The Cut and Polished Diamond (CPD) exports from India are expected to hit a five-year low in FY24, reporting a dip of around 25-30 per cent to $15 billion to $16 billion, said a report by CareEdge Ratings. The demand is expected to remain subdued in the near term. CareEdge Ratings expects no significant recovery in the segment during FY25.
India is the world’s largest centre for cutting and polishing diamonds, accounting for over 90 to 95 per cent of the total world’s polished diamond consumption. The US and China, the primary diamond-consuming markets, together account for approximately 65 per cent of India’s diamond exports. Following the pandemic, a surge in diamond jewellery demand, spurred by the US economic stimulus and limited opportunities for experiential spending, propelled CPD exports to record highs in FY22 ($24.43 bn) and FY23 ($22.04 bn). However, economic conditions in the US and China, the rise of alternative discretionary spending options, the growing market for Lab-grown Diamonds (LGD), and geopolitical tensions have negatively affected India’s CPD exports which had resulted in a 28 per cent year-on-year drop to $13.04 billion in 10MFY24, driven by decreases in volume and value.
Furthermore, the impending impact of G7 sanctions on Russian-origin diamonds regarding logistic and operational challenges for Indian CPD players would remain a key monitorable, said CareEdge Ratings.
As per the report, in the medium term, CPD exports from India will be influenced by economic recovery in consumption markets, geopolitical landscape, and customer preference for diamond jewellery in the discretionary spending space. The entities with prudent debtors and inventory management are expected to sail the tough tide.
Yogesh Shah, Senior Director, CareEdge Ratings, said, “Players operating in smaller carat diamonds (below 0.3 carats) to be better placed than entities dealing in certified diamonds, as smaller carat diamonds have witnessed lower price erosion and limited impact of LGD diamonds”.
Further, the demand-supply imbalance has pressured the pricing of polished diamonds, leading to a price correction estimated at 5-10 per cent for diamonds below 0.3 carats, 20-30 per cent for 0.3-3 carat diamonds, and 10-20 per cent for diamonds above 3 carats in CY23. This imbalance and price correction have adversely affected the export value.
Economic landscape of major CPD consuming markets
Declining consumer demand in USA: The US diamond and jewellery industry is coping with the challenges of rising inflation, the opening of alternate avenues with higher preference for experience-based spending has dampened the customer sentiment in the current fiscal year. Moreover, the increasing penetration of LGDs from engagement rings to the bridal jewellery segment has resulted in lower demand for CPD in the largest diamond jewellery market, which accounts for over 50 per cent of the diamond jewellery demand.
Economic crisis in China: The second-largest diamond jewellery market has been facing an economic crisis since 2018, followed by its zero-tolerance policy to tackle the Covid outbreak, the collapse of the real estate market, the economic crisis, and the growing preference of its population for experience-based spending and gold jewellery. Hence, China, which accounts for 10-15 per cent of global diamond demand, continued to remain subdued even in FY24. In light of the same, CareEdge Ratings expects no immediate recovery in demand for diamond jewellery from Chinese markets.
Growing acceptance of lab-grown posing additional challenges for CPD
Affordability, sustainability, and similarity are the key factors leading to a surge in demand for LGD, especially in the 1-3 carat segment of natural diamonds, the report stated. With essentially the same chemical, optical and physical properties, and crystal structure as natural diamonds, at a fraction of the price has led to a significant double-digit growth of LGDs in the USA. While the price of LGDs has plunged even more steeply than that of natural and is now selling at a bigger discount than ever before, its share in engagement rings and bridal jewellery in the overall diamond jewellery market has increased on a YoY basis, it said. Despite the consistent dip in prices, India exported LGD of $1.3 billion during 10MFY24; 9 per cent of total CPD exports.
Midstream dilemma
Challenges arising from demand-supply mismatch are not an exceptional scenario for Indian entities and the same re-emerged post the Covid upturn marked by rough diamond procurement, at high prices quoted by miners. While few entities adopted a cautious approach, most bought excessive volumes. As the retail prices slumped, jewellery manufacturers/ retailers curtailed their orders after robust buying in H1FY23. This has resulted in a scenario of excess polished inventory well above pre-Covid levels amid dampened demand reversing the gains of FY21-FY22.
To curb the losses and focus on liquidating inventory holding, the Indian entities self-imposed suspension of rough diamond imports for two months (October 15, 2023 – December 15, 2023). “While the restricted import of rough diamonds helped streamline inventory levels to an extent, the reduction in rough diamond prices by DeBeers at its first sight for CY24 is expected to address the disparity between rough and CPD prices going forward,” said CareEdge Ratings.