All that glitters

COVER STORY: GEMS AND JEWELLERY

The global market for polished diamonds turns slack, but there is demand for studded jewellery.

Low retail demand growth in markets such as the United States, Europe and Hong Kong has inevitably cast its shadow on the Indian diamond industry. India's exports of cut and polished diamonds declined 16.4 per cent in tonnage terms to 361.21 lakh carats in 2006-07, from 431.01 lakh carats in 2005-06. In value terms, this represented a decline of 7.8 per cent to $10.9 billion in 2006-07, from $11.8 billion in 2005-06.

Meanwhile, export of rough diamonds in tonnage terms jumped by 13.2 per cent to 378.70 lakh carats in 2006-07, from 334.61 lakh carats in 2005-06. In value terms, however, exports witnessed a miniscule 0.34 per cent gain, to $563.2 million from $561.3 million.

Of the total exports, rough diamond imports accounts for 73 per cent, with a value addition of 27 per cent. "Hence, a 5 per cent rupee appreciation would affect value addition and not imports, thus taking the overall impact to roughly 1.5 per cent, which is quite minimal," says Vasant Mehta, vice-chairman, Gems and Jewellery Export Promotion Council (GJEPC). But the quantum is substantial when considering the profit margin of about 6-7 per cent. The impact remained identical. With the recent appreciation of the rupee, India-made products would become expensive in the overseas market and, hence exports would face stiff competition from other countries such as Israel.

But India has explored new markets to keep the momentum going. Recently explored destinations such as the Commonwealth of Independent States (CIS) and Japan have shown good demand for Indian designs. The CIS and East European countries offer tremendous business potential to the Indian gem and jewellery sector, with a market size of $6-7 billion (Rs 26,200-30,500 crore). GJEPC has also explored African countries as a possible alternative to Antwerp to source rough diamonds in adequate quantities. The council is likely to continue selling medium- and low-priced jewellery to the CIS countries and a mix of all product ranges to Japan.

Traditionally, the global jewellery retail market has been dominated by the US, with none of the other countries individually accounting for more than 10 per cent of global sales. Similarly, jewellery fabrication has been dominated by Italy and the US, and to a lesser extent by India. And while India, Belgium and Israel have accounted for most of the world's polishing of rough diamonds, Europe has been the centre of the diamond trade for quite some time. Industry sources indicate that these traditional centres will fade in favour of new centres.

The scrapping of the 3 per cent import duty on cut and polished diamonds in the latest Budget, which opens up the Indian market to major international brands, is likely to benefit consumers in a big way even as domestic diamond jewellery makers hope to benefit from increased competition. With the latest tax sops, he Rs 70,000-crore Indian diamond sector is on the way to becoming a "one-stop shop" for diamond trading in the world. 

The numbers game: Declining fortunes
Countries	April 2006 - March 2007 (provisional) Cut & polished diamonds			April 2005 - March 2006 Cut & polished diamonds
	Cts. In Lakhs	Rs. in Crores	US$ in Million	Cts. In  Lakhs	Rs. in Crores	US $ in Million
U.S.A.	81.89	13081.50	2898.63	87.18	12592.81	2858.10
U.A.E.	49.62	5153.25	1141.87	40.61	4339.71	984.95
Hong Kong	135.29	15507.10	3436.09	144.20	15121.53	3432.03
Belgium	28.79	6130.39	1358.38	29.96	5949.40	1350.30
Singapore	4.69	521.61	115.58	76.94	5730.75	1300.67
Israel	8.31	3879.22	859.57	0.22	3390.45	769.51
Japan	17.39	1726.02	382.46	16.01	1953.04	443.27
Thailand	16.45	1366.73	302.84	16.23	1258.27	285.58
U.K	1.10	337.48	74.78	1.04	271.38	61.59
Switzerland	4.12	586.77	130.02	4.11	568.07	128.93
Germany	2.24	211.05	46.76	1.74	191.47	43.46
Australia	0.88	340.95	75.55	0.84	287.34	65.22
Italy	0.70	51.12	11.33	0.03	10.54	2.39
S.Africa	4.05	73.40	16.26	0.41	72.01	16.34
Others	4.69	239.66	53.10	11.49	385.06	87.39
Total	360.21	49206.20	10903.20	431.01	52121.80	11829.70
* Source: Gems & Jewellery Export Promotion Council (GJEPC)

An official at a leading diamond processing unit says the step will make India a global diamond trading hub where traders can offer diamond jewellery to a global market following the current trends in the world. But the conversion rate still remains a problem; it not only results in inventory loss but also increased labour charges. Explaining the complexities of this dollar-dominated inventory, the official says that an inventory of Rs 40 crore around this time last year would come down to not more than Rs 35-36 crore today because of the rupee appreciation of over 10 per cent.

But the duty reduction would not have any major impact on diamond prices, as it would enhance competitiveness, said Navin Mehta, president of the Bombay Diamond Merchants' Association. It would have no impact on the volume and value of trade, since nearly 60 per cent of the total processing work done in the world, is done in India itself, he added. Supporting the move, Sanjay Kothari, Chairman, Gems & Jewellery Export Promotion Council (GJEPC), said that since diamond processing is an export-centric sector, incentivising it would mean boosting foreign currency inflows into the country.

