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It’s Demand, Not Credit, That Eludes the Industry
Editorial
Aug 13, 2015 8:24 AM
By Avi Krawitz
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RAPAPORT... We got a sense this week that liquidity has improved in India’s diamond sector. It’s not that credit taps are flowing once again; they aren’t. Instead, having drastically chopped their purchases of rough, slashed other costs, and collected pending payments on polished invoices, diamond manufacturers are simply less worried about cash flow than they are about demand and profit margin.
In an ironic twist, at this week’s India International Jewellery Show (IIJS) diamond manufacturers were apprehensive as they watched hordes of local visitors streaming past them and into the gold jewelry section.
To be sure, diamantaires do recognize that in the long run, the prevailing, more-stringent credit requirements will have an impact on their industry.
Total Indian bank credit to the sector now stands at as much as $7 billion, local lenders and members of the trade told Rapaport News. That’s down almost 20 percent from a year ago and largely reflects a marked decline in market activity. Significantly, big lenders aren’t advancing new loans, making it very difficult for small and micro-sized companies to operate comfortably.
In return for maintaining just their current credit lines, banks are demanding stronger balance sheets from their existing customers. Lenders say the industry matured through the crisis and are confident that loans they have extended are not being misdirected toward other investments such as real estate. That said, this remains to be a concern among some large manufacturers.
That the Indian banks are being more frugal is good for the industry as easy credit previously encouraged manufacturers to overspend on rough. The challenge is getting other, smaller banks on board. And, while their resolve may not be tested in the current market with low rough purchases, they’re hopefully implementing prudent measures that will limit speculation on rough after the market picks up again.
Adjusting to Weaker Demand
Diamond manufacturing levels have plunged an estimated 30 percent to 40 percent from a year ago as production volume has been cut to bring output levels in line with weaker demand.
Some have shifted operations away from dossiers toward more sought-after 1-carat and larger goods. They’re also focused on smaller- and lower-quality goods -- which are relatively cheaper to produce -- to keep factories running and workers busy.
As expected in such an environment, diamantaires foresee an increase in labor retrenchment in Surat. Downsizing is not a simple matter for a local industry with a proud tradition of maintaining job levels even through the deepest crisis. As one sightholder noted, companies would have reduced polished production by a lot more if they didn’t have a strong sense of social responsibility. Many however cautioned that if the current market conditions linger, they’ll have no choice.
While Surat has not seen widespread firings yet, labor has been affected there. The few bankruptcies that occurred resulted in job losses. And, it’s worth noting that most workers are not salaried employees. They get paid on a per stone basis. Consequently, as production has declined and shifted toward cheaper goods, so have productivity and income.
Indians should be selling to Indians
During the 2008-09 global downturn, domestic jewelry demand provided the Indian diamond industry an advantage over other trading and manufacturing centers. That was a coup for an industry which was sustained by selling local while other markets floundered. India’s economy recovered quickly from the crisis and managed to garner a record 11.4 percent increase in the gross domestic product (growth in the first quarter of 2010).
The same hasn’t happened during the diamond industry’s current crisis as India’s economy is experiencing some growing pains after last year’s election euphoria. The government’s new ‘Make in India’ campaign is designed to turn India into a factory to the world and should benefit the diamond industry. However, as one diamantaire explained, they have not seen significant incentives such as special tax breaks or improved labor structures to encourage further investment in manufacturing.
Furthermore, there remain regulatory challenges constricting consumer spending on items such as jewelry. For example, consumers continue to be required to declare purchases above $7,800 (INR 500,000), putting a cap on their cash purchases. The industry successfully protested the government’s previous attempt to reduce that limit to $1,500 (INR 100,000).
Restrictions like theses could be a drag on sales during the Diwali festival in November and the subsequent wedding season, despite the surge in gold demand seen at IIJS. That’s especially true in rural areas where buyers don’t have credit lines and are looking to spend on gold jewelry and related products at current price levels.
Still, Indian diamantaires have an opportunity for long-term growth in the local market. The country’s vast young population is shifting away from traditional, clunky gold jewelry toward everyday items. And there is also a growing diamond engagement-ring culture where arranged marriages – which lack western-style proposals -- have traditionally been the norm. The industry can and should capitalize on these trends.
Diamond jewelry has lost market share
Through all their frustration about high rough prices and low profitability, diamond manufacturers’ biggest concern is that there isn’t enough global growth in retail demand for diamonds. Rough prices may be out of balance with polished, but for polished prices to rise once again, there needs to be a pull from consumers.
That was especially true for manufacturers watching Indian buyers flock to the gold pavilion at IIJS. And it will become even more pressing in the coming months when the global holiday shopping season begins. Diamantaires are determined to not buy unprofitable rough and are somewhat confident they can operate with tighter bank credit. But, to restore sustainable profitability, the industry needs to stimulate greater demand for diamond jewelry.
Indian millennials, like their western counterparts, are spending their discretionary income on electronics, handbags and vacations rather than jewelry. Until manufacturers recognize a lack of consumer demand is their biggest challenge, they’ll continue to be left wondering why buyers are walking past them.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz and on LinkedIn.
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Tags:
Avi Krawitz, diamonds, India, jewellery, Jewelry, Rapaport
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