A summary of the presentation at Sparkle – International Gems & Jewellery Conference, Surat, Dec 26, 2008

Mr. Dilip Mehta began his presentation by comparing Surat when it was his home in the 1960s to the city today.

Whereas then diamonds in Surat was an emerging industry, employing hardly 15,000 people, and was known as a ‘dirty city’, today it has emerged as one of the richest cities in India (AHI 460k, NCAER ’08), and houses a massive diamond polishing industry which employs 500,000 and is technologically the most advanced in the world. It also has become, he added, the ‘cleanest city in India’.

He then pointed out

•         Despite diamonds being the hardest natural material, they are not immune to the current global economic turmoil

•         Diamonds have not lost their sparkle, but have been temporarily clouded by current circumstances

•         How can we make it Sparkle Together

Mr. Mehta went on to present a detailed assessment of the current financial crisis and looked at its fallout in India as well as on the diamond business.

According to him 07-081H witnessed a ‘Desperate Race for Rough Diamonds’

•         Analysts and the mining companies predicting supply shortages

•         Markets - bullish with China, India & M.E pulling inventories with new stores opening

•         Large stones in top gear

•         Rough prices setting records every day with speculation of further polished pull

•         Prices peaked in July 08 way above polished prices

He pointed out that “Analysts and Mining Companies continuously predicted rough shortages” and “We all “knew” that we were overpaying for the rough, but we still “bid” excessively”, concluding ‘Reality : Rough Prices Rose Faster than Polished Prices’, and that ‘Industry forecasts were also as “accurate” as other forecasts’.

After analyzing the retail effect on wholesale, Mr. Mehta stated that “Given the availability of credit and the excess stock in the system, the impact on the rough demand is expected to be most severe in the first 4 months of the year”, and “Impact of de-stocking will be more severe in the short term.”

What will be the impact on bank finance?

Mr. Mehta said

“Bank borrowing base for companies will be severely affected

•         Industry lending is primarily dependent on turnover (both sales and manufacturing) which has suddenly dropped due to the crisis

•         A short-term drop of about >50% in turnover (during the de-stocking phase), will imply that the borrowing base will reduce by >50% by February/March of 2009

•         The industry will need to work closely with banks to tide over the period of this mismatch

But, he stressed, “Industry needs to accept global realities and move on” quoting Mahatma Gandhi “Fear is not a disease of the body; fear kills the soul”

Looking ahead, Mr. Mehta said,

Next six months : Crucial

•         Urgently initiate a globally coordinated (by trade organisations) dialogue with banks

•         With help from the banks you should

–        Reduce stocks gradually to achieve long term viability

–        Assess the “real” margins and continue business at an “affordable” level

–        Activities will continue, at significantly lower levels (30-60 percent in carat terms)

Why Diamond is good business?

•         Better than most commodities (down by 75%)

•         Business for long term players (not speculators) who can live with business cycles

•         Like Gold, Diamond is great store of value

–        Potential of diamonds becoming new asset class

–        Useful in the times when governments around the world are printing monies

–        Transparency will help attract investors

•         This is the first serious challenge faced by Indian diamond industry

Managing our Future

•         Back to Basics

–        Stick to CORE

–        Diamond Expertise the key

–        “Economising” a new Mantra

–        Bottom-line not the top-line will win the race

•         Deleverage

–        Many old fashioned businesses still have healthy debt-equity ratios

•         Focused and joint consumer communication

–        Help create demand – value proposition

Mr. Mehta then drew attention to the assessment that there is an increasing focus on investment diamonds and to the “Fewer, Better Things’ promotional campaign launched by De Beers in the US.

In conclusion, he said

•         The diamond industry is hit by the current crisis

–        We Guajaratis are resilient and will find our way out of the this situation

•         Help from the government is vital

–        This is the first time industry is looking for support

–        The business owners should work with other stakeholders to find soft landing for the polishers who are temporarily unemployed

•         Producers, Banks and Industry have to work in tandem to minimise the pain with frequent dialogue and plan

We will restore the sparkle back in our industry!