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14th October 2009
A Diamond Dilemma
The continuing economic problems faced by America, the main consumer of cheaper Stars and Pique polished could potentially have considerable effect on the industry, and India in particular. The Indian manufacturing industry in Surat has already lost somewhere in the region of 25% of its workforce specialising in this type of rough, lured away into other higher paying industries, as diamond polishing found itself at a near standstill in the latter part of 2008. If, as we have witnessed over the past year the Indian and Chinese domestic markets become the new focus for polished production, and their requirement’s are bigger sizes and better qualities, who will be left to manufacture the cheaper small goods when America does climb out of the current recession? The numbers problem could possibly be exacerbated over the next few weeks as the Indian Diwali holidays begin and factories close, as there is a possibility that workers will not return to the industry when the factories reopen, although the poor monsoon and a slowdown in the textile industry could alleviate the problem.
The dilemma for the manufacturers is that in order to maintain the workforce, labour costs will have to increase to comparable levels of competing industries, which in itself is difficult to justify when the resultant polished is not in demand and certainly not able to bear an increased price tag.
This situation is not only serious for the manufacturing industry in India, who could lose a unique skill base developed over many years, and therefore difficult to replace, but also the rough producers need to be aware.
From their point of view these cheaper goods represent a significant proportion of the worlds diamond deposits (in carats), which when production levels begin to increase will have to be sold. The favoured option of continuing to sell the goods could have a downward effect on price which in all likelihood would have negative implications for the better quality bigger sizes as well. Holding back the goods, might be the only answer in maintaining price equilibrium in the pipeline.
Looking ahead, perhaps the implications for the manufacturers are even more concerning. If as we are currently witnessing there is an increase in demand for the larger (grainer sizes) from India, where will the rough requirements come from? The DTC is committed to its beneficiation policy with its producer partners and increasing quantities of these goods will be ear marked for local production, which will certainly create shortages and make for even greater competition amongst Sightholders in the next selection process. Alrosa are still operating a new and generally untested sales system, and BHP and Rio Tinto do not have the volumes available to satisfy demand. In short, regular and consistent supply, the absolute requirement for a manufacturer to remain in business, will be hard to come by.
For the time being this particular dilemma is not uppermost in people minds, but as time moves on and manufacturing profiles in India change to capture new markets and pockets of demand, we should not forget that America will recover and its vast appetite for cheaper diamond jewellery will again need to be satisfied.
The implication of the DTC’s beneficiation policy also raises further points for consideration. With a growing proportion of gem quality goods in the +4gr range finding their way into the beneficiation system, the competition amongst the many excellent manufacturers of these goods outside of producer countries will of course be keen. The producers could also be faced with a real shortage of first class and fully BBP compliant manufacturing capacity if companies fail to secure supply.
As mentioned earlier the most valuable business component for a manufacturer is a consistent supply of the same goods at a fair price, and we believe that from the DTC perspective they remain committed to a policy of sustainable supply of goods into the right hands. The DTC, by their own admission have said that these goods (+4gr gem qualities, and particularly +2 carat sizes) are indeed the "jewels" of our business and are becoming increasingly rare. How then can it be justified that the leading manufacturers in the world, and those who are in a position to add the greatest amount of value to this precious resource, should have to pay premiums to dealers who in turn offer no value addition or regular and consistent supply to the manufacturer? Surely the DTC has the opportunity to maximise price in these ranges by offering the goods directly to manufacturers who will certainly pay a little more for the certainty of supply, and use the natural element of competition to ensure their goods are going into the very strongest hands. These are certainly not goods that should be put into the market to fuel opportunism and speculation, but should remain firmly in the hands of those who maximise their value and give the greatest return to the DTC.
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