|
|
Shivers of 2008
Editorial
Oct 4, 2013 8:00 AM
By Avi Krawitz
|
|
|
RAPAPORT... The statement published this week by India’s diamond industry had an unnerving, 2008 feel to it. While the Gem & Jewellery Export Promotion Council (GJEPC) fell short of stopping all rough imports to the country, as it did in response to the 2008 crisis, the group reported that India’s medium-to-large diamond manufacturers have significantly reduced their polished production heading into the fourth quarter.
The GJEPC stated that manufacturers are looking to optimize their inventory and consequently improve their liquidity positions. To achieve that, they’re hoping to influence an increase in polished prices and/or a reduction in rough prices. While the council didn’t say it directly, the underlying message was that Indian manufacturers should stop buying high-priced, unprofitable rough (see the full statement here).
Better late than never. Let’s hope they live up to their word. After all, many point a finger at the Indian manufacturers, and the banks which enabled them, as being responsible for driving up rough prices in the first place over the past five years.
This year, faced with a weak rupee, reduced bank financing, and a slowdown in diamond demand – at least in India and China – Indian manufacturers can no longer sustain previous rough buying levels at prevailing prices. They’re simply running out of money.
In apparent crisis mode, the GJEPC met with prominent diamantaires in September and established a Trade Advisory Committee to develop an appropriate response to the challenges in cutting and polishing rough diamonds, “which have recently affected the profitability and growth prospects of the industry.” In particular, the council noted the sustained lack of profitability in manufacturing diamonds smaller than 0.30 carats.
The timing may have been deliberate. The statement was published ahead of this week’s De Beers sight. Indeed, De Beers reduced prices on cheaper Indian boxes which become the non-profitable polished goods below 0.30 carats. But the company more likely received the message at the August sight when an estimated 20 percent of the goods were refused by sightholders. Initial reports from this week’s sight were more positive, but sightholders remain frustrated and cautious and further refusals of boxes were still expected at press time.
Rather, the council’s pledge should be viewed as a statement of intent. Indian diamond manufacturers are no longer in a position to sustain De Beers high rough prices, or those of other mining companies. Their banks will no longer finance purchases that are not profitable. After all, everyone is in the business to make money.
But as manufacturing is already reduced and is expected to be 30 percent to 50 percent below regular levels in the fourth quarter, what will be the ramifications for the local and global diamond markets respectively? How will the reduced capacity affect employment in the manufacturing sector? Will there be mass layoffs in Surat? Will India lose manufacturing market share as a result? And, looking more short term, will there be enough goods for the holiday season?
Already in July, reports indicated that some 25,000 diamond workers lost their jobs after the sharp slump in the rupee made rough purchases even more expensive to small manufacturers that pay for their rough on the secondary market in the local currency. The Times of India reported at the time that nearly 1,200 small units had closed their operations. Traditionally, workers who leave the industry are not easy to replace and will not willingly return.
A representative from the council told Rapaport News that the lower production levels will not result in massive layoffs this time round. Rather, workers will reduce their hours, he said. Besides, most factories close or work on significantly decreased capacity for most of November during the Diwali festival.
But manufacturers also stressed that there are enough goods available in the market to satisfy current demand. Certainly, domestic Indian demand, which is dominated by small- and lower-quality diamonds, is down and India’s expectations for the Diwali season are subdued. Therefore, the mass production of goods below 0.30 carats is likely to be the most affected categories. While demand for 0.30-carat to 0.50-carat diamonds continues to be strong, driven by steady U.S. and Far East demand for these goods, manufacturers are unlikely to cut production in those areas before or during the Christmas and Chinese New Year seasons. These goods have been relatively profitable for manufacturers this year. De Beers, meanwhile, felt confident enough this week to raise prices on the rough that is required to manufacture these same categories.
Besides, the reduced manufacturing could be a veiled attempt to create shortages and drive up polished prices at a time of the year when demand is at its peak. That is unlikely to be effective as long as consumer demand is weak. Ultimately, manufacturers are hoping to diminish their relatively large polished inventory as wholesalers and retailers have been loath to build up excess inventory of their own. Demand is currently selective and order-specific going into the holiday season, as it has been throughout the year.
Therefore, it is difficult to draw comparisons to 2008 when there was a more complete and widespread meltdown. Back then, by halting rough imports for about a month in the aftermath of the market crash, India emerged in a stronger and more liquid position than its peers who continued to buy rough. Today, many of India’s challenges are India-specific. While the challenge of high rough prices is industry wide, India’s exposure to the rough market is greatest given its scale of manufacturing. The weak rupee, and prohibitive government policies are uniquely Indian, and its banks are not as liberal in their lending as before.
So by invoking a tone reminiscent of 2008, the GJEPC has illustrated how dire India’s position is. That is enough to send shivers down the spine of any manufacturer or dealers who worked through that crisis. These so-called austerity measures are a desperate attempt to avoid sinking back to that level and to restore growth.
“It may be noted that the industry had jointly and voluntarily decided to stop rough imports for a brief period of time in 2008, owing to the downturn and financial crisis,” the council wrote in its statement. “The GJEPC urges all industry stakeholders to conduct their businesses responsibly in the current scenario and ensure that their actions do not precipitate any long-term damage to the diamond industry in India.”
That appeal is directed at De Beers to align its rough prices with the rest of the market. But more importantly, the message is aimed at the GJEPC’s members in the manufacturing sector, to wield their collective influence on rough prices. By reducing manufacturing, and by default, their rough purchases, prices should decline. The strategy pulled India’s diamond industry out of crisis in 2008. Let’s see if it will do the same again.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.
Copyright © 2013 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
|
|
|
|
|
|
|
|
|
|
Tags:
Avi Krawitz, De Beers, diamonds, GJEPC, India, Rapaport, Rupee
|
|
|
|
|
|
|
|
|
|
|
|
|