The global diamond industry is facing disruption that could stretch through the first few months of next year, including Valentine's Day in February, as a result of Indian Prime Minister Narendra Modi's radical move to abolish most of the nation's cash overnight.
In the western Indian city of Surat craftsmen usually spend 10-12 hours a day in small mills or grimy sheds cutting and polishing 80 percent of the world's diamonds but the business is based on cash and the demonetization of the high-value banknotes from November 8 has prevented many from operating. Thousands of diamond brokers in the area's narrow lanes are also doing little business.
The lack of cash is not the only problem for an industry that employs 1 million people in India, most of them in this city. Modi's shock treatment is intended to make it much more difficult for those laundering ill-gotten gains or evading taxes, and that means diamond buyers are demanding proof of tax payments that are often not available, the traders said. Top diamond miners, such as Anglo American-owned De Beers and smaller Canadian producers such as Stornoway Diamond and Dominion Diamond are seeing weaker demand and prices for cheaper stones used in lower-priced jewellery.
The picture for retailers and consumers of diamonds is less clear. The cash crunch has also badly hurt consumer demand for diamond jewellery in India, the world's third-biggest market. That means there are more of the cheaper finished stones to export, helping to create a temporary glut and lower prices at wholesaler and store level. However, that may not last if the cutters and polishers of India can't get back to work soon.
But the luxury buyer doesn't have to worry. Much of the higher-value jewellery business, with the highest grade one-carat stones usually costing more than $14,500, is protected because cutting and polishing is also done in Israel, Belgium and by bigger Indian companies that rely on bank transactions.
"The knock-on effect of Indian demonetisation has meant a reduction in the prices of lower quality diamonds," said Tobias Kormind, managing director of 77 Diamonds, an online jewellery retailer based in London. "As a result, we've seen an increase in demand for those kinds of diamonds as our clients have snapped up these favourable deals." In India, jewellery demand typically climbs in the winter months' wedding season. But this year sales are plunging as nearly two-thirds of jewellery is usually purchased with cash, which is in short-supply.
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