| Diamonds & Jewelry Business, India in the Lead | |||
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By: Hari Sud August 19, 2006 Views expressed here are author’s own and not of this website. Full disclaimer is at the bottom. 
FeedbackDiamond cutting & polishing business has resurfaced in India after it disappeared from there when the European colonizers arrived. The latter had nothing to do with it. The mines had exhausted, and with no new mines discovery in India, the world markets looked elsewhere for a source. Through the ages until discoveries of diamond mines elsewhere in the world, India was the only source of diamonds. South Africa became the next best source in late nineteenth century, followed by Canada, US, Australia, African States on the western coast and now Russia. Diamonds, as these are discovered on the surface or deep in the ground, or in the riverbeds are called “Roughs”. Roughs arrive at the consumer’s hand cut & polished, reshaped and finally encrusted in Gold, Platinum & Silver to enhance their beauty. This also multiplies their value exponentially. Diamonds are best friend of kings, monarchs, maharajahs, dukes and rest of the aristocracy. Wealthy individuals also own diamonds as an investment. They are also girl’s best friends. All these drive the current market demand and also the prices. Larger diamonds are sold for millions of dollars and smaller one from $800 onwards. Diamonds like “Koh -I-Noor” are priceless. Its ownership has been determined by the outcome of a battle or change of dynasty. No commoner could ever afford its ownership. Medium sized diamond like “Hope Diamond” has been bought and sold many times over the last two hundred years. Smaller diamonds adorn wedding & engagement rings, watches, jewelry and other ornaments. Diamonds also have industrial uses, since it is the hardest substance known to man. Total “Rough” diamond market worldwide is about $14 Billion a year. Once cut, polished and reshaped, it doubles or triples its value. Market share of diamonds that adorn ornaments, together with other precious metals (especially Gold) translates into about $70 Billion a year jewelry business. It is one business, which requires, skill, innovation, cheap labor and market contacts to prosper. India has all the forgoing characteristics. Twenty five hundred years ago India was an advanced culture and the only source of these precious stones. Indian merchant traveling to Central Asia and China introduced them to the other cultures. Roman Emperors and governors adorned them. Chinese are known to accumulate diamonds in huge quantities as the Silk Road trade made them rich and the profits from it allowed them to indulge in extravagant tastes. Demand became high and production remained low, which boosted prices. High rate of production lead to exhausting the surface mines very quickly. By 10th century, diamonds disappeared altogether from the European scene. This probably due to wars and repeated plagues exhausted Europe and no money was left for these extravagant tastes. Diamonds re-appeared in Europe again in about 15th century, fuelled by Portuguese conquest of sea and trade with India. Heyday of diamond trade in India ended about two hundred years later, although small production continued till early 20th century. Bulk of the production for the world markets came from elsewhere, mostly South Africa, hence British DeBeer Company became the master producer, marketer and chief sales agent for all the diamonds bought and sold in the world, early in the twentieth century. This distinction they still hold. Today, they hold about 50% of the market share. Rio Tinto with interest in Australia, US and Canada and other smaller independent nations hold the rest of the market share. India & Diamond Mining & Polishing Diamond mining, cutting and polishing is an ancient art in India. In the classical civilization, Roman writers Pliny (70AD) and Ptolemy (140AD) identified India as the only source of diamonds and other gems. Alexander searched and mined diamonds during his invasion of India in 325BC. This was the first time European contact for acquisition of diamonds with India was established. It continued for a thousand years. Naturally occurring diamonds during classical times were mildly polished to amplify its natural shape and luster. Large-scale cutting and re-shaping operation began in late eighteenth century. It began with the invention of tools to carefully cut and polish them. Initially it was an operation to eliminate flaws in the naturally occurring stones. Later it became a method to reduce size, reshape it as desired and enhance market value. With Indian supply depleted, supply elsewhere was sought by the European conquerors. A large scale cutting, polishing operation was started in and around Antwerp in Belgium, about 500 years back. Orthodox Jews from all over Europe settled in Antwerp and made it a center of diamond trade. It is still the center of diamond trade but not for polishing and cutting (India has replaced it). India was not in the picture