The diamond cutting and polishing industry in India, which is the largest in the world, is battling a major demand slump. India cuts and polishes nine out of ten of the world’s rough diamonds and provides livelihood to two million workers. So far this financial year, exports have crashed by 30.27% from a year ago to $7.03 billion, the worst fall in at least five years.
The two biggest importers, China and the US are facing a slowdown in demand as consumers tighten their purses. Another growing challenge is the rapid advancement in lab-grown diamonds, with technologies getting more and more sophisticated, making them indistinguishable from the real deal. However, the demand and prices for both natural and lab-grown diamonds is plummeting.
For this episode of Future Compatible with Devna Gandhi, she caught up with Vipul Shah, CEO and managing director of Asian Star Co. Ltd. and chairman of the Gem & Jewellery Export Promotion Council (GJEPC). They talked about the factors behind the declining demand for diamonds, how much the ensuing wars have an impact on India’s position in the market, and whether lab-grown diamonds will disrupt the natural diamond market in a big way.
Shah said that the inflation and COVID after-effects have led to the demand slump in the US and China. “The balance is on the gold front, plain gold jewellery is picking up. Standard jewellery, it is taking some small hiccups as well. Again because the US is a major consumer,” he added.
Shah believes that natural and lab grown diamonds complement each other rather than compete. “It is going to be like once you have a desire, where it wasn't affordable to you at some time, now because of this elaborate category, it will be an affordable category. Once you are in a different category, then you will be looking for the aspiration and then we're going towards natural because then you will be looking for investment, you're looking for value also. So both are going to complement each other,” he said.
Just wanted to first explore the challenges that the diamond industry has faced on an export front over the last year.
Yes, there have been challenges in the gem and jewellery industry as a whole and to look at in this financial year, from starting from April until now, the industry is down almost by 30%. The main reason is that in the major markets which is the US, consumer spending is on a decrease mainly because of the high interest and the interest cost not coming down because of inflation.
Inflation is when the Fed is trying to take down control. So it's going to take some time before we start seeing interest rates coming down. It will also take some time for the consumer to adapt to the new interest. So that is where their slowness is. In the second biggest market which is China, post-Covid the economy is not opened up and they are struggling by themselves. A lot of spending needs to be done to boost up the economy, which the Chinese government is aware of and I'm sure that within some time, maybe it will take say the Chinese New Year, things will start coming back to normalcy as far as China is concerned.
But overall, what we see is that out of the whole gem and jewellery basket, we are seeing that 50% is diamond and there we are seeing a sharp fall and the reason which I may have mentioned just now for the sale. The balance is on the gold front, plain gold jewellery is picking up. Standard jewellery, it is taking some small hiccups as well. Again because the US is a major consumer.
But because of these FTAs which have been signed by the Ministry of Commerce, by our honourable commerce minister Mr.Piyush Goyal, that is doing a good job. That is helping for the gold exports as of now that is coming from the UAE, Australia and many more treaties which are lined up. So hopefully we are just crossing our fingers that things will start back picking us up for the damage with the industry.
Also the Russia-Ukraine War, Russia as a supplier of small stones, small diamonds stones… there are a lot of sanctions against Russia right now. So what does that do for India?
Ah, yes, it's a good question. First of all, let me give you a background, Russia is one of the major and the largest supplier as far as loose diamonds are concerned. One thing we have to understand that Russia by value, it's selling almost 37 to 38%. It is a substantial value and the majority of our small diamonds are coming from there.
But currently, yes, the war is a scenario and after the sanctions have taken place, payments are not going through and there has been a supply disruption, which is currently not impacting us because as I said, our exports are down because of demand which has dropped because of significantly, US and China, the major consumer market. So once this demand starts picking up, supply will be a big challenge for us. And for that we are not resting and we are talking to the ministry, and I'm sure along with the ministry, some way or the other will be able to make sure that the supply is not disturbed.
Mr Shah, that means both Covid and the ensuing wars that have taken place, have had a reasonable impact on India gem and jewellery. That aside, there is a slowdown in the US, the fiscal stimulus has been pulled quite a bit by the government. So that doesn't really exist so much anymore, as it did during the time of COVID which is why even US consumer spending has gone down.
Now, how are companies in India that hold a reasonable amount of inventory, because that's really where the value is for companies, inventory of diamonds, natural diamonds, how are they coping with that and what is the hedge?
