Diamonds no longer a man’s best friend
How do diamond merchants spend the week after Diwali? Laughing all the way to the bank perhaps? Looking at the roadside hoardings, the celebrity endorsements, and the festival offers, the diamond industry appears to be in a sweet place. Business is booming by 25% annually. What's not to love? Until you take a closer look.
A peek into the world of diamonds shows an industry trapped by its own success. Traditionally, the diamond polishing industry has followed the trail of low labour costs. New York was a major diamond manufacturing centre once. Lower wage bills in Europe brought the industry to Belgium, then to Israel and now to India.
For the last 20 years, a skilled and cheap workforce has been India's unbeatable advantage. An army of 3 million men in the bylanes of Surat and Jaipur cut and polish 120 million carats in rough diamonds imported from Africa and Australia. Indian craftsmen are also able to cut 54 facets in diamonds so tiny that 250 fit into one carat. No other country can match this skill. Cut and polish add 30% to the value of rough diamonds. But profit margin rarely exceeds 2%. Even so, life has been good because volumes are large. India now processes 11 out of every 12 diamonds sold in the world. It has the global monopoly in polishing small diamonds. Herein is the root of the crisis.
All diamond mines in the world mostly produce small stones. The size of the diamond dictates where it should be processed. So, diamond miners De Beers Group, Russia's state-owned giant Alrosa and the second largest diamond producer in the world, Rio Tinto and BHP Billiton have no option but to deal with India. These miners kept an iron control over distribution and force India to buy from Belgium and Israel. Now diamonds reach us through several distribution chains, including direct supply contracts. Unable to dictate terms like before, miners are developing processing hubs in China, Russia, Vietnam, Malaysia and Botswana.
Mining nations in Africa are equally keen to challenge India’s supremacy. They want to create more jobs through local value addition and are barricading rough diamond export to India. Close rival China is partnering mining companies in the global search for new deposits. Even if there were no threat to raw material supply, Indian industry would still be anxious. We are close to maxing the opportunity in rough diamond processing. What's left is a tough future. Traditional business needs to urgently move up the value chain.
Jewellery manufacturing is the logical next step because it adds 30% in value. The market has two tiers: one for top-quality large stones two carats or larger; and a second market for smaller stones used in mass jewellery. Neither is a cake walk. High-end jewellery is dominated by Belgium, Hong Kong and Dubai. The biggest market is the USA, where luxury brand building is not for the faint-hearted.
Developing nations like India, China and CIS are the fastest growing market for commercial jewellery. India is unique in offering wide variety of gems and plain, diamond-studded and coloured-stone-studded jewellery suited for every need of every market in the world. No competitor offers buyers such a complete range of choices.
But the large number of players leads to price undercutting. Mass manufacturers have begun supplying to jewellery brands here and overseas. The upside is that these factories save on marketing. The downside is being condemned to job work and wholesale rates. Those who decide to open their own showrooms have different problems. It costs at least Rs 80 lakh to set up a 1,000-sq foot showroom. It must keep a sufficiently large choice to attract customers. Designs can't be standardised because local tastes vary sharply. A store which keeps 650 pieces of jewellery, for example, is effectively locking up Rs 2.50 crore in working capital. Short fashion cycles intensify the pressure on cash. Volatile diamond and bullion prices raise the cost of financing stocks. The cost of brand-building is extra. Multiply this into the number of stores and you know why jewellery retail is more about cash than carats.
In short, our diamond industry is in the throes of a convulsion. Rough diamond processors will eventually lose global market share. Reduced raw material will raise price volatility in a more trader-driven market. Mass jewellery manufacturers will become more dependent on their top buyers in a slowing economy. High-end diamonds are also competing with luxury holidays, flat-screen TVs, spa weekends and cars. The brands are grappling with debt and rentals. Across the chain, people are losing pricing power. Who will survive in our market? Definitely those who can handle the stone from mine to velvet box. Along with those who become giants in their segment. Competition will grind the rest. Diamonds may be forever. But the profits are certainly ephemeral.
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