This article explores the essential elements that drive the business of companies engaged in cutting and polishing diamonds. It is designed to help investors understand the core factors affecting the performance of these businesses. By the end of this article, readers will be able to identify what sets a fundamentally strong diamond processing company apart from a weaker one

Key Drivers of the Cut and Polished Diamond Industry
1) Limited Pricing Power Due to Intense Competition in the Cut & Polished Diamond Industry
Companies engaged in the cut and polished diamond (CPD) business operate in a highly competitive environment, which significantly limits their pricing power. This intense competition stems from multiple factors:
Firstly, the industry has low entry barriers, resulting in the presence of numerous unorganized and small-scale players. This fragmentation leads to a crowded marketplace with limited scope for individual companies to command premium pricing.
According to ICRA’s Rating Methodology – Gems & Jewellery (Cut & Polished Diamonds), September 2021 (Pages 3-4):
“The diamond industry is fragmented… Entities face intense competition from unorganised players as well as a few established organised ones… Furthermore, the industry has low entry barriers, leading to high competitive intensity.”
Secondly, diamond cutting and polishing is a low value-add activity. Companies typically purchase rough diamonds from miners or traders, process them, and sell the polished stones to traders or jewellery manufacturers. Despite their perceived value, diamonds—especially smaller ones—are treated as commodities.
For jewellery manufacturers, there is minimal supplier-switching cost, as smaller diamonds polished by one company can easily be replaced by similar stones from another. This gives buyers strong negotiating power and further erodes the pricing flexibility of CPD companies.
ICRA notes:
“The entities face intense competition… which limits their pricing power… the industry has low entry barriers… and consequently lower pricing flexibility.”
In summary, cut and polished diamond companies operate in a commoditized, competitive market where they struggle to differentiate themselves and command pricing premiums, especially in the absence of scale, branding, or niche specialization.
2) High Bargaining Power of Diamond Miners and Suppliers
India holds a dominant position in the global diamond cutting and polishing industry, contributing approximately 60% by value, 85% by volume, and 92% by number of pieces.
CARE’s Rating Methodology: Cut and Polished Diamond Industry, November 2022, Page 1:
“The country contributes 60% of the world’s supply in terms of value, 85% in terms of volume, and 92% in terms of pieces.”
However, despite its leadership in processing, India has negligible domestic diamond production. This makes the industry heavily dependent on imports for rough diamonds.
ICRA’s Rating Methodology – Gems & Jewellery (Cut & Polished Diamonds), September 2021, Page 1:
“Rough diamonds are largely imported from key diamond-producing countries such as Russia, Botswana, South Africa, Canada, Angola, and Namibia, who account for almost 95% of the rough diamond production by value.”
Adding to this challenge, the global supply of rough diamonds is concentrated among a handful of major mining firms. Four companies—De Beers, Alrosa, Rio Tinto, and Dominion Diamond Corporation—collectively control around 75% of global diamond production by value.
ICRA, September 2021, Page 1:
“Production remains concentrated across key mining companies… who drive almost 75% of the world’s diamond production by value.”
These mining giants exercise tight control over global diamond supply, enabling them to maintain strong bargaining power over downstream processors.
ICRA, September 2021, Page 4:
“The final supply in the market remains limited, given the high bargaining power of the suppliers in this industry.”
As a result, cut and polished diamond companies remain price takers when it comes to procuring raw material. The influence of miners extends beyond pricing to aspects like supply volumes, quality access, and contractual terms. In the next section, we will explore the different ways in which these suppliers exert control over CPD businesses.
2.1) Sight-Holder Status: A Key Competitive Advantage
In the diamond industry, access to rough diamonds directly from miners is restricted to a select group of registered buyers known as “sight-holders.” Only those cut and polished diamond (CPD) players who attain sight-holder status are eligible to purchase rough diamonds directly from mining companies.
For non-sight-holders, the only option is to procure rough diamonds through intermediaries or the secondary market, which typically involves higher costs and uncertain supply. This puts them at a significant disadvantage in terms of both pricing and reliability of raw material sourcing.
