Global revenue from diamond sales to drop 30-40% amid Covid-19: Moody's

Moody's Investors Service on Thursday forecast the global revenue from rough diamonds to fall by 30-40 per cent this year following the lockdown imposed by the governments around the world to contain the Covid-19 pandemic.

Rough diamond sales volume and prices will fall in 2020 as a result of the near shutdown of the global economy, Moody's Investors Service said in a report adding that the measures the governments have taken to contain the coronavirus pandemic have disrupted all stages of the diamond value chain from rough diamond miners, through cutters and polishers to the jewellery end market.

"As a result, we forecast a 30-40 per cent fall in global revenue from rough diamond sales this year, a credit negative for major producers Alrosa PJSC and DeBeers, majority-owned by Anglo American plc (Baa2 negative), it said.

The report also said it expects the big producers, which are pursuing 'price over volume' strategies, will cut prices less than smaller producers, who are more eager to provide large discounts to stimulate sales.

The market, Moody's Investors Service said, is expected to start recovering from the second half of 2020, as travel bans and 'stay home' orders are gradually being lifted, with global revenue from rough diamond sales growing by about 20-25 per cent in 2021, reaching $10 billion.

"We expect the market to start recovering gradually from the second half of this year as jewellers and polishers resume their operations. Absent subsequent waves of coronavirus resulting in further lockdowns this or next year, we cautiously estimate that global rough diamond revenue will grow by about 20-25 per cent in 2021, with volumes growing by about 10-20 per cent and a modest increase in prices," it added.

Retail jewellery activities, which have come to a halt partly as a result of lockdowns in India where most cutters and polishers are based, will force miners to cut prices and further reduce production to stimulate sales and balance the supply of stones with lower demand, it said.

Polished diamond sales by Indian cutters and polishers, the middlemen that connect miners with the end market, declined by 21 per cent in the financial year ended March 31, to $19 billion compared with around $24 billion a year earlier, the international rating agency said.

Demand from the US, European Union, and China, the three biggest destinations for polished stones from India, dried up as jewellers and shopping malls closed temporarily due to the coronavirus.

"We estimate that Indian polished diamond sales could decline by as much as 30 per cent to about $13 billion in the financial year ending March 31, 2021," the report said.

India's lockdown, which began on March 24, was extended until May 31, with a gradual ramping up of economic activity from early May including exports of diamonds, it said.

Demand for rough diamonds will remain subdued in the first half of 2020 because Indian cutters will have to reduce their stocks of stones accumulated before coronavirus broke out before they are able to resume restocking in significant volumes, it added.

Exports of polished diamonds and imports of rough diamonds by Indian cutters and polishers collapsed in March 2020 by 79 per cent and 48 per cent, respectively, year-on-year, it added.

Miners will reduce production in 2020, to align with lower demand and minimise the negative impact of stock build-up on working capital, it said.

Miners' reduced production plans will help align output with lower 2020 sales volumes and ease the build-up of rough diamond stocks, the global rating agency added.

"Overall, we expect global rough diamond production to contract by about 20-25 per cent to 100-110 million carats in 2020 from 140-145 million carats in 2019.

"However, we estimate that since the recovery of rough diamond sales is likely to be gradual from June-July, global production in 2020 will still outweigh sales of about 90-95 million carats by about 10-20 million carats, which would result in an accumulation of diamonds, hurting producers' operating cashflows, the report opined.

Sales volumes are likely to recover to about 105-110 million carats in 2021, which would help miners reduce their stock of stones and improve operating cash flows, provided they continue rationing their production, it added.