Diamond demand heads for a hard landing with ‘temporary disruption’ at play

• Exports of cut and polished diamonds fell sharply by 32% in July, indicating a reversal of the boom seen in FY22 and stable demand in FY23.
• The US accounts for 50% of demand for polished diamonds. During the pandemic, demand was driven by stimulus and lack of other spending avenues.
• High inflationary pressures in consuming nations and shift in preference to lab grown diamonds is hurting India’s diamond polishing markets.
• Exports of polished diamonds are expected to decline 10-15% on an annual basis to $19-20 billion, predicts a report by CareEdge.

Diamonds are forever, they say, but the love for bling is waning in different ways. Not only is demand from consuming nations like the US coming down, and preferences too are shifting towards lab grown diamonds.

This will hit India which is the world’s largest cut and polished diamond (CPD) center. Its exports will decline 10-15% in FY24 to $19-20 billion, predicts CareEdge. In July, CPD exports, in value terms, declined by 32% on a year-on-year basis, the report adds, highlighting the pain points in the sector.

Demand for diamonds has remained largely stable in FY23, after growing robustly during the pandemic years of FY22. However, the pandemic boom in diamonds was driven by the financial stimulus provided by the US government and lack of experience based spending avenues. But things have gone downhill since.

Linked to US spending patterns

While diamonds polished in India are exported to jewellery manufacturing and trading centres in the US, UAE, Hong Kong, and Belgium, the US is a key for diamond consumption. It accounts for 50% of polished diamond consumption and Indian CPD markets fortunes are heavily linked to US consumption patterns.

“Recent headwinds such as high inflationary pressures across major diamond-consuming nations continue to weigh on CPD processors in India as is evident from the sharp decline in month wise CPD export data. Anticipating the trajectory ahead, we envision this moderated demand for polished diamonds to recover in the forthcoming holiday season,” said CareEdge.

The US market will remain tight in the coming months, expect most experts in the bullion industry. “With savings from the pandemic era dwindling, credit card debt rising and interest rates staying high, risk of a hard landing for the US economy remains,” said Ghazal Jain, fund manager of alternative investments at Quantum Mutual Fund in her September outlook on gold.

Diamonds from labs

India also has a vibrant law grown diamonds (LGD) industry which is on a growth path as it is in nascent stages. LGD exports from India surpassed $1 billion in FY22 and have continued to remain strong in FY23 with exports at $1.65 billion. This segment is seeing greenshoots even as natural diamonds are going through a temporary disruptive phase, says CareEdge.

They are ethical, conflict-free and environmentally friendly and are also much more affordable than natural diamonds.

“While the natural diamond is going through a temporary disruptive phase, green shoots appear in the LGD segment. With the same physical properties and chemical properties as natural diamonds, it has developed as a separate, more affordable diamond jewellery category and not merely a substitute for natural diamonds,” says CareEdge.

Unlike in the CPD industry, India does not have a dominant position in the LGD market. China accounts for 40-45% of the production, with hubs in Russia as well.

The overall exports of LGD from India showed some moderation in the last two quarters ending Q1FY24 in value terms. This, however, is due to a sharp decline in LGD prices, but in volume terms it has remained strong. Over FY20 to FY23, the export of polished LGDs from India surged by approximately 41%.

In line with the growth, substantial capacity expansions are being undertaken in India, and with growing acceptance of LGDs, the value of polished LGD exports from India is expected to exceed $3 billion by FY26, predicts CareEdge — indicating that all is not lost as the world changes its preferences.

(This is the second article in the Boom to Bust series which discusses the post-pandemic trends.)

SEE ALSO

The Quick and the Dead: How fast food players lost their pandemic boom effect