India matters

Avi Krawitz

The annual India International Jewellery Show (IIJS) has surprisingly set the tone for what followed in the global diamond market in the past two years by going against the grain of expectation.

In 2010, suppliers held their prices firm after a quiet summer, which, encouraged by a strong Diwali festival, sparked a trading and price frenzy that lasted until the following IIJS. Perhaps it’s the timing. July and August tend to be a tricky period for the trade with dealers in the U.S., Belgium and Israel taking vacations, presenting an illusion of quiet in the market, whether real or not.

But in 2011, the market peaked in July and the Indian industry showed its first signs of cracking at IIJS. Liquidity became problematic and global economic turmoil shook confidence. Last year’s Mumbai show failed to meet expectations and buyers demanded lower prices due to financial uncertainty. Diamond prices have been on a steady decline ever since.

The downtrend has continued until today and the prevailing weak Indian market sentiment has kept pre-show expectations low. In fact, many expect slow trading to put a dampener on the event and to continue through to the September Hong Kong show, the next market indicator and an important gauge of Far East demand.

As the largest diamond cutting and polished trading center, India exerts substantial influence over the rest of the market. Therefore, while traders across the globe may be struggling with their own economic pressures and uncertainties, they are keeping a watchful eye on Mumbai ahead of the fourth quarter.

They suspect that if polished suppliers lower prices at IIJS they will ultimately follow suit. Furthermore, they will be noting the extent to which Indian buyers are active in the market.

Hopes are not high, with good reason. It has been an especially challenging year for the Indian industry. While a decline in foreign demand has hurt exporters, domestic demand – which served as a saving grace for the local diamond trade in previous crises – has slumped.

Economic growth has slowed and the rupee has dramatically depreciated against the U.S. dollar – losing about 25 percent of its value in the past year. High inflation has ensued and the cost of living has increased. Lower than average rainfall during the Monsoon season – which continues for about another month – has compounded the economic challenges, affecting the country’s all-important agriculture sector, not to mention basic water supply to its vast population.

Consumers are understandably holding back. Furthermore, their penchant for gold, both as a discretionary purchase and as an investment, is on standby as the weak rupee pushed local gold prices to record levels above INR 30,000 per 10 gram. During the second quarter of 2012, India’s total gold demand fell 34 percent year on year to $9.38 billion in the second quarter of the year with gold jewelry demand down 26 percent to $6.46 billion, according to the World Gold Council (WGC).

Government measures to strengthen the rupee and reduce its escalating current account deficit have not helped the diamond and jewelry trade (see editorial ‘Rupee Insecurities’). A 2 percent import duty on polished diamonds served to curb round-tripping – the practice of re-importing stones to procure additional bank financing using them as new export transactions – but has also diminished India’s competitive edge. The tax is a deterrent for foreign companies to operate in Mumbai and fewer Indian buyers are traveling abroad to source goods.

The result is that while the Indian government famously helped the diamond industry ?flourish after the 2008 downturn, it’s a constraining force in today’s challenging market. The traditionally Indo-centric Mumbai market has become even more insular.

In the weeks leading up to IIJS, which started on Thursday (August 23), diamond dealers were therefore cautious. Rumors are rife around Opera House about companies in financial difficulties and smaller operations are shutting their doors. Manufacturers are being squeezed by high rough diamond prices and liquidity is tight, while diamond manufacturing is below capacity, having declined further in the past two months. Still, polished inventories are reportedly high as buyers are reluctant to buy out of fear the market has not yet bottomed out.

And that’s what traders are hoping to find out in Mumbai this next week and next month in Hong Kong. Is there some pent up Indian demand waiting to emerge around ?November’s Diwali festival and the fourth quarter wedding season? Will that spur greater ?confidence among Far East buyers? Or will demand remain tentative and prices soften further?

Much depends on the rupee, which has encouragingly shown signs of stability in the past few weeks. A sustained currency will help restore confidence among consumers and in the trade, and hopefully signal a better than expected Diwali season. More affordable rough will also enable more profitability and loosen liquidity.

But for now, market sentiment hints to a downtrend and suppliers are not banking on a boom show. Rather, the next few days are expected to reflect India’s challenging environment and the cautious mood that has defined the global industry in the past few months. Unless of course, IIJS once again bucks the trend, as it has in the past few years, and signals a positive turn in the market. Stranger things have happened and IIJS has a tendency to surprise. But few are betting on it. Expectations for the show are low, and should India’s problems persist, so will challenges for the rest of the market.

Source Rapaport