Problems in the entire global diamond industry are well known but the diamond processing sector (cutting & polishing) especially in India has been the worst hit. Despite the recent insignificant drop in rough diamond prices, half of India’s diamond processing sector faces extinction.
In the recent Investor Day presentation of Anglo American, De Beers’ CEO Phillipe Mellier emphasized “the challenges in the diamond market predominantly lie in the midstream”.
Lower consumer demand has led to stockpiling of 4 – 5 months of diamond inventory at the processing units, against the normal 1 – 2 months.
Diamond processing units, which lie in midstream of diamond pipeline, have to buy rough diamonds at upfront payment and sell the polished stones either on consignment basis or mostly on long-term credit. Thus, they are squeezed in between the diamond miners and traders at the upstream and the jewelry manufacturers and retailers at the downstream. Besides, lower bank financing and higher interest burden has added to the working capital and financial woes.
Furthermore, lower profitability at the diamond midstream pipeline has remained an issue since several years. However, in past few years, profit of diamond processing has plummeted significantly. Bain – AWDC’s recently released 5th annual report “The Global Diamond Industry 2015” mentions the profit range of diamond processing sector at 0 – 3% and expected to continue fall further. Many of the mid-segment companies are operating at close to 0% margins, while some are even running at 5% losses. The report predicts a 10 – 15% fall in revenues of diamond processing sector in 2015.
India’s export of cut & polished diamonds plunged by nearly 14% in the first seven months of 2015-16; 28% in September and 17% in October. This scenario is however not just pinching the Indian government exchequer but also the small-to-medium cutting and polishing units and their workers.
In the last 4 months, 350 diamond processing units have shut shops resulting in over 20,000 job losses.
Besides, post-diwali vacations, 15% of the units are still to reopen and the remaining have dropped their production by up to 80%. Since most of diamond processing workers are paid on piece-meal basis, drop in production has affected their wages by almost 50%.
Apart from the 30% job losses happened in the past 3 years, half of Indian Diamond Processing sector that employs around 700,000 skilled and unskilled workers face the threat of job losses and shutdown this year.
The grim situation has resulted in numerous bankruptcies. Recently Sai Impex – a cutting & polishing unit in Varacha shut down rendering another 200 workers jobless. Suresh Lalan, who ran a diamond unit established 25 years ago, had to cut 120 jobs and close 30 of the 35 emery wheels at his unit. It is estimated that around 50,000 workers from Bihar have moved out of Surat – India’s diamond processing capital due to substantial cutback of polished diamond manufacturing. From Surat and Mumbai alone, diamond industry has witnessed default cases of more than INR 3,000 crores ( ~ USD 450 million).
The grave threat faced by Indian diamond cutting and polishing sector is also evident from the 25% decline in import of rough diamonds during the April – October period. Though business model revaluation, business processes optimization and operational efficiency improvement have been suggested by some experts to deal with the crisis, small to mid size companies, which constitute majority of India’s diamond processing units, are not in a position to effectively do it.
Which means only thing – a big-scale consolidation in the sector, resulting in shutdown of more than half of the diamond processing units and the bigger players taking more share of the pie, is on the horizon.