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Diwali Lessons

Diwali Lessons

The diamond industry has quieted down this week, as the Indian center went on its Diwali holiday vacation. Diwali, one of the most popular Hindu holidays, celebrates the victory of light over darkness, good over evil, knowledge over ignorance, and hope over despair. It is an important holiday, and businesses close for at least five days. 

These closures are significant for the diamond industry. In the weeks prior to the holiday, factories start to wind down. Managers from the Mumbai headquarters head out to the factories in Surat to supervise the closing process. The level of rough diamond purchases drops sharply, as seen in the most recent cycle, when De Beers announced that rough diamond sales fell 27% to $370 million from the $507 million worth of rough diamond sold just five weeks earlier. This is part of the diamond industry’s annual cycle (last year De Beers’ sales fell 23% during the same period).

The dominance of the Indian diamond industry is such that when India goes on vacation, there are implications for the entire midstream of the diamond pipeline. If you ask any diamond trader, anywhere in the world, about what’s happening in the industry this week, they will most likely say not much - everything is dormant during Diwali.

Oddly, Diwali is also a measure of the health of the Indian diamond center. During good times – when all is going well, profitability is decent, large orders are in place, and expectations for the November-December holiday season are high – rough diamond business remains somewhat active during the holiday, you see prices moving, and the length of the office closures is short. When business opportunities abound, diamond traders want to take advantage of them, and go back to work as fast as possible.

Conversely, when rough diamond purchases come to a near halt, polished sales are reserved for Israelis and Belgians, prices are flat, and the offices, as well as factories, are closed for extended vacations, you know that the matters are not going well. There is no rush or appetite to return to a less-than-favorable situation. Besides, the extended factory closures help to reduce overhead costs, and when finances are tight, every penny counts.

Last week, we reported that polished diamond prices have flattened in September compared to August, as shown in the following graph of the Mercury Diamond MDGT™ diamond price index. 

 b2ap3_thumbnail_MDGT-Index-Sep-2017_20171023-070530_1.png

Demand during September continued to improve after inching up in August, as we detailed in our analysis during the prior week after a period of weak demand.

b2ap3_thumbnail_Change-in-overall-demand---Oct-2016---Sep-2017_20171023-070611_1.png 

So how long factories and offices will remain closed this year is yet to be seen. More than a week for sure. But then what? Will the reduced financing, decrease in rough diamond supply, the relatively high inventories, and renewed demand for polished diamonds result in a renewed craving for rough diamond purchases? We know that when the industry rushes to buy rough, price hikes are immediate. Will the time away from the office be used to reflect on the way we’ve been doing business? Perhaps the time spent with friends and family will provide an opportunity to reflect on past practices, and will lead to a more moderated approach?

The form such a moderated approach will take might be this: keep supplying polished diamonds to clients at the current reduced-price levels, slow down the pace of manufacturing a little, use the cash flow to reduce bank debts, lower inventory levels and free the capital that is tied to it, and delay rough diamond purchases as much as possible. This approach, if adopted, will give diamond manufacturers a very valuable opportunity to inject some sanity into the market. It will allow us to align rough and polished diamond prices, protect the operating margins, and bring some much-needed profitability to a business sector that desperately needs it.

Taking this route has clear advantages, especially during the turbulent time we are in, but will it happen? Diwali celebrates the victory of light over darkness, good over evil, knowledge over ignorance, and hope over despair. We can use all of this in the diamond industry. Good trading practices, smart decisions, and positive outlooks.

Happy Diwali, and may the coming year be a prosperous one for us all.

 The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser. 

 

 

October 2017 Market Report
Mercury Polished Diamond Prices: Prices Stable in ...

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