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Life in the diamond market after coronavirus

20 april 2020

Image credit: Briam Cute (Pixabay)

The global hysteria over COVID-19 is nearing its peak. And the contours of a future reality for the diamond market are turning more and more visible. Frankly speaking, the prospects look hardly bright. Before describing the gloomy prospects, I think it necessary to explain my position on the issue - whether the current crisis will remain a spontaneous phenomenon or it will be given a project character.

The industry site format does not imply a serious discussion, since the numerous arguments of the supporters and opponents lie far beyond the diamond industry.

Nevertheless, I have to provide a link to one of the latest Fox News materials - this mouthpiece of the Republicans in the USA.

The article is ‘funny’ in itself with the citations from ‘sources’ of sorts, references from classified materials and the ones that are publicly available. It was mentioned above that COVID-19 was not a biological weapon, but nevertheless, a human-induced viral host shift from a bat to humans took place at the Wuhan laboratory and this was a conscious action of China against the USA. What for? This can be read in the publication.         

In this regard, I recalled my article ‘Diamonds and U.S. National debt’ published here by Rough&Polished exactly ten years ago, in April 2010.

The main thesis of the article can be summarized as follows - “The economy of the issuer of the only world reserve currency cannot develop without a continuous increase in the Fed balance required to decrease the entropy of the financial markets. Injecting ‘new money’ necessarily requires the permanent creation of ‘economic miracles’ - Japan, ‘Four Asian tigers’, China, which, as a result of pumping technology and liquidity into them, have consistently turned into export-oriented ‘economies No. 2’ and become the largest holders of the US government debt placed among foreign creditors. However, as soon as the new ‘world economic leader’ reaches a certain level in crediting the budget of its creator, there should be a planned stop in the development of the ‘economic miracle’ to prevent the moderator’s possible risks (including the political ones) from exceeding reasonable levels.”

In 2017, China set a record in crediting the USA. The quota for this ‘economic miracle’ seems to be over, and the current US administration with all its republican frankness declares this in words and active actions.

No matter how cynical it sounds, COVID-19 may turn out to be a successful crisis - it happened at the right time, one can try to solve two of the most pressing problems in one fell swoop: deflate the bubbles in the stock markets and bring the Chinese ‘economic miracle’ into a permanent recession like it was with the Japanese one.

As always, the Fed injected a bumper dose of liquidity into the economy and fixed a weakness. What will secure this liquidity appeared out of thin air? Next in turn is a new ‘economic miracle’ - in five to seven years, we will see another ‘economy No. 2’, perhaps, with the capital in New Delhi, which, of course, will quickly turn into the USA’s largest creditor.

So, the author tends to believe that there will be attempts to redesign the current crisis, even if bats caused it, to solve the above problems. Accusations of using the ‘conspiracy theory’, of course, are inevitable, but there is no difference what the name of an effective theory is? If the proposed scheme describes the reality adequately, the following prospects loom over the diamond industry.

1. Hopes for recovery and for a growing demand for rough and polished diamonds in China are not justified. The Chinese economy, at best, will be at 75-80% of the pre-crisis level and this will continue for many years.

2. The pattern of demand for rough diamonds that developed at the peak of the crisis sharply exacerbated the trend emerged in the recent years - large-scale high-quality rough diamonds will be in demand on the market and their price will rise; small-sized rough diamonds will quickly turn into useless goods. Given that the small-sized rough diamonds account for more than 80% of some major diamond miners’ production, in the very near future, the companies may face the challenges requiring most energetic solutions.

3. Just as happened on the coloured stone market, the synthetics will determine the price level of small-sized rough diamonds, and this level will continuously (and possibly, quickly) decline due to the development of technologies and the reduction in the cost of synthesis.

4. A sharp drop in demand for rough and polished diamonds and the dubious prospects for its recovery will put an end to the ‘investment diamonds’, ‘diamond-backed derivative securities’, ‘diamond-backed cryptocurrencies’ and similar risky undertakings, which, undoubtedly, can be attributed to a few positive effects of the crisis on the diamond industry.

5. The unprecedented cash injections by the Fed into the US economy may revive the demand for a diamond jewellery in the largest market in the future, but this will happen not earlier than in a year or even two, and is unlikely to fully compensate for the failure in the China’s market, especially given the difference in quality and price of the polished diamonds preferred by the American and Chinese consumers.

The above circumstances coupled with the possible aggressive marketing by luxury manufacturers, hotels, travel destinations - all those who will have to struggle tooth and nail for the consumer’s flattened wallet after the quarantine is over, are likely to result in structural changes in the diamond mining industry bringing serious consequences (including the social ones).

De Beers has every chance to significantly strengthen its positions in its negotiations with Botswana.

The Indian diamond cutting and polishing industry, of course, will try to exert maximum pressure on the prices asked by the producers, but without preferential loans from the state banks, it will be in a very difficult position.

ALROSA will traditionally make an arrangement with Gokhran on the purchase of its rough diamonds, citing a precedent during the 2008-2009 crisis. However, the price of a barrel of Brent crude oil did not fall below $ 41.58 at that time and the Russian budget looked much more stable than today.

Second-tier companies that were forced to minimize their costs, invest in low impact technologies allowing the increase in quantity of large undamaged stones during their beneficiation, and sell goods as efficiently as possible before COVID-19, may be ‘lucky’ and show the ‘decline’ by 15 percent only. Actually, the 2009 crisis showed approximately the same. The ‘decline’ shown at that time by large producers was almost by half, and that of the second-tier companies showed a maximum 15% increase.

In any case, this summer will show.

Sergey Goryainov, Rough&Polished