Issue: October 2016
Cover Story
Textiles’ – the word brings up images of beautiful drapes – cotton, silk, chiffon, lace. Whether it is the material draped on the figurine of the lady...
  Tapping Sustainable Energy Alternatives
  The second lead article, which is also focus article, is written by Shri N Bhadran Nair. Citing a report of the World Health Organisation, the author has advocated for tapping sustainable energy alternatives
  Financing Renewables in India
  The third article is written by Shri P C Maithani, Adviser, Ministry of New and Renewable Energy. He has focussed on renewable energy resources
  Steps to Achieve India’s Solar Potential
  The special article is written by Sumant Sinha, Chairman and Managing Director of ReNew Power. He opines that India must also honour its global commitments on curbing greenhouse gas emissions
  Dynamics of world diamond trade change following shortage of gemstones

Africas beneficiation programme chokes supplies to India, China gets upper hand

TN Ashok
July 01, 2013 | TN Ashok 

The fast changing patterns in global diamond trade caused by the acute shortage of the gem stone has considerably altered the position of India and China as the major cutting and polishing centres besides hitting them in trade revenues.

Several factors are responsible for this: 1) there is an acute shortage of mined diamonds worldwide 2) Africas beneficiation programme has virtually choked the supplies of rough cut diamonds into India for cutting and polishing and then onward exports to lucrative markets in the USA and Europe and Middle East and 3) a lot of illegal mining by rebel groups in Africa has siphoned out official supplies of the gem stones in the market.

The Indian diamond industry has since the last six years been fighting a losing battle with very little or little support from the government. The sparkle that brought billions of dollars as foreign exchange to the country is fast dwindling.

First and foremost is the challenge posed by Africa at two different levels? One is the official and the other is the unofficial one. The first official one relates to the continent reducing exports of uncut rough diamonds to India and China for cutting and polishing under a beneficiation programme which prompts their governments to open their own cutting and polishing centres, thus saving foreign exchange for them. But reducing the same for India or China as supplies stand choked. Imports became costlier for India as it had to look for other sources.

Second is the armed rebel groups mining diamonds illegally with or without covert government help in some of the African countries which has led to the generation of Conflict or Blood Diamonds, which means that the black market sale of such illegally mined diamonds goes into purchase of arms and armaments. They are also called Blood Diamonds because slave labour in chains is ostensibly used to mine diamonds under inhuman conditions violating international human rights conventions. So a huge chunk of diamonds has been siphoned out from official supplies.

These trends have affected Indian rough diamond imports which jumped to $15.13 billion in value terms when compared to $11.98 billion in the previous fiscal, much of the increase being accounted for by rough diamond prices because the stones became scarce with Africas new policy. Reinforcing this, in volume terms, rough diamond imports actually dropped from 154.2 million carats in 2010-11 to 131.4 million carats in 2011-12.

Consequently, exports of cut and polished diamonds also dropped a shade under 0.4% because one also had to consider the wild swing of the rupee against international currencies dropping in value against the U.S. dollar and Euro over the period. Total exports increased 4.6% in rupee terms while Gems and jewellery accounted for 14% of Indias merchandised exports in 2011-12. The growth in gold jewellery exports compensated for the dip in diamond exports thereby becoming the main driver for an increase of $16.52 billion as against $12.7 billion the previous year.

While Africa began setting up its own cutting and polishing centres and deprived India and China of their existing share in this trade globally, it also looked askance for external help in setting up centres for which it did not have the requisite manual skills or technology. While China was quick to seize this opportunity and make up for loss of its imports because of the governments backing, Indian traders went without government support and were virtually swamped out of the market.

Meanwhile back in India, the cutting and polishing centres, mostly in western India, particularly Surat, were hard hit as work force reduced due to trade uncertainties. The skilled labour in this industry reportedly shrunk to about six lakhs from eight lakhs in the period. Thus there has been job destruction for around two lakh people. Coming on the heels of a reduction in employment opportunities in agriculture as well as industry, this huge loss of jobs has been painful for the Indian economy.