Okay, let me just give you a little bit brief, as I said that industry is down almost by 30% and mainly that is the diamond segment. And what diamond segment is right now, what we have analysed from the council and we made a trade and we had a lot of trade meetings, meeting all of the top manufacturers, exporters, and we came to a conclusion that it is because of supply and demand disruptions.
Even though with less supply which is affected with the war, we don't see that kind of demand and we see falling prices and to safeguard the falling prices, we as an industry collectively came forward and decided to have a voluntary import ban and just make sure that the supply and demand is very well managed and very well balanced.
And we decided to keep a two month moratorium which started from 15th of October which we will be reviewing in the middle of December. So, that has really helped a lot. Right now we have safeguarded the falling prices a little bit which we are afraid of. That's the reason inventory levels also have gone down and that has been a boost because no new production is coming, customers are also aware worldwide.
So gradually, yes, now, things are in such a way, we will be looking for supply as far as production facilities and everything will be opening up and at the same time, we anticipate that there should be some demand coming up once we see the Thanksgiving sales, once we see the Christmas sales and other events taking place.
And we need to also look at the new markets, because again we will be reviewing the situation on the 11th and 12th of December then we will see again what are the inventory levels of the industry and based on that how do we see the demand forward and then again, we will take a call whether we should continue for some more time or we need to uplift.
Because it is one of the largest employment industries for this country, diamonds, gem and jewellery so we do have to safeguard it. But one question related to that, you said Thanksgiving sales in the US etc. But the US do you feel is moving towards lab-grown diamonds? I was reading a report which said almost half of the engagement rings that you have in the US in the bridal market are now lab-grown. That said, even in India, the consumer is starting to accept lab grown diamonds as a replacement to natural diamonds on some level. Is that valid because we do see that happening, especially the US?
Let me just address it straight forward. I won’t say it is right. I would also like to give a clear picture to our viewers that both natural as well as lab-grown are going to stay and complement each other. Where there is an aspiration, where there is a belief that there is emotion, a natural diamond means holding a value.
Once there is a value, there is a category of buyers who are looking for affordable diamonds who are looking for….. who are the first time buyers and they don't have enough kind of money power or something, they are looking for valuation, they're looking for fun jewellery, they're looking for fashion. So, this is a category where it is going to take care of that segment. They are aspiring to go towards natural, but yes, they will begin somewhere and they will end up buying natural diamonds gradually. It is going to be like once you have a desire, where it wasn't affordable to you at some time, now because of this elaborate category, it will be an affordable category. Once you are in a different category, then you will be looking for the aspiration and then we're going towards natural because then you will be looking for investment, you're looking for value also. So both are going to complement each other.
But do you think that would be the case in the US? Because trend wise, that's not what we're seeing there in terms of consumption. And couple that with the fact that there is a slowdown in the US and the average consumer is spending less on diamonds. Do you think in the US actually natural diamonds are going to make a comeback?
Yes. If you see with this slowdown, their natural diamonds has gone down in prices by almost 20-25% But in the lab grown segment of prices are constantly falling and the people who are looking for the lab grown diamond segment they need to understand that yes, the falling price if you are not looking at the price, if you are looking for your fun, we are looking for your desire and which we are fulfilling. It's a technology product at the end of the day and with the new technology adoption, prices are not going to be stabilised. So that is where the nervousness is there.
And if you've seen recently, I think Rapaport, with a huge customer base and huge connection with all the retailers, has come up with this report. There are a lot of challenges also as far as lab grown diamonds are concerned. So both the segments are having their own challenges. But again, both are going to complement each other. The consumer needs to be more educated. And with time both segments will be doing good.
You’ll see in pearls today, natural pearls, which is having a high substantial value, and you'll see South Sea pearls. So both coexist. For anything which is natural is always going to exist because it's going to be rarer and rarer.
Okay, that's an interesting point actually. But in terms of price trends, because of all the global uncertainties that exist at the moment, right now you're just trying to arrest a large slide in the price of natural diamonds because with lab-grown diamonds it's not very easy to do that given the rate at which technology is evolving. Is that safe to say?
Very valid point because miles can be controlled, a message can be given across and as far as the lab-grown is concerned we do not have any data itself and that is a huge capability all across the globe. And when it starts producing it is difficult to analyse what kind of supply I'm expecting and whether the market is ready for it.