ICRA’s Rating Methodology – Gems & Jewellery (Cut & Polished Diamonds), September 2021, Page 4:
“The CPD players who are also sight-holders usually enjoy uninterrupted supply of roughs at a relatively attractive pricing… providing the latter with a competitive edge.”
As a result, sight-holder status provides a dual benefit:
- Lower raw material costs through direct purchases at more favorable terms
- Steady and reliable access to rough diamond supplies, reducing operational uncertainty
Among the major miners, De Beers has historically been the most influential, once nearly monopolizing global diamond production. Hence, having sight-holder status with De Beers carries particular weight in the industry and is considered a mark of credibility and competitive strength.
ICRA, September 2021, Page 4:
“Traditionally, De Beers was the primary source of rough diamonds for the industry and hence the De Beers sight-holder status of a CPD player assumed significant importance.”
In essence, sight-holder status not only ensures better access and pricing but also enhances the reputation and operational stability of a CPD company.
2.2) “Supplier of Choice” Status: Enhancing Flexibility and Efficiency
In addition to the sight-holder framework, diamond miners have created another tier of strategic partnership known as the “Supplier of Choice” status for select cut and polished diamond (CPD) companies.
This status grants greater operational flexibility to CPD players. Specifically, those designated as “Suppliers of Choice” are allowed to reject or return rough diamond parcels that do not align with their production needs or market demand. In contrast, other CPD players—without this status—are contractually obligated to accept their allocated rough parcels, regardless of whether they foresee corresponding demand from customers.
ICRA’s Rating Methodology – Gems & Jewellery (Cut & Polished Diamonds), January 2015, Page 1:
“A CPD player enjoying ‘Supplier of Choice’ status from its main rough supplier may have the right to reject the rough parcels which do not meet its own requirements, as against other CPD players who may have to necessarily buy the contracted rough parcels in a given year.”
The implications for non-privileged CPD companies are significant. Being forced to accept rough diamonds irrespective of demand can lead to high inventory costs, as capital gets locked in unsold or excess stock. This not only impacts cash flow but also reduces operational agility in a cyclical industry.
Therefore, “Supplier of Choice” status acts as a crucial competitive advantage, enabling better inventory management, cost control, and alignment with real-time market trends.
3) Thin Profit Margins Due to Pressure from Both Customers and Suppliers
Cut and polished diamond (CPD) companies operate in a business environment where profit margins are structurally low, primarily due to intense pressure from both upstream suppliers and downstream customers.
On one side, customers wield significant bargaining power. Since diamond cutting and polishing is a low value-add activity, customers—mainly traders and jewellery manufacturers—can easily switch between CPD players based on price, putting downward pressure on margins.
On the other side, rough diamond suppliers, dominated by a handful of global mining giants, maintain tight control over pricing and supply through an oligopolistic structure. This significantly limits CPD players’ ability to negotiate input costs.
CARE’s Rating Methodology: Cut and Polished Diamond Industry, November 2022, Page 1:
“While prices of rough diamonds are determined by miners due to the oligopolistic nature of the segment, CPD prices are largely market-driven, based on demand-supply dynamics. As a result, CPD manufacturers have low bargaining power and are often the price takers at both ends of the spectrum.”
This dual pressure results in consistently squeezed margins. CPD companies typically do not have pricing power on either side of the value chain, making it challenging to achieve high profitability.
In essence, unless a CPD company differentiates itself through scale, efficiency, or niche specialization, it is likely to face low and volatile profit margins, which is a key risk for investors and stakeholders.
4) Cyclical Nature of Diamond Jewellery Demand
The demand for diamond jewellery is inherently discretionary, meaning it depends heavily on consumer sentiment and overall economic conditions. Unlike essential goods, diamond jewellery purchases are often postponed or cancelled during periods of financial stress.
