Can the diamond market take revenge?

Igor Leikin

The diamond market suffering from an oversupply of rough diamonds and changes in the consumer priorities in retail turned out to be a fertile ground for the seeds of COVID-19 that is devastating to the global economy. The coronavirus almost completely froze the diamond trade and forced major players to make unprecedented concessions to their customers – that said, the sales figures have been 10 times less than usual for a long time.

Nevertheless, August, traditionally strong for the diamond market, maintained its status despite the fact that the tourist activity being the main driver of demand during this period was clearly lower than last year. The signs of a new cycle in the market were the resumption of jewellery sales in China, an increase in the workload at the Indian cutting and polishing units, as well as an increased demand for rough diamonds. The signs of recovery are very slight now and the situation is entirely dependent on the possible repeated national lockdowns that can decrease the anticipated holiday sales when the industry could take revenge for five difficult months of this year.

The diamond market recovery is supported by the fact that its fundamentals benefited from the crisis like it was in 2008-2009. The diamond production this year will decline by almost a quarter, as due to the crisis, many producers, for example, in Canada, may no longer resume their operations. This will create a persistent deficit in the market. At the same time, the new reality of the remote work in jewellery retail, oddly enough, forms some positive practices. Millions of Americans still work from home and do their best to look first-class during videoconferencing, which serves as an impulse to the Zoom-worthy jewellery growth in the key markets.

Price correction in response to growth

The major diamond miners, which have been saturating the market for several years with rough diamonds that were often used for speculative manipulations or cut and polished for future use were forced not only to reduce their production and stop their sales this year but also to refuse the price reduction. This move that could theoretically increase the sales efficiency would create problems for most market players in the downturn and devalue their surplus stocks and, thus, jeopardize the financial stability. Therefore, De Beers and ALROSA – since the beginning of the pandemic – have kept prices at the level that was early in the year. Sergey Ivanov, CEO of ALROSA, explained back in March that the problem was not the price, but the slowdown in the jewellery sales in most regions of the world. To avoid excessive glut in the market in this situation, De Beers and ALROSA allowed their clients to turn down their entire allocations and defer their purchases for future periods (which, by the way, have not yet been specified).

While the monopolists tried not to overload their clients by allowing them not to execute their contracts, the smaller competitors simply could not afford this and sold rough diamonds at a 25% discount gradually eroding the market shares of De Beers and ALROSA. However, due to the fact that the main suppliers were inactive and decreased their sales to almost a zero level, the global rough diamonds supplies from March to August fell by 66% (according to VTB Capital). This created the conditions for a recovery in demand for diamonds amid the jewellery sales revival in some regions thanks to the gradual lifting of the quarantine restrictions.

The jewellery sales in China rose by 6.8% in July and reversed the trend that had been observed since October 2019. While all local jewellery retailers reported sluggish sales in the first half of the year, Tiffany’s results in the Asia-Pacific region were positive, with a 17% year-on-year growth in May-July being the strongest ever in its history. The jewellery sales continued to grow YoY in August and the Signet’s same-store sales were up 11%, with the online sales growing 65%. If this dynamic continues until the end of 2020, it will mean that the global diamond jewellery sales will fall 14% this year instead of the 23% expected earlier, VTB Capital said in its review.

The positive dynamics in China in July spurred the diamond prices that jumped in August (by 16%). If in July, the polished diamonds prices were 5% lower than those early in the year, the polished diamond prices were 12% higher by the beginning of September.

These signs indicated that the rough diamond market bounced off the bottom in July, and De Beers – in order to restart its sales – carried out a 6-10% correction that affected the stones larger than 1 carat. Probably, ALROSA took a similar step.

The decline in prices took place amid a decrease in stocks in the midstream. By September, the inventories of finished goods in the midstream were at their lowest level since 2012, VTB Capital notes, their estimate fell by $3 bn in 8 months of 2020 after reducing by $2 bn in 2019, according to VTB Capital.

The market has been without the necessary rough diamonds for a long time, and now there is a good surge in demand for rough diamonds. We are certainly capable to fully satisfy this demand,” explained ALROSA CEO Sergey Ivanov.

Market revival

The decline in price revived demand as it was in previous crises in the diamond market. The India’s rough diamond imports in August ($497.5 mn) were still low, more than 42% below the 2019 figures. But the upward dynamics was seen – the average of the previous three months was only $205 mn, which is more than 4 times lower than in the previous year. The polished diamonds exports from India in August rose to $1.217 bn, which is 26% lower than a year ago, but 35% higher than in July.

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Source Rough&Polished

Photo © De Beers.