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When the diamond market rising along with the ‘fear index’

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Image credit: amazon.com

The diamond market continued its strengthening in October amid the robust jewellery sales in the US and China where a low tourism activity is offset by a strong domestic demand. The rebound in the retail and improved margins in the midstream are driving active rough diamond purchases. Today, practically everything suggests that we are in a full-fledged growth cycle of the diamond market. But it is unlikely that any of the market players can forget that the same undeniable growth cycle in January-February 2020 was relentlessly interrupted by the COVID-19 pandemic. They will not forget that the coronavirus is not the only risk factor - and may be not the main one - because the problems of the changing consumer preferences and the expansion of the lab grown diamonds still exist.

The stock market has a very indicative volatility index, VIX. Also referred to as the ‘fear index’, it reflects the traders’ expectations on the volatility of the major US S&P index over the next 30 days. At the moments of uncertainty, which are many in 2020, the investors pay more attention to it than to other indicators. Usually, the dependence is clear - when the VIX declines the stock market rallies, and vice versa. The ‘fear Index’ hit a record high in mid-March this year when the market nose-dived, but then it decreased quickly as the market bounced off the bottom. In September-October, with the US elections approaching and the lack of new economic incentives to justify the stock market's skyrocketing since then, the VIX began to rally again. This time, the volatility index growth was accompanied by the S&P index growth, which is a very rare and alarming signal. In this situation, the investors began to lose faith in the validity of the current bid prices and started fixing the positions. If the diamond market had an analogue of the VIX, this index would probably also be quite high now and prompted the diamantaires to assess the prospects as carefully as possible after the successes achieved in August-October.

THE DOMESTIC DEMAND GROWTH

The sales of the diamond jewellery are still far from recovery, but the August-September dynamics is encouraging and suggests that the decline has at least slowed down. An interesting trend is that the low tourist activity, which always were the most important sales driver, is compensated by a strong domestic demand.

The jewellery sales in China skyrocketed in August, up 87% year-on-year after falling by 30% year-on-year in January-June. The jewellery sales in Hong Kong are still below the 2019 figures by 37% year-on-year, but the situation is improving as the figures were much worse in June-July (showing a 54-56% drop). Last year, the Chinese accounted for 35% of the total global luxury demand, but only 12% of the total global sales came from the jewellery retailing directly in China. Thus, given the limited tourist activity, there was a structural shift in the jewellery purchases; so, the sales growth in China is associated with an increase in the purchases in the domestic market, while previously luxury goods were bought mainly abroad, VTB Capital notes in its review.

The Luk Fook's fine jewellery sales in Q3 were 65% lower than a year ago, but the decline rate decreased compared to April-June when the decline reached 77%. Specifically, the sales were down 16% in Mainland China compared to a 32% drop in Q2. The situation is worse in Hong Kong, which suffered from the riots even before COVID-19, and in Macau, but the decline has also gradually slowed down there, too, 74% against 81% in a previous quarter.

Chow Tai Fook even managed to achieve a 2.5% year-on-year sales growth for the quarter ended on September 30. This is due to a business activity revival in Mainland China, which offset a 52% drop in sales in Hong Kong and Macau. The retailer was able to benefit from the active expansion of its chain in Mainland China. They were up 11% during the quarter. “In light of the easing Covid-19 situation in Mainland China, business … showed an encouraging improvement and same-store sales rebounded,” said Chow Tai Fook chairman Dr. Henry Cheng Kar-Shun.

The Chinese retail results are based on the industry recovery driven by a deferred demand and infrastructure incentives. The Caixin PMI index rose to 53.6 in October, the highest since January 2011, as the domestic demand surged to ensure further boosting the economy.

In the United States, the jewellery sales rose by 9.3% year-on-year in August after rising by 7.5% in July. In the US, the domestic demand made it possible to compensate for the decline in tourism, too. Despite the tourist flow decline in Q3, the jewellery sales exceeded the previous year’s level and also showed the strongest growth in several years. The same situation is in the largest retailer Signet’s performance, which - although they were weak in Q2 as it was expected - surprised by the same-store sales growth by 11% year-on-year in August and by a decrease in the finished goods inventories by 4% year-on-year. The strong forecast of the consumer expectations in the US in September suggests that the demand for jewellery in the coming months may remain high, VTB Capital believes.

The strong retail performances in China and the United States are the main driver of the high polished diamond prices. Rapaport estimates that after a 16% upsurge in prices on average in August, the prices rose by about 2% in September, while the ‘melee’ sector remains strong. October, according to the later IDEX estimates, was the third month in a row of consecutive increases in the polished diamond prices.

