India, the world's largest diamond processing market, is in a bind. The country that imported close to $7.5 billion in rough diamonds last year has not been able to shake off the embargo on the import of diamonds from Zimbabwe. Traders maintain that this has left the door wide open for more imports into China.

In a bid to crackdown on reports that conflict or blood diamonds are being smuggled into India and laundered there, the Indian government had earlier blocked the import of roughs from Zimbabwe. The decision was a major blow to India's diamond hub in Surat, which at one point, was the biggest importer of Zimbabwe stones and had predicted high growth in 2011.

Zimbabwe reportedly has a stockpile of over six million carats. The diamonds from the country have come under an international embargo after both the US and EU opposed the unilateral decision taken in March 2011, by Kimberley Process chairman Mathieu Yamba to allow Zimbabwe to export its diamonds.

As the crackdown by Indian officials continue, the start of June saw India's directorate of revenue intelligence arresting two diamond traders for allegedly smuggling $2 million worth of Zimbabwe diamonds into Surat that did not have the requisite Kimberley Process certification.

In a bid to end the impasse, several rough diamond buyers have urged the Indian government to accept the import of stones from Zimbabwe's Marange mines. They have pointed to reports that South Africa has also authorised dealers to take stones from the controversial Marange mines.

Officials of the Surat Rough Diamond Sourcing India Limited (SRSDIL), which is a special purpose firm formed to source rough diamonds from African countries, have said that the Indian government needs to initiate action immediately since a further delay could see India losing out on the Marange stones to China and Russia.

The consortium has also alluded to reports that suggest that Zimbabwe will use revenue from its Marange diamond fields to repay China's Anhui Foreign Economic Construction Group which is building a military training facility and a defence college.

Growing concern

What has also raised concern among Indian diamond trading houses is the news that a Chinese company, Anjin Investments Private Limited, has become one of the biggest diamond miners in Zimbabwe.

As of end-April 2011, Anjin had produced 1 million carats of diamonds from a mine in eastern Zimbabwe. Anjin, which started mining in October last year, is the second Chinese mining company operating in the Marange area.

The Zimbabwe government has said that it has sold $313 million worth of diamonds produced by two companies in Marange since last year. There are five firms with licences to operate in Marange, two of them are Chinese.

According to Ashokbhai Muddal, a diamond sightholder in Mumbai's Zaveri Bazaar, ``The annual output from the Marange field has already crossed $2 billion worth of roughs, with the government promising more mining space whenever needed,''

``Clearly, China is taking control of diamond mining in Zimbabwe. At this rate, Surat traders and export houses in India will have to depend on Chinese traders for their rough supplies,'' Muddal said.

Analysts estimate that China, India, Hong Kong, Taiwan and Japan currently account for 19% of the $65-$70 billion global diamond jewellery sales. They have forecast that demand from Asian nations is set to rise to 31% from 2015.

``The Zimbabwe ban has ensured that the world's biggest diamond cutting and polishing centre in Surat is being forced to face rough times. Indian diamantaires have to look to China. This has been weighing heavily on us,'' said diamond exporter Tirodimull Shah.

He added that the Indian government's decision to ban imports had resulted in rough prices appreciating by 30% in 2010 and leading to an acute shortage in the global market.

Chandrakant Sanghavi, chairman of Sanghavi Exports, a big diamond trading house added that Chinese companies have been getting direct supplies of roughs from Zimbabwe, whereas Indian export houses and traders have to abide by the government's stay.

``This deadlock has created a difficult situation for many diamantaires. The strong support from China may also undermine the interest of Indian diamantaires in the Kimberley Process meetings,'' he added.

Zimbabwe's Mines and Minerals minister Obert Mpofu, who paid a visit to Mumbai at the start of June, is said to have had informal meetings with few of the leading diamantaires from Surat and Mumbai.

Revenue for China

Reports indicate that Zimbabwe's Defence College is being built by the Chinese in a controversial deal with the government. The Zimbabwe government is to use revenues from its Marange diamonds to pay the Chinese government's Anhui Foreign Economic Construction Group for constructing a defence college.

China's Export-Import Bank is to provide Zimbabwe with a $98 million loan while the construction group is to recoup its expenses with diamond proceeds from Anjin Investments. The deal also stipulates that Zimbabwe will pay a 0.5% management fee to the Chinese.

Reports further indicate that Zimbabwe has mortgaged diamonds worth $100 million to the Chinese in exchange for the construction of the Defence College. Albrecht Conze, the outgoing German envoy to Harare, has dismissed the Chinese investment and has termed it `exploitation'.

He has been quoted as saying that Germany was concerned about the way the Chinese were conducting business in African countries. ``Most of the agreements signed by China will buy out the whole world's raw materials and block other countries from having access to these raw materials,'' Conze reportedly said.