Chinas thrust into Africa was essentially a part of its foreign policy initiative to grab the growing African market for development particularly the infrastructure sector. So China woke up faster than India. As China was considering Africa as a major investment destination it included the diamond industry as part of the deal. Beijing has committed billions of dollars in the resource rich Continent. US $ 6 billion to Congo, US $ 8.4 billion to Nigeria and US $ 16 billion to Ghana.

The China Development Bank (CDB) announced last year it could invest up to US $ 10 billion in Zimbabwes mining and agro sectors. In 2012, President Robert Mugabe opened a new US $ 98 million military academy erected by Chinese contractors the project cost is being repaid by Zimbabwean diamonds. China is initiating multibillion dollar deals for rough diamonds in exchange for goods it produces ranging from medicines, oils, and industrial goods and services. For years the Chinese have been mining partners in the Marange diamond fields.

Chinas future looks bright as IMF forecasts that seven of the ten fastest growing economies by 2015 will be African. Now, China is Africas largest single trading partner, and in 2011 bilateral trade crested at $166 billion, rising by a staggering 33 % from the year before. Some $93 billion of trade came from African exports of mostly natural resources and agricultural goods, while the remaining $73 billion comprised manufactured goods imported from China. Beijing sees Africa as a highly significant market for Chinese products.

Reports in Christian Science Monitor indicate that on a quest to secure raw materials and energy resources to support the exponential growth of its economy, China has become the fastest-growing investor in Africa. China overtook the United States as the worlds largest energy user, according to the (IEA), and much of that energy comes from African countries such as Sudan and Angola.

Therefore, Chinas huge investments in Africa is a Clear and Present Danger to Indian investors abroad particularly in Africa and particularly the diamond cutting and polishing industry because as the demand for diamonds jumps, prices rise and supply dwindles for other major players.

Chinas outreach policy, first outlined in its 10th Five-Year Plan (FYP, 2001-05), has been reaffirmed in the latest 12th FYP (2011-15). While motivating Chinese firms to do business abroad , the policy seeks to give them a competitive edge by making them acquire strategic assets, securing access to natural resources, and establishing new markets for Chinese exports.

This is amply borne out by data on Chinas diamond output, import and export in 2006-2011: while globally there was a 3% fall in Rough Diamond Supply, China recorded over 20% increase in its rough diamond imports in carat terms and a 55% increase in value terms.

India has no option but to adopt strategies where it can move beyond conventional sources of diamond supply. It will also have to ensure that the diamond industry is not burdened with taxes which further hobble this industry. India cannot afford more loss of both jobs and export earnings.

The Kimberley Process Certification Scheme (KPCS) has estimated world production of rough diamonds at 133 million carats. Major players such as De Beers has a share of 26% by volume and 35% by value, Alrosa has 28% share by volume and 25% by value, Rio Tinto has 11% share by volume and 10% by value and BHP Billiton has a 2% share by volume. All these figures are a clear mark down from what they were a few years ago. Dee Beers alone enjoyed a market share as high as 75 to 80% some years ago.

Looking for sources other than Africa, India has now asked Russia to push ALROSA for long-term supply contracts so that more Indian companies can source rough cuts from the mining giant. The move could enable Indias state-run trading company MMTC Ltd. and the Hindustan Diamond Company Private Limited (HDCPL) to apply for roughs from ALROSA. Anand Sharma, Indias minister of Commerce, Industry and Textiles, reportedly made a request to this effect to E. Nabiullina, the Minister of Economic Development of Russian Federation during the latters visit to Delh recently.

Other dangers to diamond trade emerge from the general consumer shift of particularly women from diamonds to electronic items such as I Phone or I Pads judging by the huge advertisement campaigns launched by consumer giants such as Samsung, Apple and Sony. Jewellery giants of the world advertised much less or didnt at all in some countries when compared to consumer electronics giants such as Apple or Samsung.

At the industry level,

while the diamond traders do make money, little is being done for the betterment and livelihood and security of the workforce. Unlike other organised sector jobs, workforce here doesnt enjoy the benefit of PF and Gratuity. An Export duty of 2% could be levied by the government and charged to the polished diamond exporters.
The revenue raised could be used as a corpus for benefitting the diamond industry workforce enhancing their job security and livelihood.

