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27 Dec 2008
“Birds eye view to ground realities” by Dilip Mehta

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


        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!



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