Not So Shiny

The global diamond market is under stress. But India could spring a shiny surprise in the coming years. At least, that is what diamond merchants are hoping for, according to the latest ‘Global Diamond Report’ by Bain & Company. It says, India is likely to become the third-largest diamond jewellery market, ahead of Europe and Japan, by around 2020.

Clearly, a large portion of the report was drafted before the 8 November demonetisation announcement. The sentiment for India has dampened somewhat since then. There’s cash-crunch and there could be an adverse impact on GDP. The continued depreciation of rupee is another factor that can spoil the party.

The report based its India forecast on growing urbanisation, middle-class expansion and engagement ring penetration.

However, the picture is a bit gloomy when it comes to diamond trade globally. For instance, in 2015, the retail sales of diamond jewellery grew 3 per cent (at constant exchange rates), but declined about 2 per cent in dollar terms, the report said. The reason: slowing demand and drop in polished diamond prices resulted in some of the lowest profit margins in years. To make the situation worse, there were high inventory levels, accumulated since 2013. In India, strong macro-demographics, particularly the growing middle-class, supported positive gains. Yet, even those positive trends were no match for the strong US dollar that drove global markets into negative growth rates, the report stated.

The forecast about an upswing in the global diamond market, however, does not consider several factors that can disrupt the diamond supply-demand balance, Bain & Company report illustrates. For example, the possibility of a cyclical recession in the US, uncertainties about the future of the EU following the Brexit referendum, and slowing economic growth in China and India could erode demand for diamonds, it adds. Technical supply disruptions, the impact of commodity prices on major producing countries, and potential new sources of supply could affect global rough-diamond production too, it said.

As to why India may shine as a diamond market in near future, the report expects demand for rough diamonds to recover from the recent downturn and return to a long-term growth trajectory of about 2-5 per cent a year on average, relying on strong fundamentals in the US and the continued growth of the middle class in China and India. However, there is a caution too. “The new government anti–tax evasion initiatives could offset positive macroeconomic trends, while further rupee devaluation is likely to offset demand growth in local currency terms.” Clearly, diamonds are not for everyone.