India's Dazzling Secrets

In 2002, the Argyle mine's production grew by 28% from 26.2 million carats to 33.5 million carats. That also meant more rough sales to India. Though 2002 worldwide new diamond production (industrials, near-gems and gems all together) would be around 120 million carats, the Indian industry alone imported some 129.3 million carats of rough last (calendar) year, at an average value of $33.73 p/c.

Often analysts ignore Indian rough exports, which, in 2002 totaled 39.9 million re-exports, at $4.58 p/c. [These exports are puzzling; they are probably mostly inspired by fiscal and accounting considerations.] In any event, the rough that remained available for domestic manufacturing in 2002 came to 89,289,000 carats. [In theory, assuming correct rough export valuations, the average price of rough for manufacturing would be $46.78 per carat. We believe it must be lower and we tend to put some serious question marks around the rough re-export values.]

The 89,289,000 carats of rough available for manufacturing would, at an average yield of 20%, produce 17,857,800 carats polished. But that's not what the export figures show. The official mind-boggling and intriguing polished export figure for (calendar year) 2002 is 36,980,000 carats, valued at $7.025 billion.

Given the low yield on the small goods, it is impossible that this would have been produced out of the "available" net imports of rough - and this means that either India supplied quite a lot of polished out of inventory or it processed substantially more rough than the statistics would indicate. The latter option seems to be the more plausible.

There is a third option which I, in desperation, often prefer: let's simply throw all Indian statistics out of the windows and admit frankly and unashamedly that there are hardly any outsiders who ever will really comprehend or understand the economics of the Indian diamond industry. India remains an enigma - and that is both the industry's greatest strength and charm.

What is beyond dispute is the fact that the average size of the Indian polished production would be close to 0.02 carats per stone (or 50 stones per carat). If the export figures are deemed to be correct, that means that India exported 1,849,000,000 polished stones in 2002. [In more comprehensible language that is pronounced: 1.8 billion polished stones!]

Though it is clear to everyone that India is producing also more and more larger goods, the considerable addition of Argyle rough to the market (and not to forget the expansion of Botswana's Orapa mine either) would rather point to an increase of the smallest goods averages.

I want to salute the Indians. The fact that nobody really understands the inner-workings of the industry has provided it with tremendous leverage over the producers. When the DTC sells a box to the Israeli, Belgium, South African or New York industry, it knows exactly how much the manufacturer "will make" - basically, the producer "sets the manufacturer's margin". In India, this isn't the case - producers may believe they "have a good handle" on what takes place, but in many cases they don't have a clue. Years ago, when rough replenishment licenses were traded at premiums of 20%-30%, the Indian diamond industry could occasionally lose at the production - and still make a lot of money.

The vast majority of the Indian output, the infinitely small diamonds in the range of 1.5-3 points in the polished, may have a manufacturing cost of less than $0.50 per stone. Just imagine manufacturing 20 such diamonds for less than $10 labor cost. What about the raw material costs? Take a rough diamond imported for $10 p/c, which may give a polished yield of 20%. The resultant polished would have a material cost of $50 p/c.; consequently, a 0.02 carats polished (a 2-points polished stone) would have a material cost of $1.00. Add labor costs - and you might get to $1.5-$2.00 per stone. After reading those figures, please start reflecting on the enormity and sheer size of exports of $7.025 billion.

We estimate that India produces today some 50% of the annual world polished consumption by value, and 80% by weight. At the same time, India has become financially probably the strongest manufacturing sector and its largest companies are among the fastest growing diamond conglomerates in the world.

Competing with the Indians? Forget it. The challenge faced by any diamond company in the world is how to work together with this industry, to set up joint ventures in manufacturing and marketing, to get some of the benefits of the center. It is so large and holds so much potential, that it seems to have room for all.

[And, as an afterthought, the Indians can do the diamond industry a great service by inviting many NGO's and U.S. Congressmen to Surat - to let them see how ridiculous and greatly unrealistic these never ending talks are about certifying each and every polished stone… That would be 1.8 billion certificates for India's 2002 production, requiring a bureaucracy of 60,000 bureaucrats to issue 6 million certificates a day. Just kidding?]