US and EU sanctions on Russia will impact India’s diamond polishing industry: crisis

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Crisil Ratings said on Tuesday that the sanctions imposed by the United States and European countries on Russia and therefore on Alrosa, Russia’s largest diamond producer, will affect the growth of India’s diamond industry. diamond polishing. Alrosa supplies 30% of the world’s rough diamonds and is a key source for India, which imports, cuts and polishes 80-90% of the world’s rough.

The sanctions severed Russia’s central bank and two major banks from the SWIFT system. Although they do not prohibit business with Alrosa, trade settlement has become difficult, which could lead to supply disruptions. India’s diamond industry, which is almost entirely export-oriented, is expected to register revenues of $24 billion this fiscal year, rebounding to pre-pandemic levels. It was expected to record a compound annual growth rate of 5-7% over the medium term – thanks to stable demand and firmer prices – before the start of the Russian-Ukrainian war.

Amid mining challenges, miner production restrictions and rapidly rising demand during the pandemic, average Indian diamond stock levels have been reduced to around three months from more four months ago. This will still allow them to continue their activities if the current disruption continues for a quarter.

Rahul Guha, Director of Crisil Ratings, said: “If the trading disruption continues, next quarter sales will be down 25-30%, which will reduce approximately $2-2.5 billion. That would mean flat growth in the next fiscal year. The decline would have been more pronounced were it not for the reasonably leaner period in the first half, when the industry typically makes 45% of its annual sales. Any increase in the severity or duration of sanctions will have a deeper impact and remains a controllable element. »

The operating profitability of Indian diamond companies has been under pressure since the second half of this financial year, due to their inability to fully pass on a sharp 21% increase in rough prices since the beginning of this financial year. Prices for polished diamonds simply haven’t kept pace. Prior to the Russian-Ukrainian war, strong demand meant crude prices were expected to rise 10-12% year-on-year in the next financial year. Now, CRISIL expects them to rise another 5-8% amid supply-side constraints.

With pent-up demand exhausted, other areas of discretionary spending like travel and hospitality opening up, and consumer sentiment moderating due to the war, diamond dealers could once again struggle, least in the immediate term, to fully pass on higher crude prices. This could lead to a potential drop of 75 to 100 basis points in their operating profitability to 4 to 4.5% in the next financial year.

Jumana Badshah, Associate Director of Crisil Ratings, said: “Nevertheless, diamond dealers’ credit risk profiles are expected to be stable as lower sales and profitability will be offset by controlled leverage through a forced reduction in inventory levels. “.

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