TRADE STATISTICS

The global diamond centres’ trade statistics released in October confirmed the growing trend of the last month. The trade in Antwerp is not yet affected by the quarantine and provides the market participants with the opportunity to view the goods; in Surat, the situation is improving, with the industry still planning to have short holidays during Diwali to fulfill all the orders by the holiday season.

The rough diamond imports to Antwerp in September amounted to 7.87 mn carats, which is 1.7 times higher than in August and 3% higher year-on-year. The average price of the rough diamonds imported to Antwerp increased by 16% over the month to $106.4 per carat. In terms of value, the imports in September increased by 38% compared to a year ago and reached $837 mn. According to the 9-month results, the imports are still below the 2019 level by 14% in volume and by 26% in value, but the dynamics has become less radical than in January-August (minus 16.5% in volume and 34% in value).

The India’s polished diamond exports also continued to recover after declining by more than 50% in April-July. In September, the exports were by 20% ($1.564 bn) below the figures a year ago, which is better than August when the decline was 27%. The rough diamond imports in September increased by 16% to $1.35 bn compared to 2019 reflecting a trend towards a continued replenishment of the inventories by cutters. Compared to the August data, the diamond imports to India have jumped by 2.7 times.

The India’s cutting and polishing sector is getting ready to export the goods to the US and China as it is approaching the holiday season, Rapaport reports. The capacity utilization is increasing and paving the way for more polished diamonds to enter the market. The industry is using virtual jewellery exhibitions to reach the clients around the world who are refusing to travel due to the COVID-19 virus. The travel restrictions even benefit the industry in part as the consumers can spend some of their income on the polished diamonds than they used to spend on travelling and vacations, said Colin Shah, chairman of the GJEPC. The coming holidays allow the GJEPC to expect an increasing demand for the diamond jewellery in Q4.

REDUCTION in PRODUCTION …

The trade revival was facilitated by a reduction in the production as the diamond miners almost completely lost the opportunity to sell their goods during the critical period and were forced to adjust their production. The production also declined due to the lockdowns.

This spring, the industry leaders, De Beers and ALROSA, decreased their production targets by more than 10 mn carats and this year, the global diamond production will fall by almost 25% below 110 mn carats taking into account all the consequences of the lockdowns, the reductions and the closures of the mines. This is the lowest production level since the mid-1990s. The largest market players are still keeping within their production forecasts and are in no hurry to boost their sales to avoid slowing down the fragile market recovery. In this sense, the expected growth in the ALROSA production in 2021 does not threaten the market balance because the company is focused on selling a significant share of its production (for about $500 mn) to the State Precious Metals and Gems Repository (Gokhran), which will prevent bringing these volumes to the market in the mid-term.

De Beers cut its diamond production by 4% in Q3 to 7.16 mn carats after a 54% collapse in April-June due to the lockdowns in South Africa and a drastic drop in the diamond demand due to the pandemic. The De Beers 9-month production decreased by 20% to 18.44 mn carats. The annual forecast remained unchanged at 25-27 mn carats, with the possibility of revising it because of the disruptions caused by the pandemic and the scale of the demand revival.

The Q3 sales were 6.6 mn carats (after just 300,000 carats in Q2) compared to 7.4 mn carats a year earlier (down 11%). Since the beginning of the year, the diamond sales have declined by 34% to 15.8 mn carats.

The ALROSA’s diamond production in Q3 increased by 62% year-on-year to 9.2 mn carats, which is explained by an increase in the utilization of the beneficiation capacities. Compared to the data a year ago (12.1 mn carats), the production in Q3 is 24% lower. Over 9 months of 2020, the diamond production decreased by 23% to 22.9 mn carats.

The Q3 sales in carats grew 8-fold to 5 mn carats compared to the previous quarter, including 4.1 mn carats of the gem-quality diamonds. ‘Due to a decrease in the finished goods inventories at the cutters and in retail amid a gradual recovery in demand for jewellery, the company has seen an increase in demand for its goods since August,” the press release said. Over 9 months, the sales decreased by 40% to 15.1 mn carats.

The ALROSA’s reserves at the end of Q3 increased by 16% year-on-year to 30.6 mn carats due to an excess of the production over the sales.

The ALROSA’s forecast for the next year made long before the pandemic and irrelevant at the moment is 38 mn carats. It will be reduced to at least 34.5 mn carats, VTB Capital believes.

Rio Tinto cut its production at its Argyle mine by 10% in Q3 to 3.2 mn carats compared to 2019 due to the deposit’s lower grade ore, the mine is to be shut down by the end of this year. Over the year, the Argyle’s production declined by 6% to 9.05 mn carats. The Diavik mine in Canada owned by Rio (60%) had a 1% higher quarterly output than a year earlier, but its 9-month results are 12% below 2019.

