The coronavirus impact in China coupled with weak demand conditions in key markets is expected to impact the domestic cut and polished diamond (CPD) industry in a major way, according to investment information and rating agency ICRA.
Consequently, it has revised the CPD industry outlook from stable to negative in view of the ongoing lockdown in parts of China and Hong Kong (C & HK) region.
China accounts for 14 per cent of polished diamond consumption while a larger proportion (about 35 per cent) of exports from India is currently routed via Hong Kong.
"Apart from recent developments in China, the CPD industry had been going through weak demand conditions in key markets and pressure on gross margins due to declining finished prices," said Jay Sheth, Vice President of Corporate Ratings at ICRA Ltd.
If the business lockdown continues in C & HK, industry pressure will aggravate thereby impacting cash flows, he said. This can have a serious bearing, especially given the cautious lending to the sector, and potentially impact CPD players' credit profile.
"The pandemic in China will also hit near-term global demand for CPD and the widespread economic shutdown in C & HK region which will further delay demand recovery. The industry is already bearing the brunt of on-going US-China trade and political tensions," said Sheth.
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The C & HK region accounts for 14 to 15 per cent of global demand for CPDs. China is a major market as it not only consumes imported diamonds locally but also to produce diamond-studded jewellery and export the same to the United States, southeast Asia and other markets in a big way.
The export of polished diamonds to China is largely routed through Hong Kong which is a major global diamond trading hub alongside Belgium and the United Arab Emirates.
Industry estimates C & HK to be currently accounting for 35 per cent of India's overall CPD exports. This is slightly ahead of the United States, the largest market for diamond-studded jewellery.
Thus, ICRA estimated the domestic industry to be majorly impacted due to its considerable exposure in C & HK.
The challenge has been compounded further as the shutdown has occurred during the busiest period for jewellery sales in China -- the peak of the festive Lunar New Year extending from January 25 to February 8.
There has been a complete retail shutdown or slowdown in some of the worst impacted provinces of China. The like-to-like retail jewellery sales in the region may have declined by as much as 70 per cent.
The trickle effect is also seen in jewellery manufacturing units because of supply chain disruptions and factories operating at just 20 to 30 per cent capacity.
CPD exports are under pressure and down 17.6 per cent year-on-year during the first nine months of current financial year on account of the trade and political tensions and subdued macro-economic environment in markets other than the United States.
"And now with potential adverse coronavirus impact, exports are likely to remain weak in the current fiscal," said ICRA.
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