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Can the diamond market take revenge?

12 october 2020

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.

The still low figures for August purchases in India where about 82% of the ALROSA’s rough diamonds are cut and polished were due to the fact that the world cutting centres was loaded by a third at that time. In mid-September, the Indian cutting industry began to ramp up capacity in response to the growing demand for polished diamonds. According to IDEXonline, seven out of ten Surat factories reopened had about 70% of their personnel. The Indian cutters are even going to cut their holiday vacations this year. Usually, during the Diwali festival (this year, it starts on November 14), the industry suspends its operations for 2-4 weeks, but the diamond cutters are working hard now to fulfil their orders taking into account that the improvement in the market may be short-lived due to uncertainty around the COVID-19 pandemic.

The expected increase in the orders from India gave the market participants more confidence in the outlook for the rest of the year and, along with the effect of lower prices, encouraged the purchases.

As a result, in August-early September, ALROSA and De Beers sold more rough diamonds than in the last 4-5 months. The ALROSA's sales amounted to $216.7 mn, which is 6 times more than in July ($35.8 mn) and twice as much as in the entire previous period of the pandemic ($123 mn). “Against the background of a gradual recovery in demand for diamond jewellery observed in recent months, especially in the United States and China, as well as a decrease in the level of goods inventories in retail and midstream, we note an increase in demand for diamonds,” commented Evgeny Agureev, Deputy Director General of ALROSA.

According to preliminary data, De Beers sold rough diamonds for a total of $436 mn from the end of July to mid-September (for comparison, in April-June only for $56 mn against $1.3 bn for the same period a year ago). At the same time, the seventh sales cycle that was from August 19 to September 10, unlike the traditional one-week sales, fetched $320 mn, which is 11% higher than a year ago. Due to the global travel restrictions, De Beers abandoned the traditional sight system to make their sales more flexible, and it has been trading almost continuously since late July. Diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations, and manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas,” De Beers CEO Bruce Cleaver said.

Monopolists’ caution

Aware of the fragile recovery cycle in the face of possible new coronavirus restrictions, the major miners have been acting rather cautiously so far.

Following the correction in prices for larger and more high-end stones, De Beers has reduced prices for small-sized rough diamonds. According to Bloomberg, diamonds less than 1 carat fell in price by more than 10% in September. The decision shows that De Beers sees signs of a demand recovery - albeit at a lower price - even in the small-sized rough diamond segment where the market has been the weakest this year.

To avoid any pressure on the market, ALROSA decided to maintain zero mandatory purchase requirements for its long-term clients in September, similar to the situation in August and July. “The market has not yet returned to a balanced state, which, coupled with the threat of a new COVID-19 wave requires all industry members to maintain a cautious and responsible approach,” the Russian company explained this decision. “The uncertainty associated with both the threat of a new wave of antiviral restrictions and consumer sentiment remains. In these conditions, we maintain a course towards meeting the real demand and curbing the speculative trade,” ALROSA Deputy Director General Evgeny Agureev commented.

Will the growth last long?

Obviously, the next steps will depend on how long and stable the recovery cycle will be.

The current impetus to the growth of demand in the diamond market may last one and a half to two months, says ALROSA CEO Sergey Ivanov, “For now, we believe that the demand will be for one and a half to two months. After that, we have to look at the situation. We must wait for November-December.” It will be possible to speak of a full-fledged market recovery only when we have the results of the key holiday season in the United States where positive dynamics is seen, but the growth rate is still lower than in China, which has come out of the quarantine earlier.

“We see the first signs of recovery as the cutting and polishing units have reopened in India, the demand for jewellery has returned in China where we see very good figures now. The main question is how the holidays in the US will be. There are a lot of problems [in the USA], both in terms of the economy and purchasing power, and most importantly, the sentiment. It is important that people return to stores,” Ivanov said. In his opinion, without a negative externality for the industry, strong demand can be expected before the Christmas holidays, which account for about 30% of annual jewellery sales.

A negative externality for the industry is primarily the repeated coronavirus lockdown, the first sign of which was the closure of Israel from September 18.

The trading activity will continue for another 2 months, Rapaport believes, attributing this to the limited supply of rough diamonds at the moment, which is not enough to meet the demand from the jewellery retail. Some diamond categories are in short supply due to the quarantine of the Indian cutters from late March to late May. This imbalance may persist until the end of November. Polished diamonds from the rough stones purchased in August will hit the market in mid-October only, as the cutting and polishing and grading processes take about 6 weeks.

Another important component is the limited supply, which is becoming a fundamental factor affecting the market balance, according to VTB Capital. The price correction by the major diamond miners will exacerbate the problems of small producers and contribute to the persistent deficit in the rough diamond market, the investment bank believes. “The major producers will benefit from the market consolidation. This year's crisis has removed 26% of the global supply from the market, some of which will not recover. We estimate the rough diamond supply deficit at 22%. Even though ALROSA and De Beers can sell the accumulated reserves in 2021 and later, the deficit will remain at the level of 15%, since the smaller diamond miners, severely hit by the crisis, are unlikely to resume their production after the decline in prices by ALROSA and De Beers,” the VTB Capital review concluded.

Igor Leikin for Rough&Polished