So yes, this segment is for the first time teenagers who are looking to buy mobile phones or Apple phones, iPhone 15, it will be trying to take the market share from there because it will be giving them a choice to buy diamonds at affordable prices. there will be a different category where it will be competing with. It’s not going to compete with natural because there's a value for natural diamonds. There is going to be desire for these diamonds because yes, that aspiration will be there.
Also Mr Shah on gold. In China, there's a lot of consumption that has shifted away from diamonds as you said and has moved towards gold. And even in India actually, even though prices of gold have gone up in the last year and a half the consumption of gold is not being impacted for the first time by a price rise, why is that? Is it because consumers basically are shifting to gold as you know, they always traditionally have in times of war and uncertainty in equity is that what is happening right now, with gold even more so?
Yes. Gold is where what comes into play is also the central bank starts accumulating, it is not only the consumption. Where they look into the reserves, it is also de-dollarisation which takes place. So, gold is again an asset where central banks try to balance all categories of assets. Yes, when there is uncertainty….. It was only the Ukraine and Russia war and then we saw this Israel and Hamas so that all added more fuel, and there was a lot of uncertainty later - how this war is going to come up, whether it's going to spread to other regions, etc.
So, whenever there is a fear factor, gold again plays a very important role. And over the years, people have seen the confidence in gold that when there is a fear factor, gold can help. And it can be easily liquidated. Whenever people needed funds, gold was the best asset for them to liquidate immediately.
That was also one of the strongest reasons and coming to your point, China, why China is buying gold and not into diamonds is because China is also coming up post-Covid. It is taking time, because consumers there, when they see prices falling, they will never come forward, they will see it to sterilise things. And then they will start once they see that things now look better. If they see a nice future, immediately as you can see that in buying.
So the reason is that, yes, they have the spending power. It's not that they don't have it. That's what they are using in buying and accumulating gold. That is one of the reasons and I personally feel once things are stabilised, once you see things moving in the right direction, once the war scenario is also at ease, automatically things will start moving and demand for diamonds will be very much there. That's what I'm looking forward to.
Oh, yes, we all are really because like I said the kind of employer, the industry is of workers in Surat and across India. Are we worried right now about jobs in this sector?
I don't think so. And, let me say it again, both natural diamonds and lab-grown diamonds have to complement each other. In employment, natural diamond and lab-grown diamonds have a similar process of cutting and polishing. So the employee.. As you see the weight and production and the unit it's being set up in India across Gujarat, if you see that a lot of plants are coming up for lab-grown diamonds, there is production taking place.
There is enough stock of goods to take care of the workers. And my worry is not on the employment part but my worry is on the demand part. If there is a demand, everything can be absorbed, our employment can be taken care of. We all need to work towards demand, there has to be healthy demand for the natural diamonds and if natural diamonds are going to flourish, lab-grown will automatically follow. We have to see an aspiration for diamonds, that is very important. Diamond marketing needs to be done aggressively. And that's exactly our message also to all the miners that there has to be enough spending and awareness to make sure that diamond segment at least exists.
Moving away from a little bit of doom and gloom, would you say India is quite a bright spark right now? Because the jewellery spending by the average Indian consumer has gone up quite a bit. So, our own sort of domestic demand for jewellery has definitely blossomed over the last couple of years.
Yes, you are right. We are in a much better shape, our economy compared to the world. We are in a sweet spot thanks to our prime minister for doing such a great thing for the country. And it is really helping a lot. Because of the slowdown in China and because of the US-China trade war, all those businesses are moving into Asian countries and India is trying to take maximum share out of it.
There is a lot of belief in India, the largest GDP forecast is going to be in India. Everybody is aware that the way India is coming up with a very strong and bullish economy. You see all the jewellers also when we just saw the Diwali sales and everything all the jewellers were in a much better spirit and they are on an expansion mode.
Traditionally gold has been doing good and even if we are getting reports, that is from our IIJS report which was recently concluded in August, we gathered a lot of demand for the jewellery parts. And that is where exactly it has helped diamond inventories also to go down because India has been very supportive. India and the consumers were very much vibrant and their spending power is great. The next couple of years should be much better for India and the Indian economy as compared to all other economies.
And you also brokered the deal for duty-free export of jewellery to the UAE. Do you think that's going to help support us as well? Through these slightly tougher times?
Yes, for sure. And we are not only looking for UAE we are looking for other countries, for the EU also and for the UK also, and even for Canada. So hopefully things are moving in the right direction. And hopefully, once this treaty takes place, our business again will be back to normalcy.
This episode was recorded on November 28, 2023.