"The duty cut could also help us get an extension of the Generalized System of Preferences (GSP) which is expiring on June 30, as we can show to the US government that we are ready to import cut and polished diamonds at 'nil' duty. This would enable diamond jewellery manufactured in the US to find a market in India," Kothari said.

Currently, 60 per cent of global diamond exports is being processed in India by importing roughs (40 per cent is processed in Israel, Belgium, US and China). While the duty cut will enable the domestic industry to import processed diamonds cheaply and open up entry to multinationals, local jewellery makers play down these fears, saying that it would enhance the performance of the domestic sector.

Indian exporters are finding it difficult to sign a deal for exports to the US beyond June 30, as the deal would add 6 per cent to cost if GSP is not extended, causing jewellery items to become costlier compared to items originating from other countries. Suspicion lingers that India's $4-billion jewellery exports to the US are under threat because of uncertainty over GSP extension. Instituted in 1976, the GSP was aimed at promoting the economic prosperity of developing countries, with over 4,650 selected products from 144 countries receiving preferential entry into the US.

Studded jewellery is the way to go

India's exports of cut and polished diamonds have slackened in the last two years. However, experts in the industry are highly optimistic that another export market is opening up for the Indian diamond industry. They believe that diamond-studded ornaments or value-added diamonds can yield substantial foreign exchange earnings for India.

Says Sanjay Kothari, chairman of the Gems and Jewellery Export Promotion Council (GJEPC): "India no doubt has a major share in the world's total exports of cut and polished diamonds. But for the last two years the demand is down because of the slack in the US economy. This year also the trend is slack. However, one more avenue is opening up for the Indian diamond industry "" export of diamond-studded jewellery or value-added diamonds."

He explains that the global demand for cut and polished diamond is affected by many factors, such as the current economic situation of the importing countries like the US, Japan, Hong Kong and the European countries, and currency exchange rates "" and none of these factors is favourable to India right now. "But diamond-studded ornaments are emerging as a major potential export. India exported diamond-studded jewellery and other ornaments worth $5 billion last year. There is potential for exports of $10 billion in the next five years, and we can do it if we take proper action now," says Kothari.

But this is not going to happen on its own. To make it possible, Kothari notes, "the diamond industry will need to invest in training workers and designers to produce better quality jewellery. It also needs to invest in high-tech equipment. Exports depend on the quality we provide. The quality needs to be of international quality and innovative designs will be helpful in boosting exports."

Nanubhai Vanani, secretary of the Gujarat Hira Bourse, agrees with Kothari, noting that, "the future of diamond exports lies with studded jewellery and the Indian diamond and gems and jewellery industry can tap a major share of the potential with better quality and designs in ornaments." He points out that the trend in exports will depend on demand, and in importing countries such as the US, Japan and Hong Kong, it is demand for studded diamond jewellery that is on the increase.

"" Soumitra Trivedi

Under the programme, diamond jewellery was imported duty-free to the US, which proved to be a boon for all those countries, especially since diamond processing had become a low-margin business. Surprisingly, India became a part of the GSP programme despite not being covered by the norms laid out by the US authority.

In order to cut the cost of rough diamond sourcing, India is looking at joint venture opportunities with diamond mining companies across Africa, Russia and the CIS countries, to source rough diamonds directly from them. Imports of rough diamonds are currently routed through Antwerp "" a major global diamond trading hub in Belgium "" making imports costlier by around 11 per cent. Direct sourcing will enable the diamond industry, which operates on thin margins, to save about $1 billion from the total import cost of around $9 billion.

Diamond Trading Company (DTC) currently supplies about 25 per cent of rough diamonds to India through its 38 siteholders. But unlike Antwerp, which is mainly a trading centre, India is one of the few processing hubs and it makes business sense for mining companies to supply the country diamonds directly. India processed nearly 60 per cent of the world's polished diamonds (worth $18.72 billion) in 2006 and, hence, deserves direct supply of rough diamonds, says Kothari of GJEPC.

The Indian government's agreement with the Alrosa mine in Russia led to direct rough diamond imports of $15 million last fiscal. Botswana has 26 per cent of the world's diamond reserves, while Namibia and South Africa have 15 per cent and 12 per cent, respectively. These are also countries from where direct import of roughs is possible. Meanwhile, public sector undertakings Mineral and Metal Trading Corporation (MMTC) and National Minerals Development Corporation (NMDC) are keen to explore gold mines jointly in Azerbaijan and Uzbekistan.

Of the $11 billion worth of diamonds processed in the country, only $2.8 billion worth underwent value addition. This shows the abundant scope for value addition to rough diamonds, says Kothari. 
 

Branded jewellery will get its due

It will be a while yet before branded jewellery gets its due share in the Indian diamond jewellery market. The market for branded jewellery has seen many entrants, such as Tanishq, D'damas, Damas and Sangini, among others, but the Indian market is still dominated by manufacturers of traditional non-branded diamond jewellery. Their share of the Indian diamond jewellery market is still as high as 70-80 per cent, while the share of branded jewellery is 20-30 per cent. However, according to industry experts and jewellers, this situation is bound to change in the next few years, because the new generation of diamond buyers prefers branded diamond jewellery.

