Parekh Sheikh has just returned to Surat from his village in Uttar Pradesh. He left the city in one of the first special trains to Uttar Pradesh during the lockdown. As a worker in a diamond unit in Surat, whose 20,000-plus units cut and polish nine out of every 10 rough diamonds in the world, Parekh was earning over Rs 600 per day. He tried farming back home but realised that earnings were not enough to feed his family of seven, including three children and parents. He decided to return when former colleagues told him on phone that diamond factories in Surat were re-opening. Though prospects are not very bright now due to persisting coronavirus fears, he is confident of getting his old job back as "sethji has got some big orders."
This is a sea change from just six months ago when the future looked dark due to sudden shutdown of factories and that too after several quarters of recession for the diamond industry. Cut and polished diamond exports fell 48.31 per cent in FY20.
Then came the lockdown. India's diamond exports fell 37 per cent to $5.5 billion in first half of FY21 and are expected to be 20-25 per cent lower for the full financial year.
But there is light at the end of the tunnel. After several painful quarters, the industry, based in Surat, is looking forward to demand revival as the global holiday season approaches. Also, many big diamond mines across the world are shutting down, which means prices will firm up as high quality and fancy diamonds, one of the last words in luxury, become more precious and rare. The worst seems to be over for the Indian diamond industry.
About 142 million carats of diamonds were mined worldwide in 2019 in major producing countries such as Australia, Canada, the Democratic Republic of Congo, Botswana, South Africa and Russia. Worldwide reserves are estimated to be 1.2 billion carats. Russia has the largest reserves, estimated at 650 million carats. A total of 177 million carats were mined globally in 2005, a number that had fallen to 142 million carats by 2019 and is projected to be 112 million in 2020 and 118-125 million for the next five years.
One of the biggest reasons for lower production is closure of mines. Snap Lake, De Beers' first mine in Africa, and Canada's first underground diamond mine, were closed last year. Argyle in Australia, which supplies 90 per cent of the world's rare and precious pink diamonds, is about to shut operations by the end of 2020. This has already pushed up demand for the precious pink diamonds - which fetch anywhere between $1 and $3 million per carat - even higher. Then, the Diavik mine in Canada is expected to be shut in 2025. Overall rough diamond production could fall by 20 per cent in the coming years, say industry experts.
Further, the period beginning 2019 was followed by lower-than-expected demand for polished diamonds globally, causing a ripple effect through the supply chain, says a 2019 Bain & Company report. Then came Covid-19, which affected the entire value chain from mining to retail. Indian polished diamond sales could decline as much as 30 per cent to about $13 billion in FY21, a Moodys Investors Service report said in June. With the industry falling into a coma due to Covid-19, trade shows were cancelled globally, and leading miners resorted to production cuts to stabilise prices and get more value for their products. Alrosa, De Beers and Rio Tinto control a lion's share of the global market.
Global revenue from rough diamond sales will fall 30-40 per cent in 2020 and grow 20-25 per cent in 2021 to $10 billion, says the Moody's report. Rajesh Shah, Partner of Venus Jewel, Surat, says polished diamond prices are expected to rise 2-5 per cent in the next one-two years, mainly due to scarcity of natural diamonds and rise in mining costs, which will drive up prices of rough diamonds. There is no new supply in the Indian market as cutting and polishing centres like Surat were shut from March to May and most have leftover inventories.
A Luxurious Opportunity
The top players are optimistic. "Since everything was shut during the lockdown, there was no question of supply coming in, even if imports were not curbed. There was never a gap between demand and supply. Crash in prices is possible only if there is excessive supply and less demand or less supply and excessive demand," says Sachin Jain, President, Forevermark India, the diamond brand from the De Beers Group.
Russell Mehta, Managing Director, Rosy Blue India, says, "The self-imposed discipline in rough imports was to address this impaired demand and liquidity mismatch due to meagre sales in Q2. Barring a few areas of goods, there is enough inventory to service the impaired demand," he says.
Despite the stalemate, diamond prices have remained stable as the industry avoided panic-selling during the crisis, which helped stabilise prices and drive sales, says Colin Shah, Chairman, Gem and Jewellery Export Promotion Council (GJEPC).
While high value and rare diamonds, a passion for the super rich, will continue to be in demand, prices of low carat pieces will go down, offering an investment opportunity. The US and China are the biggest buyers of diamond jewellery.
"Lower operating capacity in manufacturing units (in Surat) may widen the gap between supply and demand. This is the right time to buy diamonds as prices are soft," says Shailesh Sangani, Managing Director, Priority Jewels, Mumbai.
Prices of 5-10-carat diamonds were at a three-year low until recently. "The price of an eight-carat round diamond is 30 per cent less than the level three years ago, and may go up as demand increases, offering an interesting investment opportunity," says an industry expert. At the recent Christie's Jewels auction in Geneva, a diamond ring by Reza set with a fancy vivid blue diamond of 5.34 carats and a D-colour diamond of 5.37 carats, fetched $9.25 million. Similarly, at a New York auction, a necklace featuring a pear-shaped diamond of 115.83 carats got $6.29 million.
"Demand from USA, China, Middle East and parts of Europe is encouraging. In India, sales will be driven by factors like postponed marriages, festivities and other gifting occasions," says Colin Shah. A part of consumers' disposable income which was earlier spent on travelling and vacations will get diverted towards jewellery, he adds.
In Mumbai, the GJEPC's first virtual India International Jewellery Show on October 12-16, attracted 330 exhibitors, 8,000 buyers, 2,900 meetings and 200 visitors from abroad. Global industry leader De Beers sold about $467 million rough diamonds in its recent eighth sales cycle of 2020 compared with $334 million in the previous cycle and $297 million during the same cycle in 2019.
Whether costly or not, diamonds as a luxury is there to stay.