Diamantaires stand to lose a fifth of their revenues as roughs get dearer

• The US sanctions on Russian diamond mining company Alrosa, following the invasion of Ukraine, has cut supplies of rough diamonds by almost 30%.
• The state-owned company Alrosa is the largest diamond producer in the world and India is the world's largest cutting and polishing centre for diamonds.
• However, with a restriction on its source, diamond is expected to lose its lustre and dip by 15-20% in revenues in India, says a report by CRISIL.

The war in Ukraine has impacted the sourcing of rough diamonds across the world. While most of this precious commodity originates from the mines of Russia, it is polished in Mumbai and Surat. Diamantaires, who give diamonds of the world their shine in India, now have a cause to worry.

The diamond industry in India is staring at a drop in revenue of 15-20% to $19-20 billion this fiscal, said a report by ratings agency CRISIL.

World's largest polishing centre of diamonds, India to witness a dip in revenue

Following the invasion of Ukraine, the US government issued an executive order prohibiting the import of certain products originating in Russia, including the diamond.

The ban directly targets Alrosa, which the US government identified as the world's largest diamond mining company.

Government-owned Alrosa is responsible for 90% of Russia's diamond mining capacity and accounts for 28% – nearly a third of global diamond output.

Besides, key buyers in the US and EU markets have been insisting on certificates of origin. As a result, the prices of roughs have shot up almost 30% since the start of this fiscal.

Apart from that, a surge in Covid-19 cases has led to lockdowns in several regions in China, which is one of the largest importers of Indian polished diamonds.

Additionally, inflation and opening up of other avenues of discretionary spending, such as travel and hospitality, will dampen demand growth in the US and Europe in the near term, said the report.

“While volatility in rough diamond prices is typically passed onto the polished diamond prices — albeit with a lag due to the long operating cycle in the trade — tepid demand has kept polished prices from fully catching up with rough prices this time around. This could squeeze the operating profitability of Indian diamond polishers by 75-100 basis points to 4-4.25% this fiscal. Accordingly, interest coverage may weaken marginally,” said Subodh Rai, chief ratings officer, CRISIL Ratings.

However, despite various ups and downs, there is one thing that diamantaires have to cherish. Payments from customers have been timely and this, along with reduced inventory, will control reliance on external debt.

“As a result, the total outside liabilities to tangible net worth ratio will remain under 1.5 times for the industry, keeping the credit risk profiles of players steady,” said Rai.

During the last festive season, as Indian consumers started stepping out and revenge spending, diamantaires stocked up on rough diamonds.

While polished exports witnessed a growth of roughly 48% year-on-year last fiscal, rough diamond imports were up close to 74%, with almost 40% of the imports being in the closing quarter.

This hoarded inventory build-up was later corrected in the first quarter of the current fiscal, following the beginning of the Russia-Ukraine war and disruptions in the Chinese market due to new variants of Covid-19.

The lack of availability of rough diamonds in India, has given birth to a new trend. There is now increased demand for lab-created stones.

“The increasing prices and short supply of natural diamonds has also meant a growing shift in consumer interest towards lab-grown diamonds, which resemble natural diamonds and are 50-60% cheaper to boot, offering growth opportunities in a price sensitive market. The market share of lab-grown diamonds is estimated to have expanded to about 8% presently from less than 3% two years ago,” said Rahul Guha, director, CRISIL Ratings.