Despite the shock from the 2018 Nirav Modi scam, the Indian diamond industry is expected to grow at a healthy 3% in 2019, says a report.

According to the Global Diamond Report 2019, the Indian diamond jewellery market declined 1% in 2018 following rupee depreciation and the bankruptcy of Gitanjali, a prominent jeweller promoted by Mehul Choksi, Nirav Modi’s uncle who fled the country.

However, sales are expected to grow in 2019 due to increased customer confidence, rising working women population, and a shift in preference from occasion-only to everyday jewellery, says the report, prepared by Antwerp World Diamond Centre (AWDC) and Bain & Company.

The Indian diamond industry is yet to fully recover from the impact of the Nirav Modi scam. The peculiar nature of India’s diamond trade is such that when big fishes run into trouble, mid-sized ones too suffer; some of them are pushed to the point of extinction. “In 2019, access to affordable financing became even more challenging for mid-sized players,” says the report, adding financing for mid-sized players globally fell by 30% ($5 billion) since 2013, crippling the ability of manufacturers to grow operations. “While traditional diamond banks curtailed their exposure to the sector, Indian banks adopted a more conservative approach following the poor performance and challenges of the Indian financial sector at large,” it points out. As a result, cutters and polishers reduced rough diamond purchases by 30% to clear inventory and improve their cash flow. All this at a time when luxury spending draws higher taxes, gold prices are rising while the rupee is weakening.

After a period of mild growth through 2017 and 2018, the global diamond industry has struggled to maintain buoyancy in the first three quarters of 2019 due to falling consumer confidence and geopolitical uncertainty. Despite short-term challenges, Bain & Company believes the outlook for the diamond market remains positive in the long term. In volume terms, rough diamond supply growth is projected to be -2% or 0% annually. However, demand for mined rough diamonds is expected to recover, either staying flat or growing up to 3% annually through 2030.

India continued to dominate the cutting and polishing industry.
India continued to dominate the cutting and polishing industry.
Image : Bain & Co.; The Global Diamond Industry 2019

But that kind of recovery requires continued growth of gross domestic product (GDP), rise in middle-class income, and increase in purchasing power—particularly in China and India. In order to convert increased wealth into growth, the report says, the industry must provide structured marketing support. The report opines that both industry-wide and company-specific marketing are necessary to revive and sustain demand.

The report further highlights that the combination of lower polished diamond sales and excess inventory accumulated by the midstream in 2017 and 2018 reduced net imports by 3% and 30% in 2018 and 2019, respectively. “India experienced the steepest decline,” says the report. In India, net imports of rough diamonds decreased 3% in 2018 and 32% in the first eight months of 2019. “Weakened local currency, liquidity issues resulting from bank financing cuts, and on-going effects of demonetisation contributed to stockpiling of incoming goods.”

In 2019, interest rates, maturity, and availability of financing continued to challenge the midstream segment. Interest rates increased to match rising default risk. Also, in 2019, cutting and polishing players needed longer-maturity loans for two reasons: growth in consignment practices increased the number of days for receivables to turn over, and inventory turnover days increased because of lower demand among certain assortment groups.

Growth of China’s and India’s middle class will reinforce positive long-term demand
Growth of China’s and India’s middle class will reinforce positive long-term demand
Image : Bain & Co.: The Global Diamond Industry 2019

But, going forward, the U.S., China, and India will continue to lead growth in diamond jewellery consumption. “Following a relatively brief recession in the next one to two years, we expect the U.S. to grow around 2% annually in the long term,” the report highlights. “The middle class will expand in China and India by 4% and 9%, respectively, and personal income will increase for millennials and Generation Z.” In combination, these factors provide a strong foundation for growth, Bain & Company believes. “Growth rates may be slower over the next few years if a global economic slowdown occurs but long-term diamond jewellery consumption should be unaffected.”

However, the report also sheds light on its forecast going awry since it does not consider several factors that could disrupt the supply-demand balance in the short term and slow the overall global trajectory. “Consumer confidence and demand for diamond jewellery could be negatively affected if the U.S. recession is longer than expected or if the slowdown and uncertainty in China caused by trade tension continue,” it warns.

In addition to that, the on-going currency fluctuations and short-term policy changes in India could disrupt the country’s potential, the report adds. The biggest potential disruption is consumer preference, for which continued and concerted marketing efforts are imperative to sustain long-term demand.

In India, net imports of rough diamonds decreased 3% in 2018 and 32% in the first eight months of 2019.
In India, net imports of rough diamonds decreased 3% in 2018 and 32% in the first eight months of 2019.
Image : Bain & Co.: The Global Diamond Industry 2019

On the Indian macroeconomic front, the report highlights that although a near-term recession is expected, the long-term macroeconomic forecast is positive as fundamental factors remain strong; robust domestic consumption supports an annual 6% GDP growth forecast. “The middle class is expected to double, driven by urbanisation and innovation, and a 5%-10% increase in working women is expected over the next decade.” Effectively, in Bain & Company’s view, the long-term annual growth of the Indian diamond jewellery market is expected to be between 3% and 5%.

At the global level, the report foresees that rough diamond sales are expected to fall 25% in 2019, though production may remain stable. Major rough diamond producers responded to midstream pressure by increasing their inventory levels and offering more flexible purchasing terms, cutting rough diamond prices by 5%. Junior miners lowered prices by 7%-10% in attempts to minimise inventory.

However, the Bain & Company report brought solace to the industry. “The market typically returns to pre-crisis levels within one to two years,” the report says. According to the report, apart from the current downturn, the diamond industry has faced only four recessions in the past 50 years. “In the same time frame, rough diamond production has grown three times, and the prices of rough and polished diamonds have increased 450% and 250%, respectively.”

Bain & Company expects the midstream to clear its inventory backlog at the beginning of 2020, bringing a better year for the industry. “However, based on our historical analysis, the industry is not likely to fully recover in 2020 because of on-going supply-demand inequality and limited growth of financing options for midstream players.”

The report doesn’t expect significant retail growth in 2020 as consumers brace for a global recession. “The industry will have a stronger chance to rebalance and grow in 2021.”

The problems for the industry will continue at least for a year, the report says.

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