The Business Bytes
Bhubaneswar, September 25, 2024 (TBB Bureau): India’s natural diamond polishing industry is poised for a significant downturn, with revenues expected to plummet by 25-27% year-on-year to around $12 billion this fiscal—marking a decadal low. The sharp decline is attributed to muted demand in key export markets, such as the US and China, a 10-15% drop in diamond prices due to oversupply, and a notable shift in consumer preferences toward lab-grown diamonds (LGDs).
This marks the third consecutive fiscal year of revenue decline for the natural diamond industry, following contractions of ~29% last year and ~9% in fiscal 2023. As the demand weakens and prices fall, diamantaires are scaling back purchases of rough diamonds, while miners have responded by reducing production and easing inventory pressure, which has helped stabilize prices.
The ongoing slump is driven by several factors: Declining Demand in Export Markets, Falling Prices, Rise of Lab-Grown Diamonds, etc.
India’s diamond exports to the US, which constitutes 35% of the country’s diamond exports, have seen a sharp 43% fall over the past two fiscals. Meanwhile, in China, accounting for 28% of India’s exports, consumer preferences have shifted toward gold jewellery, which is perceived as a safer investment amid economic uncertainty.
The industry has been hit hard by a 10-15% drop in diamond prices due to oversupply. The fall in prices, coupled with rising preference for more affordable LGDs, has made it a buyer’s market, further limiting the revenue potential for natural diamond exporters.
LGDs, which are up to 90% cheaper than natural diamonds, have rapidly gained market share. In the US alone, the market share of LGDs has surged to 25% by value, up from 8% just two years ago. This growing trend is particularly pronounced among younger consumers with limited disposable incomes, further eating into the demand for natural diamonds.
Despite the challenging outlook, diamantaires are taking steps to stabilize their operations. According to Rahul Guha, Director at CRISIL Ratings, “The rise of LGDs is reshaping the diamond market, and their affordability and high resemblance to natural diamonds have caused natural diamond exporters to face significant headwinds.” Nonetheless, the industry is managing the crisis by curbing purchases of rough diamonds, controlling manufacturing output, and reducing inventory levels.
This recalibration of operations is expected to yield some stability in operating margins, which are forecasted to remain at 4.5-4.7% in fiscal 2025. Reduced working capital requirements and controlled debt levels will provide further support to the industry’s credit profiles over the medium term. According to an analysis by CRISIL Ratings of 40 companies representing nearly one-fourth of the industry, the sector is likely to see a decline of more than 10% in inventory this fiscal, leading to a moderate reliance on external borrowing.
Rushabh Borkar, Associate Director at CRISIL Ratings, noted, “The persistent price fall in recent fiscals has led polishers to curtail purchases, and miners have reduced production and offered more flexible procurement terms to alleviate working capital pressures. As a result, inventory levels across the value chain are expected to decline, mitigating pricing risks.”
While the road ahead remains challenging, diamantaires are focused on prudent cost and inventory management to navigate the difficult economic landscape. As demand for natural diamonds continues to soften, the industry’s ability to adapt will be critical in weathering the storm.