During economic booms, rising incomes and increased discretionary spending drive higher demand for luxury items, including diamond jewellery. Conversely, in times of economic downturns, when consumers face job losses, reduced salaries, or uncertainty about the future, spending on non-essential items like diamond jewellery tends to decline significantly.
ICRA’s Rating Methodology – Gems & Jewellery (Cut & Polished Diamonds), September 2021, Page 2:
“Since jewellery buying is highly discretionary, the economic health of the consuming market remains a direct reflection of the demand conditions and, thus, demand for diamonds exhibits cyclicality.”
As a result, cut and polished diamond (CPD) companies experience cyclical demand patterns, as their sales are directly tied to jewellery manufacturers’ requirements. When jewellery demand contracts, so does the need for CPD, impacting the financial performance of CPD players.
In short, macroeconomic cycles play a significant role in shaping the revenue and profitability trends of CPD companies, making them particularly vulnerable to economic slowdowns.
5) Working Capital-Intensive Nature of CPD Operations
The business model of cut and polished diamond (CPD) companies is inherently working capital intensive, primarily due to limited bargaining power with both suppliers and customers.
On the supply side, rough diamond procurement is dominated by a handful of powerful mining companies operating in an oligopoly. These miners typically demand upfront payments, offering little to no credit, which ties up significant capital early in the process.
Once procured, rough diamonds undergo a time-consuming process of cutting, polishing, grading, and certification—each step extending the duration for which capital remains locked in inventory.
After processing, when CPD players sell the polished diamonds to traders or jewellers, they must offer extended credit periods to remain competitive, further stretching their working capital cycle.
CARE Rating Methodology: Cut and Polished Diamond Industry, November 2022, Page 4:
“Upfront payment to miners for procuring rough diamonds, longer turnaround time in processing (including grading and certification of CPD), high inventory levels, and extension of long credit periods to its customers are inherent operating characteristics of entities in the CPD industry. All these factors cumulatively result in high working capital requirements.”
This structure leads to high inventory holdings, exposing companies to significant pricing risks. If diamond prices decline, CPD players may face inventory write-downs, adversely affecting their financials.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 7:
“High inventory levels… increase holding cost and also poses pricing risks.”
Efficient inventory management and cost control are therefore critical to maintaining profitability in this industry.
ICRA, Page 6:
“Efficient inventory management and tight controls on other overheads are the keys to maintaining healthy profitability levels.”
Conversely, poor inventory management or weakening demand can lead to inventory pile-up, signaling a decline in a CPD player’s market position and leading to liquidity stress.
ICRA, Page 7:
“Deterioration in market position of a CPD player often leads to inventory pile up, significantly increasing price risks and liquidity concerns.”
In summary, the CPD business requires careful working capital planning and robust operational efficiency to withstand price fluctuations and competitive pressures.
Extended Credit Periods Increase Risk of Bad Debts
Offering long credit periods to customers is a common practice among CPD players to stay competitive. However, this exposes them to the risk of delayed payments or outright defaults, particularly during periods of economic slowdown.
During downturns, demand for diamonds falls sharply, and customers—often traders or jewellers—face liquidity pressures. As a result, they may struggle to meet their payment obligations, thereby increasing the receivables risk for CPD companies.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Pages 7–8:
“In the event of a demand slowdown, these collection cycles may get stretched further… In a few cases, stretched/bad receivables have led to delays/defaults by CPD players on their debt obligations.”
Historically, such instances of delayed payments from customers have directly impacted the financial stability of CPD companies, even leading to defaults on their own debt obligations to banks and lenders.
This highlights the need for robust credit risk management and customer vetting practices in the CPD industry, especially during uncertain economic conditions.
Therefore, efficient working capital management is crucial for any CPD player. Failure to do so can severely impact their business operations and financial health.
6) Funding Risks Arising from Corporate Governance Challenges in the CPD Sector
The diamond industry has faced numerous instances of poor corporate governance, including fraudulent activities. A notable example is the high-profile frauds committed by Nirav Modi and Mehul Choksi, which involved defrauding Punjab National Bank of ₹14,000 crore.
