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Putting on a new hat
The diamond industry has a unique three-tier structure. Diamond producing centres are neither processing centres nor do they consume diamonds. The cutting and polishing strongholds like India are not major consuming centres. Major consumer markets like the USA and Japan depend almost entirely on imports for their requirements. The entire set up is run by the De Beers cartel.The conglomerate skillfully and at times ruthlessly controls the industry through its selling arm, central selling organisation (CSO), by choking and releasing rough supplies according to its own market perception, what it calls the `single channel system of distribution’. In normal times, it is common to hear complaints about the single channel system from all and sundry. However, recent pronouncements by De Beers officials indicate that the conglomerate itself is having a re-think on the whole system and the relevance of CSO in the future. Probably, the Argyle-split from the single channel system could be identified as the turning point for the diamond industry. It is only after the split with Argyle that De Beers initiated a series of revolutionary measures: Branding of diamonds;
Trying to forge a two-tier pricing system for roughs, one for smaller and cheaper stones and another for better and gem quality stones
Contemplating to look at the demand side of the diamond equation and making a foray into polishing of diamonds, and
The new exclusive, plant production pro forma, a club of select sightholders.
By doing so, De Beers is probably trying to hedge itself against growing imponderables confronting the CSO:
(a) Russia and its leakages of roughs outside the system still haunt the conglomerate,
(b) Leakage of roughs from civil war-torn Angola,
(c) A new entrant, Canada joining the list of independent producers,
(d) Things wobbly on the home front in South Africa itself following disputes with the regulator there, and
(e) The possibility of African countries getting engulfed in political change not amenable to De Beers.
The most potent threat, however, is a shrinkage in the global retail jewellery markets. Combined with that is the long-term possibility that Argyle, which has 30 per cent of the current production but has very slender reserves, may not last beyond 2005-6 in a worst case scenario.Hence the introspection. De Beers appears to have shifted its focus beyond controlling the supply of roughs to entering the polished segment as well. Thus, from being production-led, De Beers seems to shift to being marketing-led. What does this all mean to India? This largest processing centre is dependent on roughs from outside and is at the mercy of consuming centres. The industry still retains graphic memories of the De Beers-Argyle split, which had seen Indian exports drop dramatically in 1996-97. Due to its relationship with Argyle (most of the Argyle goods find their way to India) and the US markets (the Indian expertise in Argyle-type polished goods finds a ready retail market in the US), India can ill-afford any shrinkage in retail markets. Too much is at stake. A double blow of change in pattern of distribution and shrinkage in retail markets could deal a mortal blow to the domestic industry.
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