The announcement of the new De Beers client list has triggered dismay in the Indian diamond market, not so much because of any individual companies that were dropped as much as the fact that it will choke off a huge amount of raw material supplies to the country in general. The Indian diamond cutting and polishing industry employs upwards of 700,000 people and any raw material shortages will result in massive lay-offs. Vinod Kuriyan reports.
Diamond manufacturing on its own is too uncertain a business with not enough rewards to justify the risks and uncertainty at the end of the day. Only the mining companies at one end, the retailers at the other and some giant, vertically integrated diamond manufacturing firms will survive and thrive in this industry. There will be a spate of failures this year and a huge amount of consolidation into the hands of the big players and the giant secondary diamond market that is a characteristic of the Indian industry will diminish substantially. No one wants to really discuss plans for the future.
The paragraph above sums up the feelings of a wide cross-section of the Indian diamond industry – sightholders, both current and some of those dropped, as well as non-sightholders – with whom Solitaire spoke on condition of complete anonymity in the wake of the De Beers Diamond Trading Company announcing its preliminary list of sightholders for the contract period 2008-2011 on December 17, 2007. The terms and conditions of the new contract period are supposedly the new and improved version of De Beers’ Supplier Of Choice (SOC) initiative with all the bugs ironed out.
Dubbed SOC-2 by the trade, this was supposed to bring stability and confidence to the diamond industry. In actual fact, the effect of the new client list has been somewhat the complete opposite. A key reaction is a sense of bafflement at De Beers’ thought processes. A prime question is why were some solid companies that were considered market leaders among those dropped?
Many feel there isn’t a good reason and that the new SOC-2 list is anti-Indian. That it is designed to reduce the influence of Indians on the global industry. How, they ask, could the DTC assess their clients on the basis of distribution, which was the main criterion for SOC-1, and then suddenly rate them on the basis of whether they are the best in their particular category? They had almost readymade grounds to drop these clients.
"The DTC’s decision is disastrous for the Indian industry as a whole... it will result in a 25 per cent reduction in rough diamond supply to the Indian market."
Sanjay Kothari
GJEPC chairman
One view was that the Indian industry should now aggressively follow up on its plans to transform India from being merely a manufacturing centre to a global trading hub for rough and polished diamonds and jewellery as well. “If we become a trading hub, everything will be available in the market here. The rough will come too, the way it came to Antwerp,” said one. This, however, many noted, is an uphill task, with several bureaucratic and legislative hurdles that needed to be cleared away – in a major hurry.
Many wanted Diamonds India Limited (DIL), the rough sourcing company floated by some 60 Indian diamond firms and has had some major successes in sourcing rough, particularly from Russia, to now pull out all the stops and consider expansion plans that might even involve the acquisition of existing diamond mines.
Most of all, however, the Indian diamond market is resonating with a feeling of uncertainty. Many think diversification into other fields is a necessary hedge. Almost all say major – and unpleasant – things will happen in 2008.
To recap on events, the DTC’s client list for the new SOC-2 period dropped 25 firms globally and added six new ones. The global list was pared down to 75 from the previous 94. While three new Indian firms were among those added to the list, eight existing ones were among those dropped. In addition, three Indian-owned Belgian firms were also dropped, though one of these Jayam, had already been notified that it would not be considered for the new contract period and had filed suit against De Beers. The three Belgian firms were all rough diamond dealerships and the bulk of their product came to India for processing.
Gem & Jewellery Export Promotion Council (GJEPC) chairman Sanjay Kothari, in a press conference in early January, termed the DTC’s decision disastrous for the Indian industry as a whole. Kothari’s essential concern was with the huge secondary market that flourishes in India and is populated mainly by small and medium enterprises. He maintained that while the selection of a client list was De Beers’ prerogative, the GJEPC is worried that the new list will ensure that raw material supplies to the secondary market will be choked off.
“The concern is over the impact of the DTC’s decision on the industry as a whole,” he said, adding, “this move by the DTC will consolidate the business into fewer hands, as small and medium cutting and polishing operations that depend on rough diamond supplies through
intra-trade dealings with sightholders, will have to discontinue operations, leading to massive unemployment in the sector.”
In Kothari’s view, the new list would result in a 25 per cent reduction in rough diamond supply to the Indian market. This, while the GJEPC’s estimate was that the global shortage of rough diamonds amounted to no more than 10 per cent. Kothari also said that some of the firms eliminated had recently invested huge amounts in infrastructure – including factories that would employ thousands – on the confidence generated by an assured supply of rough. Pulling the plug on them, he said, would trigger a massive loss of trust and business confidence throughout the industry.
While the DTC has all along maintained that there isn’t enough rough to go around for everyone, the GJEPC counters that the DTC “confounds its own reasoning by massively increasing allocations to several existing sightholders – some have been given double their current supplies – while dropping others from the client list.”
Kothari also said that the DTC had the option of keeping supplies to the Indian secondary market open by boosting allocations to the Hindustan Diamond Company, a joint venture rough dealership between De Beers and the Indian government that functions as the country’s Diamdel supply system to non-sightholders. This, he said, hadn’t been done.
Kothari also pointed out other ill effect of the SOC-2 list. “No industry with any long-term vision can continue to do business with confidence or develop any plans for the future if it continually wonders whether its raw material supplies could completely vanish in an instant,” he noted.
The shortages of rough diamonds in India would cause prices to soar out of control as desperate diamantaires overbid on what supplies would be available in order to ensure their survival. Already thin profit margins would erode further and more business failures would be inevitable. Kothari said that the strong rupee and the drop in demand from the US had already cost about 150,000 jobs in India. The shortages in rough supply could eliminate another 100,000 jobs.
At the time of writing, the DTC had already announced its first price hike of the year. Indian diamantaires have braced themselves for a rough year.
