Mumbai (By Suresh Chotai): The escalating tensions between Iran and Israel could have several direct and indirect impacts on India’s Gem & Jewellery (G&J) industry, which is one of the largest in the world, particularly focused in Surat. Here’s a look at potential effects:
The ongoing conflict is likely to benefit India’s exports of cut and polished diamonds due to a decrease in Israeli shipments. However, rising oil prices may harm the global economy, potentially affecting demand. India’s diamond exports were down 20% in the initial months of fiscal 2025.
Gold prices have reached multiple peaks this year, outperforming all other asset classes. This surge can be attributed to various factors, including central banks shifting their dependence away from the dollar, institutional investors diversifying their portfolios, and a strong demand for jewellery among retail investors. As a result, gold has soared to record levels.
Despite rising tensions in the Middle East, gold prices have shown limited reaction as the recent strong U.S. labour data has tempered gold’s upward momentum by diminishing expectations for the Federal Reserve to adopt a more lenient monetary policy.
Disruption in Global Trade Routes
A conflict in the Middle East could disrupt key shipping routes, including the Strait of Hormuz, through which a significant portion of the world’s oil supply passes. This could lead to:
- Increased transportation costs for raw diamonds, polished stones, and jewelry as shipping routes might become riskier and require longer detours.
- Delays in supply chains, potentially affecting India’s ability to import rough diamonds from countries like Russia, South Africa, and Canada.
Energy Prices and Manufacturing Costs
India’s diamond polishing industry relies heavily on energy, especially in Surat, the diamond capital. If the Iran-Israel conflict leads to higher oil prices:
- Higher energy costs could increase the cost of manufacturing diamonds.
- This could make Indian diamonds less competitive globally, especially as energy costs rise and margins shrink.
Instability in Key Markets
Israel is a major hub in the global diamond trade, particularly for high-value stones. Any disruption in Israel’s diamond market could lead to:
- Reduced availability of polished diamonds on the international market, which might create temporary price fluctuations.
- However, it might also create opportunities for India to capture a larger share of the global diamond trade, particularly if buyers seek alternative suppliers.
Investor Sentiment and Jewellery Demand
Geopolitical instability tends to affect consumer confidence and investor sentiment globally. In times of conflict, luxury goods like diamonds often see reduced demand, as people prioritize essential purchases. Therefore:
- Weakened demand for diamonds in international markets, particularly in the U.S., Europe, and the Middle East, which are major destinations for Indian diamond exports.
- Fluctuations in gold prices, which are often correlated with geopolitical tensions, could impact the broader jewelry market, affecting demand for diamond-studded gold jewelry.
Supply Chain Diversification
With potential disruptions in the region, Indian companies might begin diversifying supply chains, possibly looking for alternative shipping routes or closer suppliers for rough diamonds. This could:
- Change global trade dynamics, with Indian businesses seeking more resilient partnerships, potentially shifting sourcing patterns to more stable regions.
Effect on Tourism and Retail
If the conflict spreads or results in prolonged instability in the Middle East, luxury retailers and tourism hubs in the region may suffer. This could reduce demand for diamonds and high-end jewelry sold to wealthy tourists, impacting Indian exporters reliant on these markets.
In summary, while the conflict between Iran and Israel does not directly involve India, its ripple effects—disrupted trade routes, rising energy prices, and a shift in global demand—could have significant consequences for India’s diamond industry. Indian diamond companies may need to adapt by securing alternative supply chains and markets to mitigate these risks.
