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 jewelry.
The picture for retailers and consumers of diamonds is less clear. The
cash crunch has also badly hurt consumer demand for diamond jewelry 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
jewelry 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 demonetizations has meant a reduction
in the prices of lower quality diamonds," said Tobias Kormind, managing
director of 77 Diamonds, an online jewelry 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 favorable deals."
In India, jewelry demand typically climbs in the winter months' wedding
season. But this year sales are plunging as nearly two-thirds of jewelry 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 materialize.
"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.
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."
REUTERS
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