Trump's Tariff Likely To Cut Diamond Polishers Revenue By 30%, Says Crisil

With US President Donald Trump's tariffs taking force on Wednesday, rating agency Crisil expects it to have a steep impact on the diamond polishers.

According to its press release on Thursday, the 50% tariff hike will cut the revenues of the sector by 28% to 30% in this financial year.

The revenue in this fiscal is likely to fall to $12.5 billion, in comparison to the $16 billion posted in the last financial year. This is based on the rating agency's analysis of 43 diamond polishers that account for nearly a fourth of the industry's revenues.

"The blow will follow a 40% degrowth over the past three fiscals because of a fall in both prices and sales volume of natural diamonds as demand in the US and China dropped, and competition from lab-grown diamonds rose," Crisil said in its report.

The tariffs will make export to US difficult as the industry's low margins make the absorption of the incremental levy difficult and because the declining demand would lead to passing the incremental burden to the consumers. Crisil expects the reduced operating leverage to erode the operating margin of diamond polishers by nearly 50-100 basis points and add pressure to their credit profilers.

Going into why the tariffs will have such a steep impact, the rating agency said the industry derives 80% of its revenues from exports with the US accounting for 35% of its total exports. After the US initially imposed a 10% tariff, the sales in the industry took a hit, with the share of the US in India’s polished natural diamonds falling 1,100 basis points in the first four months of this fiscal to 24%.

However, in order to meet the festival demand, the diamond polishers increased production in the last two months, resulting in a 18% year-on-year rise in July exports.

In addition, competition from lab-grown diamonds in the US will also dent the industry's revenues. The lab-grown diamonds have already captured 60% of the market share by volume. Given the decline in demand, it is unlikely that the US retailers will absorb the tariff cost. It is expected that the operating margins of diamond polishers will decline 3.5% to 4% after a 100-basis point drop in the last three fiscals.

According to Crisil, in order to navigate the 50% tariffs, the diamond polishers can increase domestic sales, push sales in alternative geographies and set up polishing facilities as rerouting through low-tariff nations is not an option.

"Even if retailers explore alternative sourcing options in lower-tariff countries such as the UAE or Belgium, a significant portion of the diamonds would still be polished in India and thus subject to higher tariff," said the rating agency.