both as a source as well as diamond cutting and polishing center until 1960. Return of this ancient art form to India after a lapse of two hundred years is a miracle in itself. It happened when realization began in India that this art form couldn’t be allowed to die completely. Hence diamond cutting & polishing industry was reborn. Cheap labor also helped. Since there is no domestic supply, it was envisaged that diamonds would be imported, cut & polished (value added) and re-exported. This concept has made India the world leader of diamond cutting and polishing. In last fifty years, the world diamond trade has evolved as follows: An Antwerp diamond dealer buys “Roughs” from either DeBeer or Rio Tinto. He (they) cut and polishes the high-end pieces themselves, send the second tier pieces for cutting & polishing to Israel. The third and the lower end pieces (and the most abundant supply & demand) are sent to India for cutting and polishing. It cost about $45 to cut and polish a carat of diamond in Antwerp (carat is unit of mass for gems. It is 0.2 grams). The same work can be done in India for about $10 a carat. This differential price structure is comparable to IT and BPO price differential between Europe/US and India. Hence all the lower end diamond cutting & polishing business has shifted to India. The forgoing is the story from 1965 to 1995. This is not true any more. Orthodox Jews are no longer in control of trade in Antwerp. They have handed it over to Indian diamond merchants. The High Diamond Council, the governing body of all diamond trade in Belgium, Indians have won five out of six of the elected seats. According to the High Diamond Council statistics, Indians account for $19 Billion of the total of $23 Billion trade out of Belgium. Business in Israel is also on decline as Jews get out of this business in Europe, they send less and less pieces for polishing to Israel and more and more to India. Today, highest-end diamonds are polished in Antwerp. Rest is polished in India. This includes middle tier diamonds also. Value of Diamond Imports & Exports from India India imports (for re-export) about $8 Billion “Roughs” every year. This translates into about 130 million carats a year. It is about 70% supply of all diamonds worldwide. India exports back about $12.5 Billion worth of cut and polished diamonds (80% of imports) to the world markets. Remainder is domestically consumed. Indian consumers have a hunger for diamonds & jewelry. The latter is popular during all seasons, especially more during the wedding season. All this work is concentrated in Gujarat city of Surat and Mumbai in Maharashtra. About 8,000 small and medium diamond-processing facilities employ close 800,000 people. Since polishing is a hand and grinding wheel operation, hence nimble and young hands are preferred. The trade works in the same way as described above, except that the Indian merchants play a greater role. This high margin business has maintained a steady progress in last 30 years. One reason for its phenomenal success is that government's) in India came to help instead of hindrance. They established training schools, trade councils and standards organizations etc. to make the best advantage of this growing trade. Very early, when the trade was at its infancy, Government of India set the value added to the “Roughs” at about 50% to enjoy substantial tax and export benefits. This became the corner stone of all progress. Diamonds adorns the Jewelry and Jewelry adorns People Diamonds have to be fittingly set in Gold, Platinum and Silver ornaments to enhance their beauty. Ornaments are borne by people. In short one without the other does not give it a good presence. Jewelry worldwide is a $60-70 Billion business. Of which diamonds constitute about $27 Billion component. Rest is precious metals as stated above. Gold is bulk of the precious metal, followed by Silver. Gold supply is another commodity not found in India today. Again in ancient times, India, Egypt, South America and China had the monopoly on gold supply. In addition, South American mines stayed captive for the local use until the Spanish conquerors grabbed it all and transferred it to Europe. India, China and Egypt traded in gold. They supplied the entire known world. Gold and gold ornaments, for time immemorial have adorned kings, queens, monarchs and everybody who could afford it. Most ancient discovery in Mesopotamia (pre 1500BC) had gold ornaments. Crown of Helen of Troy (1100 BC) was made of gold. So were Egyptian finds of Tutankhamen (1300BC). In India gold ornaments have been unearthed At Mohenjodaro & Harrappa (3500BC), signifying gold smithy a well-known art form prevalent 5,000 years back. Gold casting began soon after the end of Bronze Age. Exactly how the ancients learnt about its value and mining technique is unknown. Its untarnished luster, ease of casting and easy mining probably attracted man to it. Compared to Gold, every other known metal has difficulty-retaining luster. Hence Gold is so much the darling of every person in the