Analysis: Global diamond business roiled as cash crunch hits Indian stone cutting

Gitanjali Gems

27/12/2016 10:15

By Rajendra Jadhav and Susan Taylor 
    SURAT, India/TORONTO, Dec 27 (Reuters) - The global diamond 
industry is facing disruption that could stretch through the 
first few months of next year, including Valentine's Day in 
February, as a result of Indian Prime Minister Narendra Modi's 
radical move to abolish most of the nation's cash overnight. 
    In the western Indian city of Surat craftsmen usually spend 
10-12 hours a day in small mills or grimy sheds cutting and 
polishing 80 percent of the world's diamonds but the business is 
based on cash and the demonetization of the high-value banknotes 
from Nov. 8 has prevented many from operating. Thousands of 
diamond brokers in the area's narrow lanes are also doing little 
business. 
    The lack of cash is not the only problem for an industry 
that employs 1 million people in India, most of them in this 
city. Modi's shock treatment is intended to make it much more 
difficult for those laundering ill-gotten gains or evading 
taxes, and that means diamond buyers are demanding proof of tax 
payments that are often not available, the traders said. 
    Top diamond miners, such as Anglo American-owned  AAL.L  De 
Beers and smaller Canadian producers such as Stornoway Diamond 
 SWY.TO  and Dominion Diamond  DDC.TO  are seeing weaker demand 
and prices for cheaper stones used in lower-priced jewellery. 
    The picture for retailers and consumers of diamonds is less 
clear. The cash crunch has also badly hurt consumer demand for 
diamond jewellery in India, the world's third-biggest market.  
    That means there are more of the cheaper finished stones to 
export, helping to create a temporary glut and lower prices at 
wholesaler and store level. However, that may not last if the 
cutters and polishers of India can't get back to work soon. 
    But the luxury buyer doesn't have to worry. Much of the 
higher-value jewellery business, with the highest grade 
one-carat stones usually costing more than $14,500, is protected 
because cutting and polishing is also done in Israel, Belgium 
and by bigger Indian companies that rely on bank transactions. 
    "The knock-on effect of Indian demonetisation has meant a 
reduction in the prices of lower quality diamonds," said Tobias 
Kormind, managing director of 77 Diamonds, an online jewellery 
retailer based in London. "As a result, we've seen an increase 
in demand for those kinds of diamonds as our clients have 
snapped up these favourable deals." 
    In India, jewellery demand typically climbs in the winter 
months' wedding season. But this year sales are plunging as 
nearly two-thirds of jewellery is usually purchased with cash, 
which is in short-supply. 
    Ishu Datwani, owner of Mumbai-based Anmol Jewellers, says  
his sales are down nearly 70 percent since the government 
scrapped the high-value notes. 
    The demand is unlikely to revive any time soon as India 
struggles to dispense enough new notes, industry officials say.  
    "During the cash crunch, diamonds are one of the last things 
people want to buy. At least for the next six months demand will 
remain weak," says Praveenshankar Pandya, head of India's Gem & 
Jewellery Export Promotion Council (GJEPC). 
    The crisis hit at a time when there were plenty of stones in 
the retail pipeline or being processed. India's rough diamond 
imports between April and November jumped 30.5 percent, while 
exports of cut and polished diamonds during the period rose 12.2 
percent, GJEPC data shows. 
    Diamond processors bought rough diamonds aggressively, 
expecting a jump in exports and rising Indian demand, but now 
they are struggling, said trader Dharmesh Navadiya. 
    In trading hubs like Hong Kong, many retailers are stuck 
holding diamonds they bought three years back at higher prices 
expecting robust demand from China that didn't materialise. 
    "There has been no supply crunch as the market is already 
flooded, especially the low carat diamond," said Jonathan 
Rotbart, a distributor of gems in Hong Kong. 
     
    "SHOCK TO THE MARKET" 
    "The market is frozen. We don't have cash to buy diamonds," 
said Kalpesh Savaliya, a trader for 25 years who was sitting 
cross-legged on a mattress behind a low wooden desk in Surat. 
    As small operators close, India's rough diamond imports 
could decline by up to 25 percent between December and March, 
said Mehul Choksi, chairman of Gitanjali Gems  GTGM.NS , India's 
biggest diamond jeweller. 
    Miners are already feeling the pain with some lower-quality 
stones being discounted by more than 25 percent from prices 
before demonetization, said Panmure Gordon analyst Kieron 
Hodgson, in a recent note to clients. 
    In its final 2016 tender, De Beers said sales were affected 
by a slowdown in lower-value rough stones, a trend Hodgson 
expects to see repeated for at least the next three months. 
 urn:newsml:reuters.com:*:nL5N1E81LV 
    Dominion Diamond, with stakes in two Canadian mines, expects 
its sales in its fourth quarter ending Jan. 31 will be hurt by 
the Indian cash crisis, and sees weaker demand for small stones 
extending to its fiscal first quarter. Demonetization was a 
"shock to the market," said Chief Executive Brendan Bell. 
    Stornoway, which this year finished building Quebec's first 
diamond mine, withdrew smaller, lower-quality stones from its 
first-ever tender in November due to poor demand and prices.   
    But Mountain Province Diamonds  MPV.TO , which owns 49 
percent of Canada's newest diamond mine, Gahcho Kue, indicated 
it isn't overly worried. "Small diamonds are roughly 80 percent 
of your production and 20 percent of your revenue - and the 
demand for the large diamonds remains robust," said CEO Patrick 
Evans. 
    "The diamond market is fine. Average prices are up 7 to 9 
percent this year, but small diamonds are down about 50 
percent." 
 
 (Additional reporting by Nicole Mordant in TORONTO, Jan Harvey 
in LONDON, Nallur Sethuraman in BENGALURU and Marcy Nicholson in 
NEW YORK; Editing by Martin Howell) 
 ((rajendra.jadhav@thomsonreuters.com; +91-22-6180-7153 ; 
Reuters Messaging: 
rajendra.jadhav.thomsonreuters.com@reuters.net)) 
 
Keywords: INDIA DIAMONDS/MINING