Explained: How Nirav Modi Cheated Punjab National Bank Of ₹ 14,000 Crore – NDTV
Such incidents tarnish the reputation of the entire diamond processing sector, including cut and polished diamond (CPD) players, and have led to increased caution among banks when providing loans to businesses in this industry.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 3:
“In the light of past and recent defaults, as well as the perception of relatively lower transparency, availability of bank finance has emerged as a key challenge for the CPD industry.”
This funding challenge is not confined to India. Global banks like Antwerp Diamond Bank and Standard Chartered have also exited the CPD sector, citing concerns over lack of transparency and increased risk.
ICRA Rating Methodology – Gems & Jewellery (CPD), August 2019, Page 2:
“Globally, banks such as Antwerp Diamond Bank and Standard Chartered Bank exited the CPD sector in the past few years due to governance concerns of industry participants.”
As a result of these exits, CPD players find it increasingly difficult to secure loans, as new lenders are hesitant to engage with an industry marred by governance issues. Credit rating agencies, such as CARE, have highlighted that many CPD players do not follow proper inventory valuation guidelines, further escalating the risks for banks providing loans.
CARE Rating Methodology – Cut and Polished Diamond Industry, October 2020, Page 5:
“Inventory valuation is another area of concern…the method adopted by entities is generally not in accordance with the Indian Accounting Standard-2 (IND AS-2).”
Banks, which typically require diamond inventory as collateral for loans, may hesitate to lend when they cannot properly assess the value of this inventory, leading to difficulties in recovering loans, as seen with Punjab National Bank in the Nirav Modi case.
The lack of transparency regarding overseas customers of CPD players compounds these funding challenges. Banks and investors are unable to assess the financial health of these customers, increasing the risk of defaults and further deterring formal financing.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 6:
“The CPD industry is largely dependent on bank finance to meet its funding needs, with limited access to capital markets.”
In conclusion, CPD players often rely on equity funding or loans from family and friends, given the cautious stance of external financiers. This reliance on informal sources of funding, combined with the sector’s vulnerabilities, makes it essential for investors to exercise caution when projecting the growth prospects of CPD businesses.
7) Regulatory Risks for Cut and Polished Diamond (CPD) Players
The CPD industry faces significant regulatory risks due to several factors. First, the industry is highly export-dependent, making it vulnerable to changes in tariff structures, which can directly affect its profitability, especially since it operates on low margins.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Pages 1 & 3:
“The CPD industry is largely export-oriented, with only a small proportion (6%) of diamonds intended for domestic consumption. Due to the modest margins in this sector, any changes in duty structures can significantly impact the competitiveness and credit profile of CPD players.”
Second, because the industry is export-driven, geopolitical issues or strained relationships between key countries can directly affect demand. For instance, the US-China trade war had a negative impact on Indian CPD exports. India exports polished diamonds primarily to Hong Kong and China (accounting for about 35% of its exports), where they are made into jewelry and then sold in the USA. The US restrictions on diamond-studded jewelry from China during the trade war significantly reduced demand for Indian CPD products.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 3:
“The US-China trade war adversely impacted India’s CPD exports, particularly to Hong Kong and China, which are key re-exporters of these diamonds to the US as part of diamond-studded jewelry.”
Third, diamonds are often embedded in gold jewelry, so any government regulations on gold imports or trade can indirectly affect the demand for diamonds. Since gold is highly regulated, any changes in the import duties or trade policies can influence the final price of jewelry, impacting the demand for diamond-studded pieces.
ICRA Rating Methodology – Gems & Jewellery (CPD), August 2019, Page 3:
“The Indian CPD industry is also impacted by regulations related to the import of gold. Changes in gold import duties directly affect the price and demand for jewelry containing diamonds.”
Apart from government regulations on trade, the diamond industry is also affected by mining regulations, as diamond mining can have environmental consequences such as soil and water pollution, as well as safety risks related to mining accidents.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 10:
“The CPD sector is indirectly exposed to risks from mining, including environmental issues like soil and water pollution, and manmade hazards such as mine collapses, flooding, and other accidents.”
