Factories focus on melee amid slump in demand for larger sizes.
The Indian diamond industry has a habit of using vacation seasons to reset the market. The main time for this is Diwali, when factories shut down for longer or shorter stints depending on demand levels.
August is a less significant closure period, but it does contain Independence Day on the 15th as well as other holidays. And this year, with inventories high and prices weak, the industry is making the most of the downtime.
Kiran Gems, which claims to be the world’s largest natural-diamond manufacturer, is suspending production for 10 days from August 18. In a normal year, workers take a break of about five days. Other companies are extending their seasonal holidays.
The effort to reduce stockpiles predates the August hiatus. Factories in Surat have cut their production by up to a half in July and the first week of this month compared with a year earlier, executives estimated Wednesday.
“They’ve reduced [production] drastically,” said Anoop Mehta, president of Mumbai’s Bharat Diamond Bourse (BDB). “It’s come down by about 40% to 50%.”
Kiran Gems has also slashed production by 50% for the same period, said Dinesh Lakhani, its global director.
Buying less rough
In addition to inflated inventories, the cuts reflect a desire to reduce the losses that manufacturers have been incurring due to relatively high rough prices and low polished ones.
“If I can’t make money, then I’m paying for my raw material in cash and then I can’t sell for a profit,” Mehta commented.
Companies made use of De Beers’ enhanced flexibility at its July sight, with insiders estimating sales well below $200 million. Petra Diamonds decided not to hold its August-September tender of South African rough, deferring the goods to the October sale. Alrosa also sold lower volumes than normal at its recent trading session, market sources said.
On Thursday, De Beers told sightholders it was postponing its August sale and merging it with the October one. The combined trading session will take place in September.
Okavango Diamond Company (ODC), the Botswana state-owned rough trader, sold $55.5 million worth of goods at its August spot auction, down from $66.6 million in June. Prices fell around 5% to 15%, reflecting the weaker demand, according to Rapaport calculations.
The extent of India’s cutback on rough buying will become clearer when import statistics for July become available in the middle of this month.
What hasn’t happened this year is a formal joint effort to tackle the oversupply. Last year, the Gem & Jewellery Export Promotion Council (GJEPC) and other trade organizations recommended a two-month freeze on rough imports, which temporarily improved the balance between supply and demand. This time, manufacturers are taking the lead themselves, according to GJEPC chairman Vipul Shah.
“People are trying to be self-disciplined and trying to control and pass the storm,” said Shah.
The other half
Downturns tend to push manufacturers toward small and low-value goods. The rough is cheaper in absolute terms, enabling a reduction of losses without the downsides of heavy staff cuts. This happened in late 2022 and again in 2023.
A similar trend is taking shape in the current slump, though for apparently more positive reasons.
Goods under 0.18 carats, while still weak, have suffered less than larger items up to 3 carats, executives observed. This has prompted manufacturers to increase the proportion of these melee diamonds in their production mix, to the greatest extent possible.
This is not easy to do. Workers cannot necessarily shift from large to small stones, as they require different expertise. Some companies — or individual departments within them — don’t specialize in melee and cannot change that overnight.
“The reduction [in production] is heaviest in the pointers and caraters,” said Ravi Bhansali, managing director at diamond manufacturer and trader Rosy Blue in Antwerp, referring to goods from 0.18 to 3 carats. “Those sizes have been struggling the most. Over that and under that size range, there’s still some sign of life.”
However, unlike in previous crises, the reason appears to be demand rather than factories’ internal strategies. While weak US and Chinese demand has hit the larger goods, manufacturers have continued to sell melee.
“Even melee is down in terms of demand, but it’s bread and butter for all kinds of jewelry and watches anywhere in the world,” Bhansali continued. “There’s some of that still selling through. Brands have reduced orders, but at least it’s not as bad as what we see right now in pointers and caraters.”
One driver of melee demand is the domestic Indian market, which has outperformed the US and China during the recent downturn, executives said. It’s now gearing up for the Diwali and wedding season, which will begin in November.
“The Indian domestic market is one of the key reasons,” said another manufacturer, who asked to remain anonymous. Japan and some of the smaller Asian markets — such as Malaysia, the Philippines and Thailand — are also supporting this segment, executives explained.
Improvement ahead?
As always, the question is whether production cuts will have a long-term impact and if demand will recover in the US, China and other key retail markets.
Shah at the GJEPC believes now might even be a good time for buyers to accumulate stock, given that manufacturing is down. Drops in production tend to take about six weeks to impact polished inventories.
In addition, Diwali is coming up in November, which means there will likely be further slowdowns in manufacturing.
“In the coming months, the pipeline is going to get dried up,” Shah predicted.
Image: A polished diamond at a factory in India. (Shutterstock)
