Coronavirus in China Takes Its Toll on India’s Cut & Polished Diamond Industry

The coronavirus attack in China and subsequent business lockdown in China and Hong Kong is taking its toll on India’s cut and polished diamond industry. Interestingly, China accounts for nearly 14 per cent of polished diamond consumption and close to 35 per cent of exports from India, at present, is routed via Hong Kong. The C&HK region, as a whole, accounts for 14-15 per cent of global demand for CPDs. China is a major market as it not only consumes imported diamonds locally, but also to produce diamond-studded jewellery and export the same to the US, South East Asia and other markets in a big way.

“Apart from recent developments in China, the CPD industry had been going through weak demand conditions in key markets and pressure on gross margins due to declining finished prices. If the business lockdown continues in C&HK, industry pressure will aggravate thereby impacting cash flows. This can have a serious bearing, especially given the cautious lending to the sector and; potentially impact CPD players’ credit profile. The pandemic in China will also hit near-term global demand for CPD and the widespread economic shutdown in C&HK region which will further delay demand recovery. The industry is already bearing the brunt of on-going US-China trade and political tensions,” said Jay Sheth, vice president, Corporate Ratings, ICRA Limited.

Significantly, Hong Kong is a major global diamond trading hub alongside Belgium and the United Arab Emirates. Industry estimates C&HK to be currently accounting for nearly 35 per cent of India’s overall CPD exports. This incidentally is marginally ahead of the US, which is the largest market for diamond-studded jewellery. ICRA, therefore, estimates the domestic industry to be majorly impacted due to its considerable exposure in C&HK.

Analysts pointed out that the challenge has been compounded further as the shutdown has occurred during the busiest period for jewellery sales in China – the peak of the festive Lunar New Year extending from January 25 to February 08, 2020. There has been a complete retail shutdown or slowdown in some of the worst impacted provinces of China. The like-to-like retail jewellery sales in the region may have declined by as much as 70 per cent. The trickle effect is also seen in jewellery manufacturing units because of supply chain disruptions and factories operating at just 20-30 per cent capacity.

CPD exports are under pressure and down 17.6 per cent Y-o-Y during 9M FY2020 on account of the trade and political tensions and subdued macro-economic environment in markets other than the US. And now with potential adverse coronavirus impact, exports are likely to remain weak in current fiscal.

The cash flows of CPD companies will be also impacted with the stretch in working capital cycle envisaged on the back of delay in collections and inventory build-up. Most CPD companies avail pre-shipment or post-shipment credit (export bills discounting of tenor upto 120-150 days) from banks to fund their working capital requirements.

Receivables delay from C&HK region beyond a reasonable time will mean companies will have to make good the payment out of their funds which in turn could pressurize their liquidity position and; thereby problems like distress sales, consequent negative impact on polished diamond prices and lower profitability.