Last nail in coffin? Israel-Hamas conflict makes diamond players ask if they should revisit trade strategy

The war in Israel has put pressure on India’s diamond supply chains. Domestic players who cut and polish the stones say if the conflict gets extended, it would bring down their profit margins. They are especially worried as the industry is already feeling the heat because of the Russia-Ukraine conflict and a dip in global demand.

Israel’s diamond link

India imports rough diamonds from Israel, one of the world’s major centres for polished diamonds. This means the cutting and polishing industries in India — which has a 90% global market share in cutting and polishing natural diamonds — get the raw materials from Israel. This business is largely concentrated in Surat, where it is estimated to directly and indirectly employ about a million people. These workers would face the brunt if the supply chain is disrupted.Another reason for worry is that Israel is also a big buyer of the diamonds from India. Diesel ($5.5 billion) and cut and polished diamonds ($1.2 billion) contributed nearly 80% of India’s $8.4-billion exports to Israel in FY23.

The cut & polished diamonds, the highest exported commodity category to Israel in FY23, fell 11.24% year-on-year to $1.2 billion. In terms of imports, rough diamonds – the highest exported commodity from Israel – fell nearly 53% to $519 million.

“For diesel and cut & polished diamonds, export price is governed by import prices and the mark-up is generally 2-5%. For remaining products, Israel, being a developed country, buys high quality products where margins are slightly higher than mass products,” says founder of New Delhi-based think tank Global Trade Research Initiative (GTRI) Ajay Srivastava.

This means that the conflict can also have an impact on the sales market for these traders from Surat. If the fighting goes on for a couple of months, it can raise insurance and air travel costs, say diamond traders. This would bring down their profit margins.

Colin Shah of Kama Jewelry says, “The overall import of gems and jewellery from Israel have recorded an annual decline of 42.3% at $764.81 million in 2022-2023. If the situation intensifies, it can impact trade volume between Israel and India.”

Time to explore new opportunities?
Industry stakeholders say India should use the current situation as an opportunity to reexamine its diamond trade strategy. One suggestion is to focus on increasing the value of the gems & jewellery products. “Today, India cuts and polishes 90% of small diamonds (number) whose value is less than 20%. India must develop expertise and win trust of the global diamond trade to start processing large diamonds pieces. Most value will come from there. Diamond industry must introspect on how to achieve this. Focus on buying from miners, and aim to become a trading hub,” says Srivastava.

Another suggestion from experts is to get Israeli suppliers to divert the stones from the country of mining to India directly, instead of routing them through the West Asian country. Stakeholders also point out that India can consider buying directly from African countries that mine diamonds, as Israel primarily serves as a re-export market and doesn’t mine diamonds.

“Diamonds come to Israel from various sources, including African countries such as South Africa, Liberia, Congo and Ivory Coast, as well as Russia and Canada,” says Saiyam Mehra, Chairman of All India Gem and Jewellery Domestic Council (GJC). “Israel serves as a marketing hub for these diamonds. Hence, this can then be rotated through other countries’ markets, notably Dubai and Belgium. There could be a shift in India’s focus to (direct) diamond imports from African countries.”

Such a move would also help domestic players get rough diamonds at more competitive prices, leading to an increase in their profit margin.

Industry observers say it is time to select and develop other markets with potential so that the domestic players have a more diversified client base. They see the Middle East, Hong Kong, Singapore and ASEAN countries as growth markets for Indian gems and jewellery.

Colin Shah, MD of Kama Jewelry, sees product diversification as an alternative. There is a growing acceptance for green diamonds among Indian consumers, he adds, and this might grow in the upcoming festive season.

Pain of slowdown
The reason the Israel-Hamas conflict is causing consternation is because it comes at a time when the industry has already been depressed by a significant slowdown in demand for diamonds, including in large markets such as China and the US. India’s gross exports of cut and polished diamonds was $7.03 billion during April-August FY24, down more than 30% from $10.08 billion in the first five months of the previous financial year.

Vipul Shah, Chairman, Gem Jewellery Export Promotion Council (GJEPC) says both natural diamonds and lab-grown diamonds (LGDs) are facing headwinds due to the global economic scenario. Between “April and August 2023, natural diamond exports were down by 30%, while LGD exports declined by 26%, implying both natural diamonds and LGDs were facing challenges during this period,” adds Shah.

The muted demand last month forced over 100 diamond manufacturers, traders, importers and exporters from Mumbai and Surat to stop imports of rough diamonds from mining companies such as De Beers, Alrosa, Rio Tinto and Dominion for two months from October 15. The decision was taken to ease the inventory of polished diamonds, and improve the financial health of the industry. The action would be reviewed in the first week of December 2023.

It is not the first time that the traders have decided to stop the imports for a period. Such moves were witnessed during the Covid-19 period and the Lehman Brothers collapse in 2008.

Russian cloud over diamonds
The other concern is the ongoing Russia-Ukraine war. Russia is home to the world’s largest diamond reserves and the largest exporter of rough diamonds. However, the US imposed sanctions on Alrosa, a partly state-owned world’s biggest diamond producing company, after the war.

India’s share of the Russian rough diamond import has fallen to below 5% from around 30% following these sanctions. “Now, with rough diamond purchases from Russia under the lens, every country – small or big – holds significance for India. Israel was a critical exporter. But, with this conflict, India would have to rethink its diamond import strategy,” says a diamond trader who did not want to be identified.

These two issues have compounded the effect of the disruption in West Asia, though India imported merely 3% of rough diamonds from Israel, says Vipul Shah of GJEPC.

The gems and jewellery trade between India and Israel was $2.04 billion in FY23 compared with $2.8 billion in FY22. India imports rough diamonds for polishing, and cut and polished diamonds from Israel for sorting and grading. In FY23, it imported rough diamonds worth $519 million and cut and polished diamonds valued at $220 million from Israel. It exported cut and polished diamonds worth $1.2 billion to Israel during the same financial year.