AND the SALES GROWTH

In addition to the decline in the production, the diamond miners had to make a price correction, which boosted the demand and increased the midstream margins. The price index for ALROSA’s comparable boxes has decreased by 13% from the beginning of the year, with the main correction in Q3 when the price fell by 7%. The correction was due to “the need to resume the diamond sales cycle to meet the real demand and ensure the required profitability level in the cutting sector amid the falling prices for the polished diamonds during the year,” explained ALROSA. In August, De Beers cut the prices for its 1+ carat rough diamonds by 6-10% and in September, it corrected the value of their small stones by more than 10%. This allowed the diamond sales to return to their historical levels in August and to reach their highest levels for this period in September.

The ALROSA’s sales, after a six-fold growth in August compared to the previous month, increased by 55% in September to $336 mn. Compared to September 2019 ($259 mn), the sales were 30% higher, although the total for 9 months ($1.58 bn) was 35% lower than in January-September last year ($2.164 bn). “As a result of the September sales, we see the continued strengthening of the demand for the rough diamonds that began in August against the background of a gradual normalization of the inventories at the cutting companies and in retail,” said Yevgeny Agureev, Deputy CEO, ALROSA.

“At the key end user markets in the USA and China, jewellery stores begin to regain customers, a trend well supported by a rapid development of online trade. It is, however, too early to talk about a steady demand recovery before seeing the jewellery sales’ results for the most important holiday season, this year we see it coming at the time of the aggravating epidemiological situation in a number of countries,” Agureev said.

At its sales cycle from September 21 to October 9, De Beers sold the rough diamonds for $467 mn, 40% higher than at the previous cycle and 57% higher than during the eighth cycle a year earlier.

“We continue to see a steady improvement in demand for rough diamonds…, with cutters and polishers increasing their purchases as retail orders come through ahead of the key holiday season. It’s encouraging to see these demand trends, but these are still early days and there is a long way to go before we can be sure of a sustained recovery in trading conditions,” De Beers CEO Bruce Cleaver said.

Gem Diamonds increased its sales in Q3 by 67% to $61 mn, and the jump in the average price for the Letseng diamonds (up 56% to $2,215 thousand/ct) reflects the improved market, according to the company. In September, the average prices for Gem Diamonds stones exceeded the pre-pandemic levels thanks to the successful sales of the large diamonds from the Letseng mine famous with its exceptional rough diamonds.

In July-September 2020, Petra Diamonds increased its sales by 33% (to $82 mn) compared to last year amid the improving market and the sale of the inventories accumulated during the exacerbation of COVID-19. The sales volumes increased by 55% to 936.7 thousand carats.

The rough diamond prices at the Petra’s tender in September were 21% higher than in March and April, and they rose by another 2% in October. Despite the recent improvement in the market conditions, the prices are still 10% below the pre-pandemic levels, Petra notes.

The market is improving as the lockdowns around the world ease and the outlets reopen, Petra says. The major companies such as De Beers and ALROSA have rebalanced the market with a persistently low supply, and there is now an improvement in the demand from the cutting companies as the retailers seek to place orders in time for the retail holiday season, the company explains.

“All participants in the industry recognise that risks to a sustained recovery remain, particularly in light of the current resurgence of Covid-19 in key diamond markets,” said Petra. The level of consumer activity, especially in the US market, would be a key development.

CURSE OF THE INTERRUPTED CYCLE

Despite the market revival and impressive sales, De Beers and ALROSA continue to soften the terms of trade expanding their significant support package offered to their clients. De Beers will permit its sightholders deferrals for small-sized rough diamonds (up to 0.75 carats) at its November sight, according to Rapaport. Also, the sightholders will be able to remove the diamond categories they do not need from the boxes. The De Beers spokesman said that they were offering some deferral options for certain small-sized diamonds as this flexibility was appropriate for the current industry environment where the demand continues to change. According to Rapaport, the deferrals do not apply to larger stones as the demand in this segment has strengthened ahead of the holiday season. The sightholders will have to buy the deferred small-size stones before April 2021.

For the same period, De Beers and ALROSA renewed their long-term contracts that were to expire at the end of 2020. This decision was made to support the customers in the face of the ongoing market uncertainty, ALROSA explained. Ideally, this move should motivate the clients who are willing and able to remain on the list of the sightholders to make purchases in the remaining five months because this year, their activity was low and the monopolists had formal grounds to part with them. But in practice, in the current market situation, any drastic measures against the companies that are strong enough to do business are unlikely to be taken. At least, until the current uncertainty in the market is replaced by a vigorous recovery within the cycle, which will no longer be threatened by at least a virus factor.

Igor Leikin for Rough&Polished