DIAMOND polishing factory in India's diamond hub, Surat. Photograph: SRK Exports

India's Rupee Crisis Threatens Rough Diamond Prices

Issue 54, September 2013

India’s currency crisis threatens to cut rough diamond prices by pricing India’s dealers out of the international auction circuit. The rupee has dropped 20 per cent since May to a record low against the US dollar, falling 8 per cent in August, its biggest monthly decline since 1992. The move has tightened bank credit whilst inflating the cost of imports, pricing Indian buyers out of the market.

Low-cost skilled labour and a chintzy jewellery tradition gives India a dominant position in the diamond cutting industry, with imports of $10 to $11bn each year. Whilst the rupee’s devaluation lowers labour costs further, in the immediate market it has made imports unaffordable for dealers without access to dollar financing.

“I have stopped buying rough diamonds,” one trader told the Times of India. “The present recession reminds me of 2008,” a polisher said. “I spent the afternoons reading newspapers and doing nothing else.”

The country’s impact on the market is confined to small, low value stones, with large and mid-sized diamonds processed in Antwerp and Israel. Russia’s Alrosa, Rio Tinto and Anglo American-owned De Beers are the world’s largest producers of small stones.

Despite price decreases, an estimated 25 per cent of De Beers’ $600m uncut auction this week was refused by buyers, according to pricing group Rapaport. In the secondary market, boxes are reported to be trading at discounts and on extended credit terms. “We did adjust prices,” said a spokesman for De Beers, “but we’re not in a position to follow the rupee.”

Currency movements have historically wrought havoc on diamond prices. In the 1970s, spiralling Israeli inflation caused dealers to hoard stock, driving prices higher. De Beers’ fears that the process could threaten its own control over inventory forced the company to pressurise Israeli banks into increasing interest rates, rapidly reversing gains.

“Our game is stability in pricing,” De Beers’ head of global sales said this week. “We’re not going to do anything knee-jerk.” Indian importers typically deal on credit, such that the rupee’s fall has caused huge paper losses, encouraging dealers to dump inventory in Hong Kong in the coming weeks.

“Business has come to a grinding halt,” said a dealer on Bharat’s Bourse.

“I spent the afternoons reading newspapers and doing nothing else.”

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