Lastly, labor regulations impact the CPD industry because diamond cutting and polishing are highly labor-intensive. The sector is particularly vulnerable to labor disputes, especially in regions like Surat (Gujarat), where labor unions are prominent.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 10:
“The industry is heavily reliant on human capital and is exposed to risks of labor disputes, particularly in unionized areas like Surat.”
In conclusion, investors should closely monitor regulatory changes affecting the CPD industry, including those related to trade, labor, mining, and gold, as these can significantly impact business operations and profitability.
8) Diversification Provides a Competitive Advantage for CPD Players
The cut and polished diamond (CPD) business operates on low profit margins, with CPD players facing limited bargaining power with both customers and suppliers. Additionally, the industry is cyclical, making profitability and cash flow highly vulnerable during downturns, potentially threatening the survival of businesses.
To counter this, CPD players often pursue diversification strategies to improve profitability and mitigate the effects of cyclical fluctuations. These strategies help reduce the impact of external factors, strengthening the business model in times of uncertainty.
For instance, geographical diversification allows CPD players to shield themselves from economic slowdowns in specific markets. By operating across multiple regions, they can maintain profitability even when demand drops in one area.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 4:
“A CPD player with a diversified presence across different regions is more likely to perform consistently, regardless of fluctuations in demand across various consuming markets.”
Additionally, geographical diversification protects CPD players from regulatory changes or political instability in any one country, ensuring the continuity of operations.
CARE Rating Methodology – Cut and Polished Diamond Industry, November 2022, Page 2:
“Companies with diversified export sales are better equipped to handle challenges arising from reduced demand in specific countries, regulatory changes, or economic and political instability.”
A diversified customer base also plays a crucial role. CPD players who serve both wholesale diamond traders and direct jewelry manufacturers are better positioned to withstand economic downturns, when liquidity issues often cause delays in payments. By engaging with multiple customer segments, they can spread risk and maintain more stable revenues.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 4:
“A well-diversified customer base helps CPD players manage risks associated with bad debts, especially during periods of economic slowdown when liquidity pressures arise.”
For example, CPD players may focus on wholesale diamond trading in Belgium (Antwerp) or UAE or may choose to directly engage with jewelry manufacturers in markets such as the USA, Europe, or China, ensuring a broad distribution reach.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 4:
“CPD exports to West Asia and Hong Kong are often resold in markets like the US, China, and Europe in the form of ready-made jewelry. A player’s direct presence in these key markets can significantly enhance their distribution capacity.”
Similarly, CPD players who leverage multiple sales channels—such as direct sales, online platforms, affiliate marketers, and brokers—enjoy greater business stability.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Pages 4-5:
“Utilizing multiple sales channels such as brokers, online platforms, and affiliates in addition to direct sales helps CPD players maintain a more resilient business model.”
Furthermore, CPD players who can process a wide range of diamond types—including varying shapes, sizes, carats, and colors—are better able to meet changing consumer preferences, thereby thriving in various phases of economic cycles.
ICRA Rating Methodology – Gems & Jewellery (CPD), August 2019, Page 4:
“CPD players offering a diverse portfolio of diamonds in terms of shape, color, size, and carat weight are better positioned to cater to a broad customer base and manage earnings volatility.”
Additionally, CPD players that specialize in certified diamonds (graded by international agencies for the 4 Cs: Carat, Cut, Color, and Clarity) can target the premium customer segment, while also serving value-conscious customers with non-certified diamonds. This dual approach ensures stable demand and profitability, even through economic fluctuations.
CARE Rating Methodology – Cut and Polished Diamond Industry, November 2022, Page 3:
“CPD manufacturers with a significant share of certified diamonds in their sales mix are better positioned to compete in a market where consumers are increasingly quality-conscious and willing to pay a premium for third-party certification.”
