Industry Analysis "I would classify the problems faced by the diamond industry as structural and situational," said Neelesh Hundekari, principal, A. T. Kearney Ltd., a global management consulting firm. "While no one anticipated the current financial crunch/meltdown/downturn in the global markets, which exacerbated the situation drastically, some of the structural problems already were known."

Sharing his observations on the diamond market over the past two years in an interview with RDR, Hundekari suggested that "The origins of many of these current problems can be traced back to what happened between 2000 and 2005. While diamond jewelry worldwide has grown by less than 5 percent in value terms between 2000 and 2005, rough production grew from $7.8 billion to $12.7 billion and rough prices grew at a compound annual growth rate (CAGR) of 9 percent plus over the same period.

Polishing capacity kept pace with rough production and greater polishing capacity kept driving the demand for rough to almost irrational levels. This led to a significant accumulation of polished inventory in the pipeline. As a consequence, since 2005, credit terms for polishers have been increasing until they extended beyond 180 days. Some industry observers expected that polished inventory levels would become unsustainable by 2008, leading to consolidation," which is precisely what has happened.

Hundekari feels that overdependence on the U.S. market all these years also has contributed to the current crisis. "With 45 percent of the diamond jewelry sales coming from the U.S., where domestic consumption has reached peak levels (meaning consumption exceeds savings at a national aggregate level) the industry was susceptible to even a slight reduction in the U.S. market. The moment growth in the U.S. market began to stagnate, the upstream industry started having problems."

In terms of correction, Hundekari mentioned that a correction was expected in rough prices in the 2008/2009 period, which is, of course, currently happening. "Reduction in employment in the diamond industry in India was also expected," he said, "which is now visible. However, in the absence of the global downturn, this correction would have helped the industry consolidate, flush out the old inventory, bring rough prices and production more in line with end jewelry demand and make the portfolio of markets more balanced. However, the downturn is going to delay the recovery of the global industry easily by 12 to 18 months."

Hundekari added that the core strengths of the Indian industry(mass production at inexpensive labor rates and timely delivery) "have not disappeared and they will help the industry emerge stronger from this crisis. Capacities will get balanced, consolidation will happen, the bargaining power relative to the miners will increase and productivity/efficiency will become an important differentiator."

From the GJEPC Since Vasant Mehta took over the reins from Sanjay Kothari as chairman of the Gem & Jewellery Export Promotion Council (GJEPC) in October 2008, he has faced a tough time with the market. Speaking with RDR, Mehta expressed his wish to see an additional 2 percent credit on interest (in addition to the 2 percent already granted) along with expanded dollar availability and greater gold supplies in remote parts of India, where consumers who cannot afford jewelry might purchase gold as an investment.

Mehta said, "We expect the industry in India to take a positive U-turn in another four or five months, considering production already has been reduced by almost 60 percent. That will help to stabilize the demand/supply ratio in the coming months, which will in turn help stabilize prices and help clear the inventories." In a way, the economic downtown is an advantage to India because it has increased demand for less expensive goods, which India is capable of producing.

In regard to displaced workers in Surat, where most of India's diamond processing is headquartered, Mehta said the Gem and Jewellery National Relief Foundation (GJNRF) has authorized donations to help pay school fees for diamond workers' children in the area, as well as other miscellaneous expenses. In February, The Times of India also reported that the Indian government and industry entrepreneurs had joined in recruiting jobless workers from Surat's diamond industry for subsidized training and positions in the garment, embroidery and power-loom manufacturing units, where workers are in short supply.

The Marketplace Domestically, movement has been seen in light brown (LB) goods. In terms of clarity, the greatest movement domestically is in VS1. Overall, domestic demand is not good for VVS. Internationally, business with the U.S. is showing no positive signs. For the export market, VVS goods are in short supply at current market prices, resulting in increased demand. Manufacturing in India is down by almost 30 percent but this is considered a prerequisite to bringing the demand/supply ratio into balance.