), outlined the new antimoney-laundering regulations
applicable to Indian companies, noting that the jewelry sector is particularly
vulnerable to these given that diamonds and jewelry are recognized as currency
substitutes, are high-value commodities and are easily transportable.
Complaints also were heard that new regulations on transfer pricing, which
governs transactions between entities within the same group, and on
cross-border investment from one country to another, which were described as
burdensome by some conference attendees, reportedly require procedures that the
industry does not yet have in place.
• Credit/liquidity. Manish Jeloka, head of consumer bank
treasury for India and South Asia at Standard Chartered Bank India, noted that
there is, in fact, a shortage of liquidity in India’s overall banking system.
In response to the claim that the industry is being overregulated because the
banks are unable to control their lending, he explained that the banks are, in
fact, limited in the amount of funds they can allocate to a company, an
industry and, in the case of a foreign bank, to a country. “But lending is
often driven by relationships as well as finances and the banks have grown with
the industry,” he added.
Kothari noted that the banks were also encouraged to lend to
the diamond industry by requirements to allocate up to 15 percent of their
funds to export industries. Diamond businesses were natural beneficiaries of
this requirement since they deal in a high-value product that can help the bank
easily achieve its quota so that it can then move to unsubsidized,
higher-interest-bearing loans, he explained. Kothari added that it has become
difficult for the banks to monitor who valid loan parties are, given that the
industry has grown largely because of overseas subsidiaries.
The conference panelists agreed that liquidity in India’s
diamond industry — particularly its manufacturing sector — has become tight due
to a combination of lower exports, reduced financing, high rough costs and the
decline in global and domestic demand. Nor did they predict any immediate
relief. “In the next 12 months, our estimate is that this liquidity situation
is likely to remain,” Jeloka said.
Synthetic diamonds present a challenge to the natural
diamond industry on two fronts. First, they could capture market share from
mined diamonds “because the synthetic diamond manufacturers are presenting
their product as environmentally friendly, conflict free and a socially
responsible alternative,” said Marc Brauner, co-chief executive officer (CEO)
of International Gemological Institute (IGI) Worldwide. Secondly, they could
undermine consumer confidence if they appear on the market masquerading as
natural diamonds, defrauding buyers who think that they are buying the real
thing.
The recent discovery by two labs that melee diamonds
submitted to them for routine certification as natural diamonds actually were
synthetic stones raised industry concerns that more man-made versions already
have invaded the diamond marketplace. See complete coverage of the incident, as
well as synthetics in general, in the cover story beginning on page 40 of this
issue.
• Industry concerns focus on the fact that the quality of
synthetic diamonds has been improving and appears likely to continue to improve
as the production technology advances. Matthew Hall, director of Gemological
Institute of America’s (GIA) Mumbai laboratory, noted that Chemical Vapor
Deposition (CVD) diamonds are characteristically brown, colorless,
near-colorless, pink and red colors, relatively small in size, up to 1 carat,
with clarities mainly in the region of IF to VS. He reported that High
Pressure-High Temperature (HPHT) stones are becoming increasingly commercially
viable and can be found in several different colors.
• Currentlaboratory equipment and processes can positively
and conclusively identify synthetic diamonds. Hall explained that CVD diamonds
typically have distinctive black inclusions and growth patterns and most show
varying intensities of blue phosphorescence, which is very rare in natural
diamonds. In addition, HPHT stones are identifiable via a combination of
gemological and spectroscopic methods. “It’s not the first time people are
nervous about synthetic diamonds and it won’t be the last time, either,” said
Hall. “But we are confident in our ability to detect synthetic diamonds and
maintain that synthetic diamonds are readily identifiable in a properly
equipped and staffed gemological laboratory.”
• Brauner stressed that the traditional diamond industry
must embrace the growth of synthetic diamonds, as the phenomenon cannot be
stopped. In doing so, the industry must focus on ensuring that three conditions
required of synthetic goods are always present. These include providing full
disclosure at the point of sale; ensuring that the stone is laser-inscribed,
labeling it as synthetic, lab-grown, man-made, or brand-name created and
requiring that every synthetic stone is certified.
In recent months, manufacturers have felt squeezed between
rough and polished prices, with no room for profit. Add to that the erratic
rough supply and unpredictable market demand and the industry has felt
whiplashed into uncertainty over which path to take going forward. Vishal
Doshi, group executive director of Shrenuj & Co., estimated that before
Diamond Trading Company’s (DTC) August price adjustment, there was about a 15
percent gap between the rough and resulting polished price, which has since
reduced to approximately 5 percent. Rapaport recognized that manufacturers are
therefore extremely price sensitive, relying as they do on polished prices
going up during the production process in order to profit.
During his afternoon keynote address to the conference,
Rapaport stressed that prices should not matter and that dealers and
manufacturers need to learn how to make money regardless of price movements.
