India could prove to be diamond’s best friend

Indians have taken a sudden fancy to diamonds. Or so it appears from the fact that domestic purchases of the precious stones doubled last year.

Diamonds (as part of diamond studded jewellery where gold accounts for barely 20% of the value) worth $3.37 billion were absorbed by the country in 2010 — total value of diamonds imported less the total value of diamond exported — compared with $1.69 billion in 2009, representing a 100% growth.

What’s more, marketmen expect this growth rate to be sustained, if not improved upon this year.

What gives?

“Some of it could have been on account of the surge in jewellery purchases by the growing number of increasingly affluent Indians. Helping this demographic change is the increasing number of young people who want to buy and offer engagement rings (invariably diamond studded). Some of it could be inventory, or just work in progress. And some of it could be investment purchases made by high networth Indians as part of an overall investment strategy,” said Martin Rapaport, group chairman and founder of the Rapaport Price List for diamonds.

As an investment, diamonds appear to have paid off for many Indians. The value of diamonds went up by an average 20% last year — a far cry from the fall in prices during the financial meltdown three years ago, which saw the entire diamond market slump as customer confidence plummeted.

The surge of interest in the precious stones is despite the fact that their value has taken a beating compared with gold. With gold prices increasing sharply, many have moved to diamonds in a bid to spread their non-dollar investment risk.

“One of the factors behind such investment decision is the awareness that the value of the dollar has been falling,” said Rapaport.

For all that, investment in diamonds has always been problematic — it’s tough to say how much one should pay for a diamond.

Unlike precious metals like gold and silver, which have international benchmark prices, diamonds have almost a hundred different parameters that affect pricing, though diamantaires agree on four main criteria — carat, cut, colour and clarity.

This is where companies like Rapaport hope to make a difference.

Established in 1978, the Rapaport Group advises its 11,000-plus members across 102 countries on prices, market information, certification and even its services as a guarantor of trade between member buyers and sellers.

It certifies diamonds worth $4 billion annually and expects this number to rise exponentially in the coming years.

As a guarantor of trade, it charges a 3% commission on the value of the trade transacted and guaranteed. For this service, Rapaport has 5,930 member companies across 74 countries, and has already dealt with 770,000 diamonds. It guarantees trade worth $4-5.5 billion at any point of time.

The spurt in India’s diamond consumption understandably has diamond traders excited.   

India cuts and polishes more than eight —- some put it at closer to nine —- of every 10 diamonds sold in the world. But the country’s emergence as a consumer of diamonds has surprised one and all.

That could explain why De Beers wants to increase its hold on India’s policymakers, so that only diamond roughs mined in countries that accept the company’s marketing strategy find a place in this market. In fact, De Beers should be pleased with more price lists becoming popular as they would help it shore up the diamond’s perceived value.

Going by Pooja Kotwani, managing director, India, Rapaport, the compounded annual growth rate of diamonds in India was 32% for diamond roughs and 79% for cut and polished stones —- growth rates any marketman will drool over.

Contrary to traditional belief, the market for diamonds in India is no longer confined to the south. “True, the best quality diamonds usually find their customers in south India. But the northern part of this country is equally important —- in terms of a higher volume for lower priced stones,” said Kotwani.

Rapaport has also been eyeing the China market, which saw diamonds worth of $800 million sold last year. Estimating the size of the Chinese market has not been easy, as much of the purchase is made through Hong Kong and most of the diamonds find their way into the mainland thereafter. Segregating Hong Kong sales and mainland sales has never been easy.

But will Rapaport’s price lists find acceptance in India?

The company sure hopes it does. What it offers is a pricing matrix based on size, shape, colour and clarity so that each range of size can be given an approximate value, based on what experts believe the market is willing to offer. These prices are updated every Thursday midnight (New York), and are now being made available in Indian rupees as well (instead of being shown in dollars). However, the actual prices at which transactions take place are invariably at a discount of over 23%, which further underscores the inability of the market to get a fix on the price of diamonds. The price lists help in price discovery. However, thereafter, it depends on the ability of the seller to get a good price, and the buyer to beat down prices.