Rapaport Magazine

Two Steps Backward

India March Market Report

By Zainab Morbiwala
With the long-awaited shipment of Zimbabwe diamonds coming up against a new and unexpected roadblock, the Indian diamond industry is back to square one in trying to secure adequate supplies of rough to meet demand. As late as mid-January, the industry was upbeat that the dispute over Kimberley Process (KP) certification for the Marange diamonds had been resolved and that $160 million worth of stockpiled rough sitting in Dubai awaiting certification would soon be exported to India. But the sigh of relief that certification was imminent has given way to disappointment and concern.

The Controversy Continues

“There is good demand from the domestic as well as the international market for diamonds right now,” said a diamond trader who wishes to remain anonymous. “This is the time when the industry can recover the majority of the losses it suffered in the past two years. But now, with the industry once again facing a shortage of raw materials, I am afraid that we shall see the demand-supply imbalance causing continued losses to the industry.” Sanjay Kothari, vice chairman of the Gem and Jewellery Export Promotion Council (GJEPC), sounded equally concerned. “I am not sure when this issue will be resolved. Some people are speculating that we shall see an end to this in May or June but everything until then remains in the doldrums.”

For those who came late to this story, the World Diamond Council (WDC) early in February dismissed reports that the KP already had given Zimbabwe the green light to trade its gems from the Marange fields. According to the WDC, the Democratic Republic of Congo (DRC), the current chair of the KP, had not yet given its formal and final approval. “The authorities in Zimbabwe need to complete a series of consultations with the new KP chair from DRC, who has called for the understanding and patience of the industry” until this is settled, the WDC said in a press statement.

Zimbabwe’s diamond exports are now at the mercy of the DRC, which assumed the KP chairmanship — which rotates among KP member countries — on January 1, 2011. “We continue to advise members of the diamond industry that until a conclusion is reached, exports of stocks and production from the approved concessions in Marange do not carry the approval of the Kimberley Process,” the DRC said in a statement.

To Auction Or Not To Auction

Without the critical new source of rough from Zimbabwe, small and medium-size diamond traders will have to secure their stock through the auction route. A news report in The Times of India recently stated that Dinesh Navadia, the president of the Surat Diamond Association (SDA), has warned that the diamond industry is heading toward another bout of recession because ten big diamond traders in Surat and Mumbai, who control the rough diamond market in the country, have created an artificial scarcity in the name of a global shortage.

The traders, who deal in the secondary market from which the small and medium manufacturers purchase rough stones, procure their stock from the open auctions organized by mining companies like ALROSA, Diamdel and BHP Billiton. To secure the rough supplies, the traders pay a 10 percent to 15 percent premium on the auction price.

Those rough stones are then imported into the secondary market in Surat and Mumbai and Navadia said the small and medium manufacturers are being asked to pay premium rates of 30 percent per carat on their purchases. “Diamond traders are gambling and the small manufacturers are not able to purchase the stones sold at high premiums exceeding 30 percent,” said Navadia. “If this continues, most of the small manufacturers will have no other option but to shut their factories.”

“I personally do not like this system of auctions,” admitted Kothari, “but nothing can be done about it. Whether we like it or not, we have to accept it. I do understand that this is not good for the industry overall. It creates a hardship for the players when they cannot be assured of a continuous supply and, as a result, cannot commit to their clients.”

Market Dynamics

In response to the shortage of raw materials in the market, there has been a rise in the prices of rough and polished. It is estimated that the increase has been close to 10 percent for both rough and polished although, according to Kothari, the market is still showing positive growth and, even after the year-end holiday season, sales and demand have been very good. But it is important to note that, at this stage, the market is showing signs of extreme discomfort with the scarcity of rough supplies. Industry players in India have their fingers crossed for the coming months.

The Marketplace

• Polished and rough markets remain hot.

• Small goods — particularly stars — are the hottest category.

• Demand is very good for VS-SI category and good for piqué goods.

• Buyers began showing some price resistance around mid-February.

• Production is still not anywhere near demand.

Article from the Rapaport Magazine - March 2011. To subscribe click here.

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