Mumbai-There are dark clouds on the horizon as the Indian diamond industry prepares to enter the final months of 2023 and look beyond into early 2024.
The clouds have been gathering for some time, the result of several smaller storms that have been brewing over the past year or so.Major markets are experiencing an economic slowdown, with the shadow of a possible global recession looming large. Geopolitical alignments are shifting, a factor that has gained momentum since the start of the war in Ukraine.
These developments are having a major impact on global trade. In addition, there has been a sudden shift in market dynamics in the diamond jewellery retail sector, particularly in the United States, as lab-grown diamonds have made rapid inroads into the engagement ring segment.
Over the past 12 months, the production of polished natural diamonds has slowed to well below last year’s levels. Figures released by the Gem & Jewellery Export Promotion Council (GJEPC) show that between April and August 2023, the first five months of India’s fiscal year 2023-2024, exports of polished diamonds fell by 30 per cent in value terms from $10.01 billion to $7.03 billion and by 28 per cent in volume terms to 8 million carats from 11.1 million carats a year ago.
Sluggish global consumer demand
Ajesh Mehta of D. Navinchandra Exports, who is also the convener of the GJEPC’s Diamond Panel Committee, characterises the downturn as the result of “the vicious circle of market forces”.
“Demand is sluggish around the world,” he explained. “The plateauing of the US market was not entirely unexpected, as the stimulus effect had ended and other categories of luxury experiences such as holidays, travel, etc. were once again available to consumers.”
However, the global slowdown was deeper and broader than expected, he noted. Diamond market analyst Pranay Narvekar of Pharos Beam Consulting said the no-show of Chinese consumers has hit the industry the hardest.
“Indian diamantaires had high expectations after that market opened up in early 2023. But as the year has progressed, Chinese demand has remained stagnant. An important part of the global market has disappeared.”
Sabyasachi Ray, executive director of the GJEPC, believes that small goods manufacturers have been most affected by the lack of demand from the Far East, which they had hoped would offset the end of the surge in demand from the US market.
In addition, there is another challenge facing the industry in what he characterises as “mid-size goods”, diamonds between 0.70 and 2.5 carats. US consumers have shown a preference this year for lab-grown diamonds in these sizes. “India also has a significant share of these sizes,” he said.
Impact reaches supply side
As is often the case, changes in supply patterns have lagged behind the decline in demand. The inflow of rough diamonds has not slowed at the same rate as exports. In the first five months of this fiscal year, Indian imports fell by 18 per cent in value terms, from $7.9 billion to $6.4 billion, but remained flat in volume terms.
Observers believe that cutting and polishing of natural diamonds has been running at around 50 per cent of capacity for the past year. However, unlike in previous downturns, this has not led to idling and mass redundancies.
Most units have made a fairly seamless transition to cutting and polishing lab-grown products, and some have shortened the work week and reduced wages accordingly.
The traditional closure of diamond factories during the Diwali festival, which falls in mid-November this year, is expected to be longer than usual. Meanwhile, manufacturers’ inventories of polished diamonds are building up, although prices have fallen for most sizes.
Talks with miners
Against this backdrop, the Indian industry has approached the major mining companies. “After extensive consultations among diamantaires, we have been in touch with miners and have asked them to adjust their supply as per the market realities,” said the GJEPC’s Ray. “We are hoping for a positive response so that we can all tide over this difficult period together.”
India’s domestic market offers another ray of hope.Ajesh Mehta said, “The buzz at the [new loose] diamond show held as part of the IIJS premiere indicated that demand in the country remains strong and the trade is looking to Diwali and wedding sales for a boost.
The outlook for China remains unclear and the industry is hoping that the Hong Kong show at the end of September will give some indication of which way the wind is blowing, he added.
Depending on the outcome of these markets and the steps taken by mining companies, the industry will plan its next steps to balance the supply and demand equation.
The war in Ukraine
India is also bracing for new challenges after the leaders of the Group of Seven (G7) nations announced that they would work together to tighten sanctions on Russian goods, including diamonds. The new sanctions will reportedly come into force on 1 January.
Discussions have taken place on a government-to-government basis and the exact details of the restrictions that will be implemented globally remain unclear at this stage.
Many in the industry are hoping that they will only apply to goods weighing 1 carat and above. “In our discussions with US officials, we have emphasised that tighter sanctions will affect the livelihoods of millions of artisans and their families,” said GJEPC officials.
While individual companies with significant business in the US had already taken steps to ensure segregation within their pipeline following the initial sanctions in 2022, preparations for an industry-wide system are now underway.Trade bodies are putting the finishing touches to a system that will track all goods above a certain size as they pass through the cutting and polishing process in India.
GJEPC officials said that once this system is in place, an official body will be able to certify the segregation of a wide range of polished goods, barring perhaps the very small sizes. This will ensure that sanctioned goods are not sent to G7 markets, they said.
Disruption has become part and parcel of every business today, driven by a combination of factors ranging from new technologies to political alignments to consumer sentiment.
As a senior member of the industry recently remarked, “The natural mined diamond manufacturing industry in India seems to be going through such a disruption today”.