world. Gold Jewelry & Diamond Encrusting And India Today’s gold supply from local sources in India is negligible. The colonial rulers exhausted the mines. As this supply was being exhausted, fresh mines were discovered by the British in South Africa, Australia, Canada and South America towards the middle of nineteenth century. These mines today are the basis of total gold supply in the world. Lately Russia has begun to exploit its Siberian mineral wealth. Gold from Russia is an important component of the world supply. Gold has other end uses also, like electronics, industrial, dentistry, coins, medals, investment in gold bars etc. Total gold demand worldwide in 2005 was 3,700 Tones. At $450 an ounce (average price in 2005), it is worth $53 Billion. Add price escalation, since 2005, its value has gone up by 30%. Of the total production, jewelry consumes about 2,700 tones. It is by far the single largest consumer of Gold. Indian quest for gold and jewelry is legendary. When you think of gold, you think of India. That is common saying at gold bourses all over the world. Official gold imports into India are put at about 700 tones every year. Unofficial imports add another 100 to 150 tones to the total availability. Starting from the late fifteenth century, India began trading with the European nations. India always had a trade surplus with them. All trade settlements were in gold & silver. Hence over 500 years India accumulated immense quantities of gold, all European and a bulk of it Spanish gold of South American origin. A portion of gold, which the Indian people have, is known. Still a huge part is hidden and unknown to the outsiders. It is kept hidden from the prying eyes by every household. This amount could never be quantified. Other nations like the Arab World and now China has started to import gold in large quantities. It is measure of their prosperity. Arabs have money and have been importing gold in large quantities for the last 25 years. So is China. But none of these imports are comparable to India. Headway to be made in Jewelry Exports All the Gold brought into the country does not end for private use. A much smaller component in turned into jewelry and exported. About $1.5 Billion worth of Jewelry is exported by India every year. US accounts for the largest share of exports market (about 40%), followed by Middle East. It is again value added export where gold bars are imported and then turned into items of beauty for export. Lower labor cost is key reason for this recent surge in sales abroad in last few years. Still it is an infinitesimal amount in $70 Billion jewelry market. It can be greatly increased, provided product quality in improved and linkup is made with the world’s great Jewelry stores. The latter demands a much higher quality and design, which is only possible with better labor training, better process & procedures, better quality control and import of much needed equipment and machinery. Like IT & BPO, it is high skill and labor-intensive business. In return, it offers greater margins. Higher level of investment made in all the forgoing will help to grab a bigger share of world’s jewelry market. This investment will have a short payback and cash inflow for a much longer period. Industry estimates indicate that size of jewelry market worldwide is stable, with few bumps. The down side is that during worldwide recession it may suffer much greater loss of volume and may take longer to recover. But still the rewards during normal times are so great that the pain of recession years can be overcome with proper planning. Is China will ever be a Threat to this Business? At the moment China is no serious threat to India in diamond polishing or gold jewelry business. It is at a distant second place to India in this area. But it is working hard for an upswing. If India maintains its excellence in cutting & polishing business and its market prominence at Antwerp and New York, then China will be a lesser threat. Their labor costs are as low as India’s and their quality is at par with India except that they do not have market presence like India. It took India 30 years to reach, where it is today. China will have to spend the same amount of time to acquire the marketing and trading experience. In addition, this business is in private hands with no government impediments; hence innovation is key to business growth. India has all the credentials for it. In short succeeding in diamond polishing and other gem business together with gold/silver jewelry business requires high skill, background in gemology & jewelry, low labor costs, market experience, abundant supply of raw materials etc. India has first three in abundance. What it lacks is abundant supply of both gold as well as diamonds. With the success of Indian entrepreneurs in gems and jewelry business, India has the stranglehold over this market. If India could work to ensure reliable supply, India could triple this very profitable business in a few short years. Hari Sud
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