Why Indian diamond companies are facing a double whammy

The Indian diamond industry, a key exporter from the country, is likely to see a sharp drop in business this year after hitting a peak last fiscal. This is because the industry is facing a double blow due to declining demand and rising prices of rough stones across the world.

Revenue of the Indian diamond industry is set to fall 15-20% to $19-20 billion in the year ending March 31, 2023 after the decadal high last year, according to rating and research agency CRISIL.

The main dampener for demand this year is the surge in Covid-19 cases that has led to lockdowns in several regions in China. While the financial capital Shanghai saw some restrictions being eased down after months of hard lockdown, many regions and cities remain under the authority lock.

As China is one of the largest consumers of Indian polished diamonds, this makes for bad news for Indian exporters.

Moreover, inflation and opening up of other avenues of discretionary spending, such as travel and hospitality, is also expected to shrink demand growth in the developed markets of US and Europe in the short term.

At the same time, American sanctions on Russian diamond mining company Alrosa, in light of its invasion of Ukraine early this year, has cut supplies of rough diamonds by close to a third. The state-owned company is the biggest diamond producer in the world and the sanctions that are unlikely to be lifted soon means the supply of rough diamonds will remain tight in the near term.

Indeed, the significant buyers and distributors in the US and EU have been insisting on certificates of origin so that the sanctions do not get diluted.

This has resulted in a sharp jump in price of rough stones. It has risen as much as 30% since April.

In general, rough diamond prices are passed on to the final consumers, even if with a gap. But the weak demand sentiments have meant the catch up is even slower this time around. This translates into a hit on operating margins that is projected to sink from around 5% to 4-4.25% this year.

On the flip side, the Indian diamantaires had stocked up well in the second half of last year expecting to cater to the pent-up demand. As a result, they have a good stock of raw materials currently, which could cushion some of the margin pain in the short term. But they did run down some of the inventory in the last quarter so the comfort factor is limited too.

All in all, Indian diamond exporters are likely to see not just sales shrinking this year but also will see margins decline.