Beyond diversification in sales and customer segments, sourcing is also a critical aspect. CPD players who procure rough diamonds from both primary sources (diamond miners) and secondary sources (diamond traders) are less vulnerable to supply disruptions, ensuring a continuous flow of diamonds for processing.
CARE Rating Methodology – Cut and Polished Diamond Industry, November 2022, Page 2:
“Diversification in rough diamond procurement from primary and secondary sources helps CPD players avoid supply chain disruptions.”
Lastly, CPD players who diversify their funding sources—across multiple banks, capital markets, and financing channels—are more likely to weather economic downturns than those relying on a single funding source.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 3:
“A diversified funding profile with multiple banking arrangements can help a CPD player cushion the impact of any sudden withdrawal of credit from a particular financial institution.”
9) Large Scale Operations (Economies of Scale) Provide a Significant Competitive Edge for CPD Players
Since CPD players lack bargaining power with both customers and suppliers (diamond miners), they need to focus on minimizing their operational costs in order to enhance profitability and gain a competitive advantage in the market.
One key strategy employed by CPD players to reduce costs is scaling up their business operations. A larger scale brings economies of scale, allowing fixed costs to be spread over a larger volume of diamonds, which effectively lowers the cost per diamond processed.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 4:
“A larger scale of operations provides economies of scale, facilitating better cost absorption and enabling companies to withstand competition more effectively.”
Additionally, larger CPD players are the ones who can exert some level of negotiating power over their suppliers and customers. Only a company with significant size can guarantee the supply of a wide range of diamonds to jewellers at short notice. Similarly, large CPD players have the ability to purchase large quantities of rough diamonds from miners, making them more likely to secure special concessions from these suppliers.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 4:
“A CPD player’s scale of operations is a crucial factor in determining its competitive position and bargaining power with both suppliers and customers.”
Furthermore, large CPD players often expand their operations into jewelry manufacturing and retailing, allowing them to capture a greater share of the value-added chain and improve profitability. Integration into these areas also provides the opportunity to build a brand for their diamonds, enabling them to command a premium from customers.
ICRA Rating Methodology – Gems & Jewellery (CPD), August 2019, Page 4:
“Many CPD players forward integrate into jewelry manufacturing by expanding into retail or wholesale, selling branded diamonds under their own label.”
Large CPD players are also better positioned to diversify across various geographies, product ranges, and rough diamond procurement sources, ensuring greater stability in their business model.
Such companies are also more likely to attain sight-holder or supplier-of-choice status with diamond miners, guaranteeing a continuous supply of rough diamonds in the quantities they require.
Moreover, large CPD players possess the financial strength to withstand economic downturns, enabling them to maintain operations and capitalize on opportunities during challenging periods.
The ability to invest in cutting-edge technology further enhances their competitive position. Larger players can adopt advanced technology to improve operational efficiency and reduce diamond wastage during the processing stage, leading to cost savings and higher profitability.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 6:
“Higher technology adoption for specific higher carat product categories can enhance profitability by minimizing wastage and maximizing value per carat.”
In conclusion, large CPD players enjoy significant competitive advantages over their smaller counterparts, thanks to their scale, bargaining power, ability to integrate operations, diversification, financial resilience, and technological capabilities.
10) Foreign Exchange (Forex)/Currency Risk
The business operations of CPD players are heavily reliant on the import of rough diamonds and the export of processed diamonds. This creates significant exposure to foreign exchange fluctuations, as many of their transactions are conducted in foreign currencies.
However, CPD players often benefit from a natural hedge when both their sales and purchases are denominated in the same foreign currency, such as USD or EUR. Despite this, they still remain exposed to currency risk due to their dealings in various currencies and their net import/export position.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 8:
“The currency risk faced by a CPD player is influenced by its net import/export position. While most rough diamond requirements are met through imports, a large portion of polished diamonds are exported, providing a natural hedge.”
In addition, CPD players often use working capital loans in foreign currencies to make payments to overseas suppliers, which can help mitigate currency risk in their day-to-day operations.
