Is The Large Diamond Now A Safe Haven Investment?

The prices of large, good colour and clarity diamonds have appreciated 76.5% this year! Naturally, these diamonds are no longer being bought because they make great adornment. They’re now pure and simple investments. Check out the report here.

At this point, most diamond industry insiders would wag their heads and mutter about impending doom, citing the great crash of ‘84 etc. If you’ve been reading this blog, you’ll know that I’ve voiced my share of concerns on the subject as well.

I have to say now though, that what’s happening now isn’t quite the same as what happened the last time round. Back then, it was the diamond industry itself that was engaging in speculative with no underlying support from consumer demand. They chased the prices up into the stratosphere, where they naturally stalled and came crashing down to earth again. This time, the buying is from the consumer end. That makes things different – though I have to confess I’m still nervous.

Is the large diamond at least, now heading the way of gold? Is it becoming a universally agreed upon safe haven investment? Has it broken its connection with jewellery demand? Are these prices sustainable in the long term? As you can see, I’m doing all the asking, not offering any answers. All I have to say is that the situation bears watching. We may be on the brink of yet another disaster just waiting to happen, or we may be on the threshold of something new.

 

Indian Diamond Cutting Industry Under The Knife

The shakeout in the Indian diamond cutting and polishing industry has begun to accelerate. The incident where a diamond cutter demonstrating for higher wages was killed in Surat is one of the visible signs of this. There were more protests in Ahmedabad and I don’t think the whole thing is going to die down in a hurry despite the call for calm negotiations by the upset chairman of the Gem & Jewellery Export Promotion Council.

Sanjay Kothari’s statement actually encapsulates the situation extremely well. Inflation in India is currently raging in the region of 12% (many market gurus say it is much higher) and the cost of food alone has risen by over 30% in the last few months. You can absolutely understand why the cutters are agitating for more wages. Most unit owners do too. Almost all of them have agreed to hike wages. Just a handful of them are resisting. This isn’t because these are bad people. They literally can’t afford to pay higher wages because they’re teetering on the edge themselves.

The Indian diamond market has been in the doldrums for some time now. There isn’t much movement and business sentiment is really depressed. The Indian industry’s problems began long before the slowdown in the US. There was a massive build-up of production capacity a few years ago and right now, India has a huge overkill in production capacity. Many units had already shut down forever before the US slowdown became apparent. They just couldn’t chase down supplies of rough at prices that would afford them a decent spread. The slowdown in the US multiplied the agony many times over. There are many more units just hanging in by their fingernails today. Sadly, the hard truth is there is still production overcapacity in India and the ground reality is that many more units will probably close before year’s end.

 

Ouch! Could General Motors Go Bankrupt?

Even as the global gem and jewellery industry, faced with fading American demand, is feverishly trying to open up new markets all around the world, here come more alarming signals from the US. Merrill Lynch now says behemoth automaker General Motors could go bankrupt if it can’t raise $15 billion to shore up its liquidity problems, reports the Financial Times blog. You can also read the detailed report here.

What would happen if it really did go belly up? This ‘unthinkable’ thought occurred to analysts as far back as three years ago as GM ploughed through another financial crisis at the time. Here’s what Business Week said at the time:

What would a GM bankruptcy look like? It probably would be the most massive Chapter 11 filing of all time — a watershed moment in the history of American business, with far-reaching consequences for all of GM’s stakeholders. While the direct impact on the national economy would be relatively modest, the Midwest would be hit hard by the combination of job losses at GM and its suppliers and benefits cuts for the company’s retirees.

The report went on to say that large investors like Las Vegas casino magnate Kirk Kerkorian, whose 9% stake in GM was already at the time under water by some $350 million, would, along with other large investors, fight any move to declare bankruptcy. Obviously he didn’t let that happen then. But can he and the other big investors hold off the inevitable today? Financial analysts have downgraded all US automakers stocks and the outlook for the whole industry doesn’t look good. So what Business Week considered a ‘modest impact’ on the whole US economy had GM gone belly-up then, might be far more significant today.

 

Mittal May Bid For Rio Tinto

The Rio Tinto takeover battle is getting more interesting every day. According to this report on the Financial Times blog, Indian-born steel magnate Lakshmi Mittal, having joined the board of Goldman Sachs, his financial advisors, is now thinking about jumping in with an offer for Rio. Mittal, of course, is interested in Rio’s iron ore assets. But if he takes control of Rio, he’ll take control of its diamond assets – including its prospective new mine in India.

Don’t jump to any conclusions right away. Mittal strikes me as a pretty hard-nosed guy and he wouldn’t hesitate to offload Rio’s diamond assets if he felt they don’t fit in with his core businesses and overall strategic view. This would open up possibilities for everyone else including BHP Billiton and Anglo American, who might choose to make the acquisition through De Beers.

So will he or won’t he bid for Rio? And if he does, will he or won’t he hang on to its diamond assets?

 

Do De Beers Clients Have To Push General Development In Southern Africa?

