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DIAMONDS: INDIA'S LITTLE
GEMS
Part 2: Rough stones and the
Russian connection
By Tony Allison
Part 1: A cut above the
rest
Over 125 million
carats of diamonds are produced world-wide each year in
gem, near-gem and industrial qualities, and 80 percent
of these rough diamonds (by caratage) are cut and
polished in India. Enormous capital investment is
required to develop, construct, maintain and operate a
mine. But mining is only the first step. To recover
diamonds, the ore goes through many stages of crushing
and processing - including advanced X-ray techniques -
before final sorting in a high-security secure
environment. South African conglomerate De Beers, with
its affiliates, produces over 40 percent of the world's
annual production, from 20 mines, principally in
southern Africa.
The top seven diamond-producing
countries today are: Botswana, Russia, South Africa,
Angola, Namibia, Australia and Zaire. These nations
account for 80 percent of all diamonds in the world.
Mining to a smaller extent is conducted in Brazil,
Guyana, Venezuela, Guinea, Sierra Leone, Ivory Coast,
Ghana, Central African Republic, Tanzania, China,
Indonesia and India.
The Diamond Trading
Corporation (DTC) - De Beers' selling and marketing arm
- processes some two thirds, by value, of the world's
diamond production. All diamonds are sorted and valued
into over 16,000 categories of shape, quality, color and
size. At present, the diamonds are sold by the DTC at
regular sales called "sights" to the world's leading
diamantaires.
However, from January next year,
De Beers will introduce a new distribution system for
its more than $4 billion of rough diamonds a year to
help drive demand for the precious stones. It is part of
a plan by De Beers to rejuvenate demand for diamonds by
streamlining distribution and creating the designer
branding that already exists in other luxury goods,
experts say.
De Beers presently sells to an
exclusive group of about 120 customers, who are traders
or cutters located in diamond cutting centers around the
world, including New York, Antwerp, Johannesburg, Tel
Aviv and Mumbai.
De Beers invites customers to
London to buy stones 10 times a year. The customers do
not know in advance how many stones they will be told to
buy or what the assortment will include. Customers who
do not like the system are cut off.
Now the
European Commission and De Beers have agreed to a number
of approaches designed to increase the rights of its
customers, including an ombudsman to settle disputes. In
addition, De Beers must give customers six months notice
if it wants to cancel a contract, up from three months
now.
Instead of finding out the quantities of
stones that they will be getting on the day they receive
them, customers will be notified six months in advance.
This new system is expected to introduce more
flexibility into the market, and will certainly assist
India in pinning down sources of rough diamonds and more
predicable prices.
The Russian
connection
During fiscal 2001-02, India imported
120 million carats of rough diamonds valued at roughly
$3.8 billion. Maintaining an uninterrupted supply of
rough diamonds is therefore critical to the Indian
industry, which obtains 70 percent of its rough diamonds
from De Beers' DTC, with the remaining 30 percent routed
through Antwerp. Currently, 50 percent of the rough
diamonds from Russia are routed for sale through De
Beers. Russia itself accounts for 22 percent of the
world's rough diamonds.
Earlier this year, India
was reported to have lost a deal to import rough
diamonds directly from Russia, which would have reduced
prices by about 20 percent.
Following Russian
President Vladimir Putin's visit to India in 2000, the
Russians made an offer to sell some rough diamond lots
to India. But Indian manufacturers could not buy them,
as the state-owned Russian agency Almazy-Rossii Sakha
(Alrosa) insisted on advance payments. Under Indian
foreign exchange regulations, advance payments are not
allowed without a bank guarantee, which the Russians
were reportedly unwilling to provide. "India lost an
opportunity to import rough diamonds directly though it
accounted for a small percentage of the total trade,"
said one diamond exporter.
