China, India demand to keep diamond prices firm

CRISIL believes that diamond prices, which have witnessed a sharp rebound over the past year, will remain firm over the medium term because of increasing consumption in the emerging markets of China and India and recovery in the US market. Moreover, supply of rough diamonds is expected to tightly match the demand. The credit risk profiles of 114 CRISIL-rated diamond and diamond jewellery players are expected to remain stable on the back of buoyant demand outlook.



China and India, the fastest growing markets in the world, are likely to continue with their double-digit growth in the medium term. The markets in China and India, have grown by around 25 per cent in 2010, and contributed to around 20 per cent of the global consumer demand for diamond jewellery in 2010, as against 12 per cent in 2008.



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Mr. Gurpreet Chhatwal, Director, CRISIL Ratings Says, "China and India are at an inflexion point and will see a structural shift in consumer preference for diamond jewellery over the long term, resulting in a strong demand growth." Jewellery sales in the US market, which accounts for around 40 per cent of the global diamond consumption, is estimated to have increased by 7 per cent in 2010, driven by recovery in consumer spending and inventory restocking by retailers. The US market is likely to sustain the recovery in consumption over the medium term.



Rough diamond prices will remain firm over the medium term, supported by buoyant demand and cautious supply management policies by the mining players. During the downturn in 2008, miners, especially the De Beers group, the largest supplier of rough diamonds, curtailed supply in line with subdued demand. Mr. Subodh Rai, Head, CRISIL Ratings Says, "While rough diamond prices may be volatile over the short term because of temporary demand-supply mismatch, the prices will remain stable over the medium term, as the supply is expected to increase with the De Beers group likely achieving full production capacity and Rio Tinto’s Argyle mine commencing underground operations.



The credit risk profiles of CRISIL-rated diamond and diamond jewellery players will remain stable, backed by the expected growth in consumer demand and strong polished diamond prices. In the short term, conversion margins of diamond players may come under stress, but will ease over the medium term with the steady absorption of price rise by the customers. Moreover, players are also expected to gain from the lower average cost of existing polished diamond inventory. CRISIL believes that the players that maintain prudent working capital management practices, which they had adopted during the downturn, will stand in good stead.



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