2023- A rough year when natural diamonds lost their sparkle

2023: A rough year when natural diamonds lost their sparkle

– By Sakshi Suneja

After shining brightly during CY2021-22, exports of cut and polished diamonds (CPDs) lost their sheen in CY2023. In 10M CY2023, India exported $15.3 billion worth of natural diamonds, a whopping YoY decline of 25%. The contraction in exports was largely volume-driven, as reflected by 20% YoY reduction in volumes due to the weak underlying demand conditions in key consuming nations mainly, the US, Europe, and China. These nations collectively account for ~80% of the global CPD demand. Expecting the contraction in exports to continue in the near term, ICRA in September 2023, revised its business outlook on the CPD sector to Negative from Stable.

Beside shrinking sales, CPD players are also facing profitability pressures. The average prices of rough diamonds during 10M CY2023 remained higher by 6% from the 15-year median level, though some softening has been seen in recent months. Continued constrained supply of roughs from Alrosa PJSC – Russia-owned diamond mining entity, (which supplies ~30% of the rough diamonds globally), following the US sanctions and no major ramp-up in mining output by other mining companies, have kept rough prices elevated. The prices of polished diamonds, on the other hand, have been sliding since March 2022 amid subdued demand. They are currently trading lower by 23% from the 15-year median level. These in turn have led to shrinking spreads between polished and rough prices, translating into profitability pressures for CPD exporters.

Going forward, H1 CY2024 is expected to remain muted for the industry, though some YoY improvement in demand is expected to trickle in from H2 CY2024 onwards with a slight pick-up in economic conditions. Any recovery in demand for diamonds in China, especially during the Chinese New Year in Q1 CY2024, could limit a further slide in polished diamond prices and would be a key monitorable.

From the credit point of view, the key monitorable for the industry would be inventory management. Faced with declining sales and profitability pressures, inventory levels have risen in CY2023, though they remain lower than the pre-pandemic levels. The CPD players have been cautious in managing their working capital cycle so far to control their dependence on bank debt, a lesson perhaps learnt from the previous demand slowdown seen in CY2019. The players have not been stockpiling roughs, in the absence of visible offtake of polished diamonds. Some relaxations have also been provided by miners in the form of deferment of part of purchases by CPD players to the next year, instead of mandatory purchase of the allocated quantum of roughs. Furthermore, receipt of payments from customers have been timely so far. This has helped arrest the weakening in credit metrics of CPD players.

However, if the slowdown in demand from key consuming nations and unfavourable polished-rough price differential persist in CY2024, the credit profile of many CPD players would weaken further in ICRA’s view, regardless of their prudent working capital management.

(Sakshi Suneja is the Vice President, Sector Head-Corporate Ratings at ICRA Ltd.)

(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)