London — As diamond traders descend on Botswana this week for one of the year’s biggest sales, the $14bn industry is struggling to recover from India’s war on black money.
De Beers, the world’s top producer of gems, will offer customers concessions for a second consecutive buying round to support the market, according to people familiar with the process, who asked not to be identified because the information was not public.
The industry has been hit after India imposed wide-ranging currency reforms in November that created a cash crunch. As much as 90% of the world’s rough diamonds pass through India to be cut, polished or traded by the thousands of gem companies.
"The Indian demonetisation programme is showing how much of the polishing industry is still a cash business," said Richard Chetwode, an industry consultant and former executive at Dominion Diamond and Gem Diamonds.
The company’s first sale of the year, which gives traders a chance to replenish stocks following the crucial holiday period, follows its smallest sale of 2016 reported in December.
India’s crackdown on so-called black money has hit the lowest end of the market the hardest. In De Beers’s final sale of 2016, the former monopoly allowed its customers to pass on boxes of the cheaper stones even if they had used up their allowance of deferrals, people familiar said at the time. De Beers also took the unusual step of permitting buyers to refuse lower-quality stones from pre-mixed assortments of diamonds, they said.
Alrosa, the world’s second-biggest producer, said December sales fell 31% from November, after small and middle-sized Indian diamond-cutting companies were hit by the monetary reforms.
India’s imports of rough diamonds fell 4.7% to $1.4bn in December from the same month a year earlier, according to data from the Gem & Jewellery Export Promotion Council. That pared an increase in shipments in the financial year that began on April 1 to 25%.
De Beers sells its diamonds at 10 sales a year known as sights in Gaborone, the capital of Botswana. It invites about 80 customers, know as sightholders, who buy the diamonds at prices set by De Beers.
The Anglo American unit, which produces about one-third of the world’s diamonds, will allow its customers additional flexibility at this week’s sale, the people familiar with the process said. However, the gems that could be deferred would be in narrower ranges than at December’s sale and customers would not be allowed to separate stones from pre-mixed assortments again, they said.
Prime Minister Narendra Modi’s reforms came just as the diamond industry was starting to show some signs of recovery following a bruising 2015. Average rough diamond prices rose 9.1% last year, recovering some of the ground lost when prices collapsed 18% in the previous year, the worst performance since the global financial crisis.
De Beers’s decision to offer less flexibility than in December’s sale may signal that the worst has passed for the broader market.
Still, the lower end of the market was underperforming amid oversupply even before Modi’s reforms, and the demonetisation has added further pressure, said Chetwode.
"The first three rough sales at the beginning of a year are historically the largest, as manufacturers look to restock after the very important fourth-quarter diamond jewellery retail sales season," he said. "The picture at the bottom end could turn nasty very quickly."
Bloomberg
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