Says Chunibhai Gajera, partner of Laxmi Diamonds, Surat and Secretary of the Gujarat Hira Bourse and the Gem & Jewellery Park Project, Surat: "Local jewellers still dominate the diamond studded jewellery market in India. The branded diamond jewellery sector is new, while local jewellers have decades-old relationships with customers. Around 70-80 per cent share of the market for diamond jewellery is still in the hands of local jewellers. Only 20-30 per cent of the market is with the branded diamond jewellery sector. It will still take many years for branded diamond jewellery to claim its due share in India's diamond studded jewellery market."

Gajera explains that one of the major reasons is pricing: Local jewellers are able to sell their diamond-studded jewellery at much lower prices than branded diamond jewellery companies, because they do not have to spend on marketing their products. Their business runs on trust and decades-old relationships and solid reputations.

On the other hand, branded diamond jewellery companies have to spend on TV commercials and print advertisements, sales and marketing staff, and multiple retail outlets to make their presence felt in the market. This adds to their overhead costs, forcing them to increase product prices, while local jewellers have to contend with only raw material and labour costs, enabling them to charge lower in comparison with the branded jewellery segment.

"Branded diamond jewellery companies will have to work very hard to generate the sort of trust among people that the local jewellers have already generated," adds Gajera.

Nanubhai Vanani, Secretary of the Gujarat Hira Bourse and the Gem & Jewellery Park Project, Surat, concedes that the market share of branded diamond jewellery companies is quite small, as the concept is fairly new to Indian diamond buyers. "However, the future of branded diamond jewellery is quite bright, as the new generation prefers to buy diamond jewellery from well-known companies rather than from local jewellers. This trend is increasing day by day," he stresses.

Highlighting some factors favouring the branded diamond jewellery sector, Vanani says that though it charges higher prices than local jewellers, it also assures the quality of the diamonds. "The other thing is that the buyers can always sell the jewellery to anyone, because it bears the guarantee card of the company. However, if one buys diamond-studded jewellery from a local jeweler, he will have to sell it to that jeweller only," he adds.

"" Soumitra Trivedi

India's consumption of gems and jewellery has grown rapidly (10.2 per cent over the last five years). Today, the market is estimated at $14 billion and growing at a CAGR of 9.2 per cent. But branded jewellery constitutes barely 1 per cent of retail sales. The country is also one of the fastest growing markets for diamond jewellery, consumption of which in 2006 was valued at $1.75 billion, with demand growing at a CAGR 43.5 per cent over the last five years.

But, since the tastes of Indian consumers are changing in favour of branded jewellery, world leaders have starting making forays into the Indian market, says Rajiv Popley, Director, Popley & Sons, a Rs 950 crore jewellery retail group. In line with the development of the retail sector in India following liberalisation and growth in per capita income, jewellery retailing too is undergoing a transformation. Traditionally dominated by small-scale local players, jewellery retailing is rapidly moving towards greater organisation, as retail channels mature and develop greater penetration across the country.

Also evident in the industry is increasing professionalism, quality control and processes and a heightened consumer focus. The need for being consumer focused has emerged as a response to increasing levels of consumer sophistication, both in terms of design and production demand, as well as a general orientation towards jewellery product origins, gemstone certification and jewellery hallmarking. 

India's principal markets Exports of polished diamonds by destination
Country	Percentage of total exports
USA	23
Hong Kong	28
Belgium	11
UAE	17
Israel	6
Singapore	5
Japan	4
Thailand	2
UK	1
Switzerland	1
Australia	1
Others (including Germany)	1

Growing disposable income coupled with innovative designs offered for all classes of consumers by the jewellery manufacturing companies have created a desire among Indians to invest in diamond jewellery. Jewellery companies are luring customers with affordable price ranges for different classes.

According to Popley, increasing organised retail penetration, influx of overseas retailers, growing urbanisation and development of the hinterland have made the Indian markets of jewellery one of the fastest growing markets in the world, with latent potential for all forms of jewellery products. In recent years, India's retail landscape has seen the emergence of malls, supermarkets and hypermarkets, e-commerce and other modern formats of organised retail. Clearly, this is only the beginning, says Popley. Organised retail forms only 2.5 per cent of the jewellery trade, and this is expected to gather momentum in the years to come. Naturally, this would have several implications for the jewellery retail industry in India.

In an attempt to achieve an export target of $20 billion in 2007-08, Indian diamond and jewellery exporters are likely to forge alliances with prominent mining companies in the CIS and East European nations. But, owing to tough mining laws and other environmental concerns in these countries, Indian companies would have to pass through several tests.

In addition, sourcing roughs directly from mines abroad and improving wafer thin margin would be a greater challenge for those who have invested huge sums on backward or forward integration. Another challenge the Indian diamond exporters are facing is the uncertainty over GSP extension. If extended, it would be a boon for them; otherwise, some of them may have to exit the US jewellery markets.