 "Polished diamonds have gotten cheaper by 15%: Why this trend may continue")
The Indian diamond polishing industry will see revenue drop 30-35% on-year to $14-15 billion this fiscal as an economic slowdown in its main markets — the US, the European Union (EU) and China — cuts demand, said rating agency Crisil in a note.
These three geographies account for 75 per cent of India’s polished diamond exports (US ~35%, China ~30% and the EU ~10%).
A study of 46 of them rated by CRISIL Ratings, accounting for over a fifth of the Rs 180,000 crore industry by revenues last fiscal, indicates that a high inventory of polished diamonds amid falling retail prices will put the profitability of polishers under the pump. However, the silver lining is that a shrinking business translates to reduced debt, which will offer some offset against the pressure on the credit risk profiles of diamond polishers.
"Israel imports $1.25 billion worth of polished diamonds annually from India. With the country now declaring war on the Palestinian militant group Hamas, this number could be at risk. To be sure, there is some bump-up in demand in the second half of every fiscal from festivities such as Thanksgiving, Christmas and the Chinese New Year, but this is unlikely to provide a significant offset," said Rahul Guha, Director, CRISIL Ratings.
With the inventory of higher-cost polished diamonds piling up to over 4 months of sales, the profitability of polishers will be chiselled 50-100 basis points amid lower retail prices.
Demand for polished diamonds had started weakening since last fiscal amid slowing economic activity leading to a volumetric drop of 25 per cent. But worries about the supply" of rough diamonds following Western sanctions on Russian mining major Alrosa supported prices. Polished diamond prices on average were up nearly 10% last fiscal year. This helped arrest the decline in India’s polished diamonds exports to $22 billion last fiscal from $24.2 billion in fiscal 2022.
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"This fiscal, not only has demand fallen further in major markets, but also there has been no disruption in the supply of
roughs. Consequently, prices of roughs have corrected, leading to polished diamonds getting cheaper by 10-15%," noted Crisil.
Another flank of trouble is lab-grown diamonds (LGDs), which have more than doubled their market share to 15 per cent on- year, despite prices halving. LGDs are 20-40% cheaper than natural diamonds yet have quite similar characteristics, thus posing a threat to the natural stones.
"The overall working capital of the diamond polishers will reduce 30-40% this fiscal on a diminished scale of business. Though their receivables cycle currently is under control at ~90 days, some polishers could face a stretch depending on their position in the value chain and their counterparties. This remains monitorable," said Rushabh Borkar, Associate Director, CRISIL Ratings.
India's export of cut and polished diamonds is projected to decline by 22% to $17.2 billion in the current fiscal due to weakened demand from the key consuming nations, according to rating agency Icra.
In the first five months of the current fiscal, cut and polished diamond exports witnessed a sharp year-on-year decline of 31% following lower export volumes and higher polished diamond prices, it said.
Export of cut and polished diamonds has been on a declining trend since the first half of 2022-23, it added.
"The export contraction is primarily being driven by weak underlying demand conditions in key consuming nations like the US and Europe due to the inflationary pressures, leading to a shift in spending away from diamonds," Icra Vice President and Sector Head Sakshi Suneja said in a statement.