However, the Finance
Ministry, in consultation with the Reserve Bank of
India, is now understood to have agreed in principle to
work out a mechanism to enable India to buy Russian
diamonds directly. Praveen Shankar Pandya, a former
chairman of India's Gem and Jewelry Export Promotion
Council, is reported to have said that a working group
was sorting out issues hurting direct trade between
Indian and Russia. "We hope to resolve the issues soon,"
he said. According to him, there was an urgent need to
realign rough diamond supplies to consolidate India's
position in the world diamond market and to ward off the
threat from China.
In August, Alrosa chairman
Vladimir Kalitin announced plans to open representative
offices in India and the US to handle the rough diamond
trade. With an upcoming Russian presidential decree on
diamond market liberalization, Alrosa will be able to
sell rough diamonds outside the DTC. Last year, Alrosa
produced about $1.8 billion worth of rough diamonds or
some 22 percent of a total global output of about $8
billion. The small-sized diamonds or "Indian goods"
amount to some 60 percent of Alrosa's total output.
Furthermore, Russia's diamond giant is mulling
raising its production capacity. On October 2, Alrosa
announced plans to double output of its Anabarsk mine
within the next three years. And there have been reports
on test sales to India of Russian diamonds from Gokhran,
Russia's state stockpile agency run by the Finance
Ministry.
Gokhran typically declines to publish
stock or sales figures, but its annual sales of
stockpile diamonds to domestic polishers are estimated
at some $150 million. However, Russian manufacturers buy
rough diamonds on condition that they can also dispose
of the small-sized diamonds, which they cannot cut and
polish as profitably as the Indians.
Russia
diamond exporters are also exploring other major Asian
markets. For instance, in September, a Chinese mission
including executives of the Jinghua Diamond &
Jewelry Co Ltd traveled to Russia and met with Alrosa
representatives. Back in 1997, Russia and China inked an
inter-governmental agreement to develop cooperation in
the diamond industry, a deal lobbied by Gokhran.
Liberalization of the Russian diamond sector
could mean a larger volume of Indian-type diamonds
available for exports from both Alrosa and Gokhran. In
future, diamond export quotas will be issued for a
five-year period instead of for one year. This will mean
that Alrosa will be able to lend money for the
development and modernization of its manufacturing
processes. Secondly, the company will have the right to
sell about 15 percent of its diamonds in the free
market, bypassing the DTC.
Trends
The
Bharat Diamond Bourse, intended to be a well equipped
platform for promoting diamond and diamond jewelry
exports, will become functional in Mumbai by 2004. At
present, most of the diamond merchants operate from
little cabins in office towers in south Mumbai. The
facility, coming up in the fast-developing Bandra-Kurla
complex, will provide a centralized area of operations
for the diamond industry. The 1.8 million square feet
complex will house facilities such as telecommunication
networks, sophisticated security systems, strong rooms,
lockers and customs clearance services. The bourse, a
non-profit making body, was registered in August 1984 to
provide all the infrastructure facilities for export
promotion in this sector.
The launch of the
Shanghai Diamond Exchange and a gold exchange,
meanwhile, are part of the government's commitment to
open up the market and provide a fairer, more convenient
and more transparent environment in which to compete,
according to Chinese officials.
On January 1,
2003, about 45 countries will implement the Kimberley
Process, an international monitoring system that aims to
prevent "blood" diamonds or "conflict" diamonds from
entering the legitimate market, while at the same time
protecting the diamond industry. The system mandates
internal government controls, uniquely numbered and
validated certificates, and tamper-resistant containers
for all shipments of rough diamonds between
participating nations. Further, the system binds
participating governments to accept imports from and
authorize exports to only other Kimberley Process
participating countries. Moreover, the system is fully
inclusive: additional countries may sign on to the
system and trade in accordance with Kimberley Process
procedures at any time.
There are obviously no
figures on the percentage of rough blood diamonds that
make their way to India, but insiders estimate that the
figure might not be inconsequential. The Kimberley
Process, if properly implemented, will therefore have
some effect on India, but this could be offset by the
availability of stones directly from Russia.
(Additional reporting by Sergei Blagov
in Moscow.)
(©2002 Asia Times Online Co,
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