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India’s Cutting Sector Faces Decade-Low Revenues

Global downturn has led to fall in polished prices and an inventory buildup, says ratings agency Crisil.
Apr 28, 2020 5:26 AM   By Rapaport News
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RAPAPORT... India’s polishing revenues will plummet to their lowest in a decade this year, as prices have dropped and inventory has built up, a credit agency has warned.

Diamond sales will decline up to 32%, to $13 billion to $15 billion, in the current fiscal year ending March 31, 2021, India-based Crisil Ratings estimated Tuesday. This compares to approximately $19 billion in the fiscal year that just ended, it added.

“Twisting the knife for India’s beleaguered diamond polishers is the shift in the epicenter of the COVID-19 pandemic to the US and the European Union from China,” the organization explained. “The reduction in sales, coupled with potential [losses in inventory value], cannot but impact the profitability of Indian diamantaires in fiscal 2021.”

The past year was already a negative one for the trade, with polishing revenues falling around 21% for the fiscal year that ended March 31, compared with around $24 billion in the previous 12 months. But the global pandemic has exacerbated the situation, noted Crisil, which is a subsidiary of US credit agency S&P Global.

India’s polished exports to the US and the EU, which account for more than 45% of the total, fell 41% year on year in February and have since plunged further. Demand for diamonds, jewelry and watches has also slumped in Hong Kong and China, which contribute a similar proportion of India’s outbound shipments, the group added.

This initially led to prices falling by an average of 7% across various diamond cuts in March, while inventory levels increased 15% to 20% during the first quarter of 2020, said Subodh Rai, senior director at Crisil. It formed its analysis using intelligence on 114 diamond exporters, representing more than 30% of the industry.

Cash flow has also suffered, as payments for goods sent to Chinese clients began to diminish in February due to the emergence of the virus in that region, Crisil reported. Since March, Indian suppliers have received only about 25% to 30% of the payments they were due from all global locations, as the spread of the pandemic to Europe, the US and elsewhere led to a global downturn.

As a result, Indian companies could struggle to repay loans they took out to fund shipments, even though banks in the country have extended payment periods by 60 to 90 days, the company added.

Jewelry industry groups have tried to limit the impact on inventory levels and liquidity, calling for banks to offer lenient terms for borrowers and, in the past week, urging diamond manufacturers to stop importing rough for a month. De Beers reduced its 2020 production outlook by 7 million carats, partly in response to the weaker trading conditions, and cancelled its sight scheduled for late March and early April because of difficulties with travel and shipments.

“While the industry is staring at humongous losses this year, the need of the hour is sustainability in the long run, driven by a well-laid-out plan,” commented Sanjay Kothari, vice chairman of Hong Kong-based diamond manufacturer KGK Group.

The crisis will be a major test of diamond polishers’ credit-risk profiles, added Crisil director Rahul Guha. While the current shutdown of important global retail markets and India’s cutting industry makes a short-term improvement difficult, a key factor in a recovery will be importers’ ability to pay in a timely manner, he noted.

“Assuming the pandemic starts subsiding by June and trade channels normalize over the next quarter, Crisil expects a revival in demand to be pushed into the second half of the fiscal,” the company forecast.

Image: Melee diamonds at De Beers Group Industry Services in Surat, India. (Ben Perry/Armoury Films/De Beers)
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Tags: China, Coronavirus, COVID-19, credit, Crisil, CRISIL Ratings, cutting, Europe, exports, Hong Kong, Manufacturing, Polished Diamonds, Polishing, Rapaport News, US
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