The diamond industry, by the very nature of the product, can essentially be considered as one single supply chain. Any stimulus which affects the end consumer demand affects the entire chain in an amplified manner. The industry felt the adverse impact of this “bull-whip”effect in 2009. Consequently, 2010 could see a positive effect, as sales and stock levels stabilise.

The industry was also dealing with the drop in consumer spending. Overall, the industry witnessed a drop in retail demand of about 10%. This drop, in itself, was far less than what other industries witnessed, and the industry was fortunate in that regard.

However, the implication of stock holdings along the entire supply chain led to more severe consequences. Retailers, shaken by this drop in demand and the uncertainty, focused on both managing stocks and increasing stock turns (which was below 1 turn for the entire global retail industry). This stock management was implemented by significant reduction in purchase of polished diamonds and wholesale jewellery, which fell by about 27%.

This effect was further amplified in the rough demand. The diamond industry, reacting to a 27% reduction in demand, needed to reduce their purchases even further to manage its inventory. The industry held about 9 months stocks, and this led to a 44% reduction in the rough demand.

This drop in volumes was not uniform, but was steeper during the first half of 2009, as companies across the industry drastically reduced their purchases. Rough purchases, during the first quarter of 2009, were almost at a standstill. The situation started stabilizing only in the third quarter of 2009. This impact is best represented by our model, which predicted how the sales for the industry will pan out in 2009 and 2010.

Pranay Narvekar Member of the Executive Management

IMPACT ON PRICES In 2009, banks were also under stress as liquidity and non-traditional forms of finance dried up. They in turn tightened lending to all industries, including the diamond and jewellery industry. This, coupled with the drop in sales volumes caused price fluctuations in both rough and polished diamonds. Prices bottomed out during the first quarter of 2009, and then gradually increased subsequently. Rough diamond prices fell more than polished, and their recovery was also much more rapid. Rosy Blue tracks prices quarterly on 16 categories of diamonds. These are then combined to produce our internal index of prices. This price movement is shown below.

IMPACT ON DIAMOND POLISHERS

Diamond polishing companies, especially in India, were severely affected. Many factories in Surat, the primary polishing hub, did not open for months after the Diwali festival in November 2008. Bulk of the factories started functioning only by end of the third quarter in 2009. It is estimated that over 0.5 million workers were idled for over 6 months, with about 0.2 million polishers permanently shifting to other industries. Many polishers turned to suicide as their last resort.

As the industry recovered, workers were gradually re-hired. The loss of workers by the industry has also resulted in some labour shortages, as volumes gradually pick up. This has resulted in some pressure on the wages. The industry will require 1-2 years to train fresh workers.

DIAMOND TRADING AND MANUFACTURING COMPANIES

Austerity measures, to reduce costs are expected to have helped diamond trading and manufacturing companies reduce costs by about 20-25%. Efficiencies were sought in assortment and trading activities.

Financing was a major concern during the first half of 2009. Trade financing typically works on discounting of invoices, rather than long term borrowing. This necessitates that there is a constant volume of sales. The sudden drop in volumes faced, implied that this mode of financing came under severe pressure. Banks had a mixed response to this. In certain countries, like India, where diamonds are a key export, measures were taken to provide the industry with some breathing space. The industry faced a maximum financial stress in the second quarter of 2009, as volumes were bottomed out, and overdue receivables reached their peak. Thereafter, as volumes started to increase, the flow of funds improved.

As other asset markets also improved globally, the industry was able to liquidate other assets which they possessed (like real estate and investments) and they were able to shore up the capital to a certain degree. This also aided in restarting the funds cycle.

It was creditable that the global diamond industry was able to get through the crisis without any major bankruptcies and without any direct government bailout. On the whole, the industry managed to reduce its overall leverage in an orderly fashion.

ROUGH PRODUCERS

Rough producers and mining companies faced a situation of almost zero demand in the first quarter of this year. They did take the right actions, which helped stabilize the industry. A few smaller rough producers continued selling their goods during the crisis, selling the goods at much cheaper prices during the first half of 2009.

Large miners received admirable support from their shareholders, who even injected fresh monies, when required. This enabled manufacturers to significantly cut down on their production and the quantity of rough available for sale. This limited the fall in the price of the rough, and consequently polished.

Rough producing companies and countries managed the crisis in different ways. In Botswana, major mines were shut for upto 6 months as piled up stocks were cleared. This was extremely creditable, given the dependence of the country on diamond mining.

Alrosa, the Russian mining company, actually continued mining diamonds. However with the support of the Russian government, they did not sell any diamonds in the market during the first half of 2009. This went a long way in stabilizing the prices. Alrosa sold over USD 1 billion of rough to Gokhran, the Russian treasury in 2009.

BANKS

Support from the banking industry was crucial in helping the quick recovery by the industry. The banks helped the industry deleverage gradually, as the face of the sudden loss of volumes (and hence collateral). Overall the industry managed to reduce their leverage during the crisis, without any major distress asset sale.

Globally, the industry did see some clear winners and losers. Chaim Even Zohar, the noted industry analyst, stated that India was the clear winner for 20097. In his view, financing is the key to the future of the industry, and business with following the area where bank financing is available. India was able to use this crisis to increase its market share in key consuming countries.