As a direct fall out of the Indian Prime Minister Narendra Modi’s radical move to abolish most of the nation’s cash overnight, the global diamond industry is facing disruption that could stretch through the first few months of next year, including Valentine’s Day in February.
The demonetization of the high-value banknotes from Nov. 8 has prevented many from operating 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 as the business is based on cash.
For an industry that employs 1 million people in India, the lack of cash is not the only problem. The traders said that diamond buyers are demanding proof of tax payments that are often not available as Modi’s shock treatment is intended to make it much more difficult for those laundering ill-gotten gains or evading taxes.
Weaker demand and prices for cheaper stones used in lower-priced jewelry is being seen by top diamond miners, such as Anglo American-owned De Beers and smaller Canadian producers such as Stornoway Diamond and Dominion Diamond.
However less clear is the picture for retailers and consumers of diamonds. The diamond jewelry in India is the world’s third-biggest market and the cash crunch has also badly hurt consumer demand for the same.
A temporary glut and lower prices at wholesaler and store level were created as there are more of the cheaper finished stones to export.
However there is little worry for the luxury buyer. Since cutting and polishing is also done in Israel, Belgium and by bigger Indian companies that rely on bank transactions, much of the higher-value jewelry business, with the highest grade one-carat stones usually costing more than $14,500, is protected.
“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 the winter months’ wedding season, jewelry demand typically climbs in India. But as nearly two-thirds of jewelry is usually purchased with cash, which is in short-supply, this year sales are plunging.
His sales are down nearly 70 percent since the government scrapped the high-value notes, says Ishu Datwani, owner of Mumbai-based Anmol Jewellers. Industry officials say that as India struggles to dispense enough new notes,, the demand is unlikely to revive any time soon.
“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 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.
Mehul Choksi, chairman of Gitanjali Gems, India’s biggest diamond jeweler said that as small operators close, India’s rough diamond imports could decline by up to 25 percent between December and March.
Panmure Gordon analyst Kieron Hodgson, in a recent note to clients said that miners are already feeling the pain with some lower-quality stones being discounted by more than 25 percent from prices before demonetization.
Dominion Diamond, with stakes in two Canadian mines, sees weaker demand for small stones extending to its fiscal first quarter and expects its sales in its fourth quarter ending Jan. 31 will be hurt by the Indian cash crisis. Chief Executive Brendan Bell said that the demonetization was a “shock to the market.”
Due to poor demand and prices, withdrew smaller, lower-quality stones from its first-ever tender in November were withdrawn by Stornoway, which this year finished building Quebec’s first diamond mine.
(Adapted from Reuters)