In an interesting development, De Beers Diamond Trading Company (DTC) managing director Varda Shine hosted an ‘Africa leadership’ seminar in South Africa to kick off the new 3-year contract period. You can read all about it here. And here’s how a De Beers release after the meeting quoted Shine:

“To maintain our position as the world’s most effective distributor of rough diamonds it is important that we recognise and learn about the enormous opportunities that southern Africa offers to our clients. We hope that by hosting this event, for our clients and partners, that it demonstrates our commitment to this region as we move towards a more sustainable economy through beneficiation of diamonds. To salute the region by bringing the world’s leading diamantaires to Southern Africa to experience, at first hand, our commitment and their commitment to the industry and the region is part of the leadership that we wish to nurture.”

Maybe I’m reading too much into it, but I got the message that if you want to stay a De Beers client, you need to invest and/or add value in southern Africa – perhaps
even outside the diamond industry.

 

Rio Might Have Found A Diamond Mine In India

 

It looks as though Rio Tinto might have found a diamond mine in India after all. Going by their application for a mining lease at Bundelkhand in the state of Madhya Pradesh, they seem to have found a deposit that might yield at least some 27 million carats. If the mine does go into production, it will be the first significant one after the legendary alluvial deposits at Golconda were first mined over a thousand years ago.

And if Rio are onto something, there’s a good chance that the other big operators like De Beers and BHP Billiton, who have also been busily looking for diamonds these past few years, might find something of significance.

It would be great for the global diamond industry if another major source area for rough diamonds was opened up.

 

Can India & China ‘Think Globally, Act Locally’?

In an extremely interesting piece, Seeking Alpha writer James Picerno takes the view that demand from the emerging markets is fuelling inflation in the US and other developed markets. The US Federal Reserve’s monetary policy, he argues, is basically playing into the hands of the developing economies, who have intentionally stimulated demand to prod along higher growth stoked by exports.

The problem is, the exports from these developing markets, primarily India and China, are overwhelmingly targeted at the US market. Take demand out of that market and exports begin to flounder – which then impacts business, employment and buying power in the developing economies…

The Indian gem and jewellery industry, as also its Chinese counterpart, is trying to make up for lost exports by going after an expansion in the domestic market. They don’t really have a choice. After a disappointing JCK Las Vegas show, where else can they look for customers? But as I’ve said before, the combined buying of the Chinese and Indian markets at current levels can’t even begin to make up for the lost exports to the US. And as the exports were the thing that brought about prosperity and consumer demand at home…

The emerging markets have to focus on inflation in their own markets, which is surging to unacceptably high levels – it’s all part of the ‘global inflation’ that the economic pundits are talking about. So while finding local solutions to their inflationary problems, these markets have to also keep one foot inside the global economic chalk circle. ‘Think Globally, Act Locally’ is what Picerno’s piece is titled. The question is, can they?

 

    

 

Pegging The Diamond Industry To 4-caraters & Billionaires’ Wives

I haven’t heard anyone bringing up the topic of a diamond futures market for some time now. But here’s Martin Rapaport keeping the topic alive. According to him, there are “increasing calls from within the industry” for a futures market. He goes on to say that the price of 4-carat-plus stones has appreciated 130 percent since the beginning of the year and that “There is no limit to the upward movement of diamond prices in an environment where the appetite of the wives of billionaires is insatiable.”

Firstly, how can anyone use the price of 4-caraters as an industry benchmark? And does Rapaport think billionaires’ wives will drive this industry? By the way, I don’t believe the demand for large stones is being driven by actual demand from women who want to own and wear them. They’re being bought by speculators who don’t really care whether the diamond is beautiful or not. They just holding on to it as another investment instrument.

The last thing the industry needs right now, in my opinion, is a futures market.

 

After A Disappointing Vegas, Indians Look For Salvation At Home

There’s considerable despondency in the Indian gem and jewellery industry after the recently concluded JCK Las Vegas show. Not surprising considering the trends that have emerged from the show. You can read our correspondent’s report here. It’s the same old story. The high end seems to be holding up well despite the economic downturn in the US. Everything else is in trouble.

There’s greater focus now on the upcoming India International Jewellery Show (IIJS), which will run from August 7^th to the 11^th. If anything can be salvaged from the situation, it can only be done in the domestic market. Meanwhile, the government has announced that inflation in India is running at 8.1%. Jewellery manufacturers I spoke to pegged it much higher – in double digits. High inflation is not good news to anyone. It’s disastrous for the luxury industry…

 

Inflation Spoiling The Party In Emerging Markets

This is the big news – and the big worry – in India right now. While the economy has grown at 9 per cent over the past year, inflation is today, raging at 8.1 per cent. Worse, the government concedes it can’t do very much to contain it as it is riding on the back of a consistent rise in global commodity prices.

So while the Indian gem and jewellery export production industry is looking at the domestic market to make up for what it has lost in the way of a market in the United States, global forces have barged in to shatter even those fond hopes.

While there is a substantial Indian contingent at the JCK Vegas show, many say they don’t really have high expectations of the US market and that if a rescue package is going to be formulated, it will have to involve the emerging markets, primarily the Middle East, India and China. The Middle East is still buying strongly, buoyed by high oil prices, but China is also waging a battle against inflation that threatens to run away out of control if tough measures aren’t taken. The Middle East is buying primarily high end goods and even with its strong showing, can’t begin to make up the sales numbers that are needed to shore up the industry. This is going to be a long, tough year for the global gem and jewellery industry…