The Surat, India diamond manufacturing hub, where most of the world’s rough diamonds are cut and polished, reopened in a more formal, but limited, capacity on May 20 after being closed for almost two months. However, a ramp-up in business to pre-pandemic levels could take months as many industry workers left the city to return home to rural villages in March, April and May due to a lack of work amidst the lockdown. As of June, the larger manufacturers that have resumed business are operating with an estimated less-than 50% workforce.
Business has also partly resumed in Mumbai, India’s primary diamond trade and export hub. The Indian diamond manufacturing trade group, the GJEPC, recently reported that Indian diamonds are being exported at 30-40% of “normal” volume. According to industry sources, most all of the current export activity is being directed to Hong Kong and the Greater China market, as most business activity there has now returned to pre-pandemic levels. As of mid-May, Richemont (SWISS: CFR), luxury conglomerate and parent of Cartier and Van Cleef & Arpels, said all of the company’s 462 stores in China have reopened. Last month, Greater China’s largest jeweler, Chow Tai Fook (HK: 1929) said that it had reopened over 90% of the company’s stores by mid-April.
Despite the resumption of mid-stream business in India, the GJEPC, along with four other related organizations, called for a one-month voluntary import ban on rough diamonds in June in an effort to limit excess inventory held by the industry as well as limit the subsequent negative impact that would have on credit availability to industry participants. In a letter to the trade in late-April, the organizations explained: “it was assessed that such import stoppage will help the industry face the challenge that has arisen out of turmoil in the global gems and jewellery market."
Current circumstances due to the pandemic and the related global lockdown could certainly result in inventory indigestion in the diamond pipeline, especially until end-consumers start buying diamonds again creating a demand pull though in the supply chain. However, if a significant number of manufacturers further hold out on buying rough for an additional month or two, following the already 3-month-plus mandatory lockdown, it would likely further strain the financials of the diamond miners, especially the independent miners, a number of which are already facing severe cash flow challenges.
In an open letter to the trade in early-May, addressing just this, De Beers said “today we are faced with a challenge not to one part of the (industry), but to the entire (industry)…when this crisis ultimately recedes, as it will, if the upstream is intact but there is no functioning downstream, or a midstream but a significantly depleted source upstream, then we have no functioning (industry) at all.”
Industry leaders, De Beers and ALROSA alone have already cut 2020 production guidance by over 10 million carats and given all of the combined pandemic-related production suspensions, curbs and curtailments across the industry, global production is estimated to fall to under 110 million carats this year, almost a 25% year-over-year decline, which would be the lowest level of global output since the mid- to late-1990’s.
This was published in print in The Northern Miner.
Paul Zimnisky, CFA is an independent diamond industry analyst and consultant based in the New York metro area. For regular in-depth analysis of the diamond industry please consider subscribing to his State of the Diamond Market, a leading monthly industry report; an index of previous issues can be found here. Paul is a graduate of the University of Maryland's Robert H. Smith School of Business with a B.S. in finance and he is a CFA charterholder. He can be reached at firstname.lastname@example.org and followed on Twitter @paulzimnisky.
Disclosure: At the time of writing Paul Zimnisky held a long position in Lucara Diamond Corp and North Arrow Minerals Inc. Please read full disclosure below.