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The diamond industry, which was hit hard at the first stage including due to transport restrictions, suddenly, looks like a beneficiary of the Covid-19 pandemic towards the end of the year. The lifting of strict quarantines triggered a ‘broken-down’ diamond trading mechanism, as the sightholders were able to fly to Antwerp or Moscow to view and buy their goods. At the same time, global travelling is at a very low level due to a sharp increase in the COVID-19 infections, and restaurants are closing or restricting attendance. In the run-up to the holidays, a significant portion of the funds that should have been spent on travelling or dining out may be spent to purchase diamond jewellery.

Since two-thirds of the Americans stopped travelling in 2020, more than 40% of consumers have some extra cash, the De Beers Diamond Insight Report says. “Since travel, which has long been the main competitor to diamonds as a means of creating memories, has been so restricted this year, the market for diamonds has benefited,” said De Beers. As a result, according to the Bain’s estimates, although 2020 will bring the first drop in the luxury market over 10 years (by 22% compared to 2019) the situation looks quite good for the diamond jewellery.

In the medium term, according to experts, the industry will depend on the vaccine availability. Paradoxically, there is a situation by the end of the year that an effective vaccine against COVID-19 could adversely impact the diamond jewellery attractiveness. Now, they are actively cannibalizing travel and restaurant industries, but as soon as the COVID-19 threat disappears, the deferred demand will no longer play in favor of polished diamonds. An example of this trend is the sharp decline in the prices of tech companies - the beneficiaries of remote teleworking like Zoom and cloud service providers - based on the news about the effectiveness of the vaccines. Restaurants will be full again, airplanes will fly and cruise liners will sail, and the diamond industry, however, will be left with the same problems it has stumbled over for so many years.

Rough DIAMOND SALES

In October, the rough diamond sales rose double-digit year-on year on the background of the improved midstream margins boosted by higher diamond prices and strong jewellery retail performance. The prices for 1-3 carat polished diamonds, according to Rapaport, rose by 1% in November after rising by 1-1.8% in October, and the roughs have now a 15% higher price than a year ago.

The performance of the major diamond miners continues to exceed the market expectations. De Beers reported their sales growth at the eighth cycle (late September - early October) by 57% YoY to $467 mn. During the ninth cycle, their sales grew by 12% to $450 mn compared to 2019. “Steady demand for De Beers Group’s rough diamonds continued in the ninth sales cycle of the year, reflecting stable consumer demand for diamond jewelry at the retail level in the US and China, and expectations for reasonable demand to continue throughout the holiday season. However, the resurgence of Covid-19 infections in several consumer markets presents ongoing risks,” said De Beers CEO Bruce Cleaver.

In October, ALROSA received a lower result than in September ($310 mn versus $336 mn), since the company did not hold a traditional trading session this month, but in the final figure of the October sales, the sales of the September session (ended in the first half of October) were included as well as the results of the auctions. At the same time, the October result was 17% higher than a year ago. The November sales are expected to be at least at the September level, not lower.

VTB Capital expects a continued recovery in the rough diamond sales in Q4, given the growing activity in the market. The diamond miners will be able to more actively bring their accumulated reserves to the market that increased by 4% to 73.1 mn carats in Q3 compared to the previous period (stocks increased by 19% a quarter earlier). Despite the signs of recovery in August, the sales of rough diamonds in Q3 were down 7% than a year ago, amounting to 26.5 mn carats (versus a 66% decline in Q2).

PRODUCTION AND SALES FORECASTS

With the normalization of the market situation, the diamond miners’ appetite has grown. ALROSA plans to reduce its reserves to 26-27 mn carats by the end of the year, that is, by 13% below the September level (30.6 mn carats). Next year, the baseline sales scenario assumes the sales of 34-35 mn carats, that is, by about 5 mn carats more than the anticipated production (28-30 mn carats). ALROSA wants to keep the same production and sales ratio for the long term, the company’s top management explained.

These forecasts may suggest that some part of the ALROSA’s production initially planned to be sent to Gokhran (State Precious Metals and Gems Repository), will also enter the market this year and next year so that the Gokhran could sell it when the market demand is good. The deal (the potential value of which was up to $500 mn) seemed inevitable in the spring and summer due to the declining financial performance of the company having its social and tax obligations to Yakutia. The market situation quickly improved, as did the ALROSA’s financial position, which means that the deal is no longer a priority, the ALROSA’s executives said in November.

The diamond production recovered in Q3 amid the easing of the restrictions. According to the VTB Capital estimates, the rate of decline in the global production slowed down - while in Q2, it was 33% lower than in 2019, in July-September it was lower by 16% and amounted to 29.3 mn carats.

STATISTICS OF the SHOPPING CENTRES

The increased sales of rough diamonds and the market revival were confirmed by the world’s diamond centres’ statistics. The diamond imports to Antwerp in October increased by 65% in value to $873 mn, compared to a year ago. According to the 10-month results, the imports are still lower than last year by 19% in value and 6% in volume, but the difference is levelled out (during 9 months, the imports decreased by 26% and 14%, respectively). The Antwerp polished diamond exports in October ($692 mn) were down 6% YoY as the growth in the US supplies was offset by the declines in the supplies to Hong Kong and France.

