For the Indian diamond industry, the last week once again brought into focus a grim reality - that not only is the current crisis it is facing one of the worst ever, but this round could well have a more long lasting impact than other setbacks faced in the past.
The first warning note came from De Beers CEO Phillipe Mellier, who in his presentation at parent company Anglo American's Investor Day said that "the challenges in the diamond market predominantly lie in the midstream".
He outlined the high inventory levels due to less than expected consumer demand, lower levels of bank financing at higher costs leading to working capital and profitablity challenges and some bankruptcies. All of this has happened mainly in the cutting and polishing segment, where most Indian companies have significant operations.
A day later, global consultancy Bain & Co released its fifth annual report on the industry, prepared in association with Antwerp World Diamond Centre (AWDC), which predicted a 10-20% revenue drop for the producers and mid-segment companies in 2015.
The Bain report, entitled 'The Global Diamond Industry 2015: Growth perspectives amid short-term challenges', said that the average operating margin in the mid-segment in now close to zero, with some companies reporting operating losses of 5%.
This overview captures the reality that the Indian diamond industry has been facing at the ground level. During the first seven months of fiscal 2015-16, exports of cut and polished diamonds have fallen by 13.81 per cent to US$ 10.42 billion, while Imports of rough diamonds have declined by 22.3 per cent to US$ 8.09 billion.
In Surat, which is the nerve centre of this cutting and polishing industry, this translates into lay offs and closures. Thousands have lost jobs, some companies have shut shop; many are working shorter hours to avoid having to retrench workers.
The Bain report pinpoints some of the reasons behind this situation. It points out that the cutting and polishing segment (including trading) represents a traditional competitive market with low entry barriers and a large number of players.
As a result, the segment has generally had lower bargaining powers vis-a-vis both the upstream and downstream segments, and has often borne the bulk of the financial burden. It pays upfront for rough it purchases and sells the polished on consignment or with long credit terms to jewellery manufacturers and retailers.
Currently, the lower margins available in mid-stream are driving less efficient players out of business. While this phenomenon is not new - the diamond industry has seen slumps and dramatic recoveries in the past - this time the Bain report suggests that "declining profitability will likely cause structural changes in the mid-market".
According to the report, mid-market companies are being forced to re-evaluate their business models amid industry turbulence and continuing pressure on the market. Those who want to survive and grow will be forced to improve operational efficiency, optimize business processes and redefine their overall business model, possibly leading to a process of overall consolidation, the analysts say.
They point out that those who sustained margins during the last few months, did so by pursuing one of two business models - either "specialization in particular types of stones while working on consignment, or integration with the diamond jewelry retail segment".
Both the De Beers presentation and the Bain report conclude that the short term challenges should be viewed against the fact that the essential long-term fundamentals of the industry are sound. In fact, the Bain report projects that the recovery this time round may be quicker than on earlier occasions.
While rough imports into India rose for the first time in many months this October, going up by 14 per cent in value terms, the slump in polished exports, which dipped year-on-year by 17 per cent has continued.
The worst days may be coming to an end, but there is still a long, ardous road ahead to full recovery. And this time around, it may be a trimmer and fitter industry that rises up to take advantage of the new growth opportunities that exist!
Columnist
He has been a journalist since the mid-1980s, and has spent close to two decades tracking the gem and jewellery industry while holding different editorial positions in industry specific publications and websites