India's cut, polished diamond exports to dip by 22% this fiscal on weak demand: Report

Mumbai: India's exports of cut and polished diamonds (CPDs) is likely to decline by 22 per cent to USD 17.2 billion in 2023-24, amid weak underlying demand conditions in key destinations including the US and Europe, a report said on Tuesday.

CPD exports have been on a declining trend since the second half of FY23 and during the first five months of this financial year shipments witnessed a sharp year-on-year decline of 31 per cent, Icra said in a report.

The decline in CPD exports was led by a fall in both export volumes and polished diamond prices, it added.

While some sequential improvement in volume is expected in the coming months, driven by the onset of the festive season, overall exports are still expected to contract by 22 per cent this fiscal, it stated.

The rating agency has thus revised the sector outlook to 'Negative' from 'Stable'.

"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.

"Demand from China, which accounts for 10-15 per cent of the global demand, has also not picked up meaningfully so far," Icra Vice President and Sector Head Sakshi Suneja said.

In addition, competition from lab-grown diamonds, which are priced at a significant discount to natural diamonds, also accentuated the dip in volumes, particularly for the large-sized diamonds in the range of one to three carats, she added.

The report further said that the prices of rough diamonds remain elevated in FY24, with current prices hovering around the 15-year median level, despite some softening seen in the recent months.

These prices had soared in the last two years, following limited supply from mining companies and robust revival in demand, post the pandemic, it noted.

However, despite subsequent softening in demand, rough prices remained high due to limited availability from Russia in the market, following the US sanctions on Alrosa PJSC - the Russia-owned diamond mining entity, which supplies 30 per cent of the rough diamonds globally.

With intensified sanctions on Russia and no major ramp-up in output of other mining entities, rough prices are expected to remain elevated, the Icra report said.

On the other hand, the prices of polished diamonds continue to be under pressure, with current prices being 15-20 per cent below the 15-year median level.

Coupled with demand pressures and limited ability to pass on the prices, this will shave off 40 bps of the operating profit margins (OPM) of diamond entities to 5 per cent in FY24.

"Profitability pressures will result in moderation in the credit metrics of CPD players in FY24. Faced with lower demand, the inventory levels are also expected to increase to an extent, while remaining lower than the pre-pandemic levels," Suneja said.

The CPD players have been conscious in managing their working capital cycle to control their dependence on bank debt. Additionally, recovery from customers has been timely so far. These factors would keep working capital borrowings of the industry under check, Suneja added.