So, both the diamond industry ( importers, exporters and others along the value chain), and the government need to work together to restore the premier place for India which once produced the worlds best 2A quality diamonds from its own Golconda mines in Hyderabad. These mines are just mined out and left with nothing more to produce, it seems.

There has also been a problem of diamond industry in India diverting finance from the diamond business to risky sectors in the hope of making huge piles of cash. An amount of US $ 5 billion or over Rs 30,000 Crore was reportedly diverted by a section of the diamond trading business into real estate which has since crashed following the recessionary trends set in motion in 2008.

The monies borrowed from banks threatened to become bad debts and the banks are hard put to recover them. With the slump in real estate, these firms are now caught in an unprecedented fund crunch. How to repay it?

And when it comes on top of a situation where there is a sharp decline in imports of rough cut diamonds and consequent fall in export of cut and polished diamond, it can literally break the back of the industry.

So much so the diamond industry pushed the commerce ministry to come out with a status report by a DGFT task force to address issues affecting it. Diamond exports are set to fall by 7 billion USD in 2012-13 from 25 billion USD achieved in 2011-12.

The task force took serious note of Indias shrinking share in the US market, Chinas dominance in global markets and its direct diamonds for commodities barter deals with Africa and suggested remedial measures like establishment of a special fund by the Reserve Bank of 3 to 5 billion for refinance of borrowings given to non-petroleum products which have high import content of 70%. The diamond industry comes under this category and is eligible for this facility. If such a financing facility cannot be made available then they should be allowed ECB (External Commercial Borrowing) facility in foreign currency to finance the import of raw materials.

Good intentions by the government indeed. But is the diamond industry genuinely in a crisis? Or has it plunged into a self-made crisis from which it desperately tries to surface? The question is will the special fund actually go into helping the genuine diamond traders in a crisis or go to help those who diverted finance into other sectors and put the entire trading community in peril?

For the industry hit by shortage of funds, dwindling exports, reduced rough cut imports, a new source of supplies has now emerged through the breakthroughs offered by science and technology. Worldwide leading diamond producing companies have turned to using this technology of growing diamonds in a laboratory which are finding acceptance in leading gem stone markets.
An Indian company, II A Technologies has also opened a facility in Singapore to produce such diamonds for the Indian market as also elsewhere.

Two well-known technologies which grow diamonds: HPHT (High Pressure High Temperature) and CVD (Chemical Vapour Deposition), have been a leading area of research, in the last decade. Several corporations like Scio Diamonds (formerly Apollo Diamonds), Element Six (a subsidiary of De Beers), D.Nea, Gemesis and now 2a Technologies have been researching these technologies for years to find a way to grow diamonds.

According to a leading scientist who happens to be a technical director at a CVD research center, CVD technology involves usage of state-of-art machinery which has its origin in semi-conductor industry. After several years of research and development it is now possible to grow extremely pure colourless diamonds which can be used in high tech scientific applications as well as gems.

The growth process begins with a small diamond seed, placed under controlled conditions mimicking those that give rise to natural diamonds in the earth's core. The carbon atoms, provided using a source of carbon, disperse and re-form around the seed, growing the diamond atom by atom and layer by layer, just like nature's geological processes. Grown Diamonds are real diamonds and are physically, chemically and optically identical to mined diamonds, explains the technical director.

Grown diamonds are also just uncut and rough diamonds replicated from the original possessing all its properties of shine and glitter and long life. They need to be cut and polished. They are eco-friendly and conflict free diamonds which are certified by international agencies on par with mined diamonds which cause pollution, damage the environment by soil erosion, disturbing the upper atmosphere through artificially created air currents, hit water beds in the earth etc.

Grown diamonds are an answer to the conscience of the world which fights against conflict and blood diamonds and wears a heavy heart on the ecological damage that naturally mined diamonds cause.

the author is former Economics Editor of PTI. He is now researching the diamond industry with the objective of writing a compendium.
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