“The diamond trade makes money by selling diamonds, not by holding them,”
Rapaport said. “Dealers must learn to make profit when prices go down by
selling and replacing inventory at lower prices.” He further cautioned Indian
diamond manufacturers not to buy at unprofitable price levels and to cease
speculative manufacturing based upon future polished price increases.
• Russell Mehta, Rosy Blue India’s managing director,
suggested that many manufacturers are competing for a limited supply of rough
from only a few major suppliers, in addition to competing for customers. “My
pricing power is limited on both sides of the equation,” he explained, and
added that a manufacturer’s purchasing power largely depends on bank credit.
Doshi agreed, claiming that the retail pipeline has been deflated in the past
few months as jewelers limited their buying but continued to sell. “I think
that there will be demand in the short term on account of refilling the
pipeline,” he argued.
• Ashish Mehta, a partner at Kantilal Chhotalal, suggested
that manufacturers have been too focused on turnover in the past few years and
should concentrate instead on their bottom line and bringing added value to the
market. Doshi argued that the only way to get a decent return on the rough is
to work with a higher volume of goods. “The mid-level manufacturer space is
shrinking because overheads are high,” he said. “So you either have to move to
the high-volume league or develop a niche.”
• Russell Mehta acknowledged a double-edged sword when it
comes to developing diamond-related investment products, such as exchange
traded funds (ETFs). “If consumers are buying these ETFs and prices are
extremely transparent, it will diminish some of the mystique surrounding
diamonds and regarding prices,” he explained. “But it will also increase demand
and bring a lot more investable dollars to the industry.” Doshi suggested that
it is difficult to develop such products given that there are many different
price points and qualities in diamonds, making it hard to generate sufficient
trade volume in each category. Rapaport proposed that raising investment
opportunities by creating futures trading where traders could hedge their price
risk would help create an environment whre prices are not set by the mining
companies but by market forces.
If adding value to diamonds was an underlying theme at IDC
2012, jewelry branding emerged as one of the most effective ways to accomplish
that goal. The entire idea behind branding is to add value and in order to add
value, you have to create new demand. At the same time, to create new demand,
you have to identify the differing and very specific needs, interests and
buying motives across the full range of individual market segments. Brands must
be customized to reflect various price points, retail formats, occasions,
jewelry categories and designs, as well as positioned in distinct ways as store
brands, aspirational brands, celebrity-centric brands, occasion-focused brands
and product brands.
“Some of the key advantages of branding include improved
stock turns, higher footfalls, improved margins and a better connect with
consumers,” said Mehul Choksi, chairman and managing director of Gitanjali Gems
Ltd. “If more players start branding their products, valuations within the
jewelry business could double.”
• Vikram Merchant, manager of Rio Tinto’s India
representative office for diamond sales and marketing, noted that great growth
opportunities are available for the industry in gift-giving — especially in
India, where weddings are such a significant gift-giving occasion. He
acknowledged, however, that giving diamonds as a gift remains a fairly novel
concept in the country. His explanation: While diamond jewelry is considered an
emotionally charged, classy, exclusive and trendy gift, affordability and budget
constraints have been a barrier to gifting diamonds.
• Research by Rio Tinto found that price and design have the
greatest influence on diamond purchases, while the brand and the story behind
the piece played smaller roles. “We have an opportunity to take consumers
beyond value toward emotion,” Merchant said. “But we’re not telling our story.
We haven’t given the assurance of the price points we’re offering.”
• Given the fast-moving consumer trends and the increasingly
diverse consumer tastes, both Choksi and Merchant agreed that the key to
effective branding is to identify demand in each segment and communicate and
differentiate the brand messages accordingly. Gitanjali, for example, which has
India’s largest portfolio of jewelry brands, has positioned its different
brands by linking them to different emotions. Rio Tinto, on the other hand,
adopts a variety of brand messages to target its Nazraana brand to different
potential gift recipients.
• Choksi predicted that about half the jewelry market will eventually
consist of branded goods and noted the growing focus on branding among luxury
companies. “The branded jewelry market is growing at a much faster pace than
generic jewelry,” said Choksi. “And if we don’t continue with these efforts,
diamonds will fall back to being just a commodity.” Merchant agreed and
cautioned that diamonds and jewelry too often lose out to other luxury products
because of poor marketing. “The way they market is just much sexier and unless
we change, we’ll lose market share,” Merchant said.
Vasant Mehta, vice president of the International Diamond Manufacturers Association
(IDMA) concluded, however, that prospects for the local industry remain strong,
given that manufacturing has been kept well below capacity and that demand can
be expected to improve in the long run. “The situation is temporary. I think
inventory levels are going down, the banks are sincere and the weaker
manufacturing companies are leaving the industry,” Mehta said. “When you look
at supply and demand, the next five years are going to be very strong for the
industry.”
Despite the conference focus on industry challenges and
imbalances, the fact is that India will continue to dominate world diamond
manufacturing and the 100 million middle-class consumers in India, China and
the Far East will fuel diamond demand for the foreseeable future.
Article from the Rapaport Magazine - October 2012. To subscribe click here.