ICRA Rating Methodology – Gems & Jewellery (CPD), September 2021, Page 8:
“CPD players typically enjoy dollar-denominated working capital facilities from banks, which further helps reduce the impact of foreign currency fluctuations.”
Despite these hedging mechanisms, CPD players continue to face risks stemming from currency fluctuations due to the complex mix of imports, exports, and foreign currency dealings.
Frequently Asked Questions (FAQs) on the Cut and Polished Diamond (CPD) Industry
1. Why do CPD players face intense competition?
CPD players face significant competition due to the fragmented nature of the market and low entry barriers. Many small and unorganized players dominate the industry and engage in price-based competition to attract customers, leading to low profit margins.
2. What are the challenges faced by CPD players regarding customer power?
Customers, including jewellery manufacturers, have high bargaining power because they can easily switch from one diamond processor to another. This gives them leverage over CPD players, who are forced to compete on price.
3. How do diamond miners affect CPD players?
Diamond miners control both the supply and pricing of rough diamonds, which creates an oligopoly. Miners impose conditions such as sight-holder and “supplier of choice” status, which further squeezes CPD players’ profit margins by reducing their negotiating power.
4. How does the cyclical demand for diamonds impact CPD players?
The demand for diamonds is cyclical and tied to economic conditions. During upcycles, demand for diamonds increases, but it declines sharply in downturns. This cyclical nature puts significant pressure on CPD players’ liquidity, and in some cases, may threaten their survival.
5. Why is the diamond cutting and polishing business working capital intensive?
CPD players need to maintain large inventories of both rough and polished diamonds to meet customer demands quickly. Additionally, they often provide long credit periods to customers due to competitive pressures, requiring significant investment in working capital.
6. How does working capital affect CPD players during economic downturns?
During downturns, large working capital investments become a challenge. Diamond inventories consume capital, and delayed payments from customers can lead to bad debts. This strains liquidity, and some CPD players may default on their loans, making recovery difficult for lenders.
7. What corporate governance challenges do CPD players face?
The CPD industry often has corporate governance issues, including a lack of transparency regarding the value of diamond inventory and details of overseas customers. This leads to challenges for banks and lenders, who may hesitate to provide large exposures, creating funding difficulties for CPD players.
8. How do changes in regulatory policies impact CPD players?
CPD players are exposed to significant regulatory risks, as their business is highly dependent on the import of rough diamonds and the export of polished diamonds. Any changes in trade policies or duty structures can significantly affect their operations, as seen during the US-China trade war.
9. How does geographical diversification benefit CPD players?
CPD players with a presence across multiple geographies are better positioned to weather trade policy changes, political instability, and economic downturns in specific regions. This diversification helps them maintain steady business operations and mitigate risks associated with one particular market.
10. What are the benefits of diversifying rough diamond sources and funding?
CPD players who diversify their sources of rough diamonds across various mines and traders can ensure a more reliable supply of diamonds. Similarly, diversification of funding sources, such as using multiple banks and capital markets, helps in meeting growth requirements and managing financial risks.
11. How does a large scale of operations benefit CPD players?
Large CPD players benefit from economies of scale, which allow them to spread fixed costs over a higher volume of diamonds, reducing the cost per diamond. They also enjoy better bargaining power with both customers and suppliers. Additionally, larger players have greater financial flexibility, enabling them to withstand downturns and invest in advanced technologies, which further improves their profitability.
12. What is the impact of diversification on a CPD player’s business model?
Diversification, whether in terms of customers, product offerings, or geographies, helps CPD players mitigate risks. A well-diversified business model allows CPD players to manage fluctuations in demand, reduce liquidity pressures during downturns, and stabilize their revenue streams.
13. How should investors analyze a CPD company?
Investors should consider several key factors when analyzing CPD companies, including low pricing power, the high bargaining power of suppliers, cyclical demand for diamonds, working capital intensity, regulatory risks, and corporate governance challenges. A well-diversified and large-scale operation can offer competitive advantages and stability in a volatile industry.
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