The rough diamond imports from India increased by 15% YoY in October, while the polished exports were by 29% lower than in 2019 indicating some recovery from a 32% decline in August. With the rough prices down more than 10% compared to the pre-pandemic levels and the polished prices up 16% year-to-date, the profitability in the midstream has improved significantly, VTB Capital said in its survey. As a result, the cutting and polishing activity recovered in October to the pre-pandemic level, according to Sarine Technologies, which means the cutters may start restocking in the near future.

The global cutting and polishing sector volumes will remain at their historic levels in the coming months due to favorable conditions and in the run up to the holiday season, VTB Capital believes. “In addition, given the decline in the COVID-19 infections in India, we do not expect the country to introduce new lockdowns in the short term, which supports our positive outlook for the India’s rough diamond imports,” the review said.

The cutting centre in Surat is expected to ramp up after Diwali that was short this year and nearly 200,000 migrant workers will return to work to fulfil the orders before the holidays. The orders are reportedly coming from all over the world, including the key markets in the US and China, so the manufacturers are doing their best to fulfill the orders well before Christmas and New Year. Traditionally, the Diwali holiday lasts from two weeks to a month, and this year, it was reduced to a few days at the Surat cutting and polishing units so that the industry could recover its business damaged during the quarantine. The manufacturing capacity in India works now at 90% of its normal rate.

RETAIL

The recovery of the Indian cutting and polishing sector and the rise in the rough diamond turnover in the trading centres have improved the retailers’ sentiments, most of whom are expecting strong Q4 this year. According to a National Jeweller study, the US retailers are optimistic about the holiday season given its impressive start. Several retailers in the Northeastern United States noted that the Christmas sales began earlier this year, with no consumer money spent on travelling or restaurants.

The US jewellery sales rose by 13.7% in September and surpassed the 2019 level for the fourth month in a row. The major US retailers started the holiday season earlier this year to avoid shopping lines during the pandemic. Some big chains such as Best Buy and Macy's, which usually hold their Black Friday on the Thanksgiving weekend (late November), began selling in late October. ‘In our opinion, this will support the retail jewellery sales in the coming months, and we will see further growth,” VTB Capital said.

Signet also saw a boom in the engagement ring sales a few months before the traditional dates. Over 60% of jewellery buyers expressed their readiness to make a purchase in August and September. The company’s market study also shows that the COVID-19 quarantine only strengthens the relationship of the couples who engaged 18 months ago. As a consequence of these trends, the overall Signet sales in Q3 were up 9.5% year-on-year. The same-store-sales rose by 15.1%, while the online sales jumped by 71.4%.

According to the US National Retail Federation estimates, the sales in the holiday season this year could grow by 3.6% to 5.2%, despite the risks due to the continued spread of COVID-19. If the forecast hits the upper limit, the season could be the best since 2017, with holiday sales up 5.3%. Deloitte is forecasting a 1-1.5% rise in the US holiday sales this year to $1.15 trillion.

The statistics of the largest Chinese retailers confirm the upward trend in the demand for diamonds in this segment. Some revival of the tourist activity in October may also be helpful.

The Chow Tai Fook fine jewellery sales in October-November were down 1% than last year, compared to the 13% drop in Q2. The inventory turnover in Q3 increased by 15%.

The Luk Fook sales in mainland China rose in October and the first half of November after falling by 15% in Q3; the sales in Hong Kong where the tourism restrictions were still in place, the sales fell by 35%, which is more optimistic considering the 65% drop in Q3.

The jewellery sales in India during Diwali season beat expectations amid a release of pent-up demand following the quarantines and due to less consumer alternatives, Rapaport reported. The consumer confidence about future gold prices also contributes to the active behaviour of jewellery buyers.

Colin Shah, chairman of the Gem and Jewellery Export Promotion Council (GJEPC) of India, quoted by Rapaport, estimated that by value, the sales revenue remained at the 2019 level, as higher gold prices compensated for a drop in sales volume of around 15% to 20%.

Cutting the spending on tourism and weddings created funds for jewellery purchases, he explained. “The mood is good - customers haven’t spent money on anything else. People are bored and went out and shopped. Everyone is just tired of sitting at home,” he said.

ONLINE SALES

The share of online sales is naturally growing due to the desire to keep the social distancing. In the US, from November 2020 to January 2021, the e-commerce sales will grow by 25-35% to $196 bn, according to the Deloitte estimates. The events like Amazon’s Prime Day or key sales dates in China (in addition to the Singles Day on November 11, the sales are also popular on September 9, October 10 and December 12) are creating a tradition of new e-commerce festivals with a significant jewellery presence, De Beers notes.

The online segment supported the sales during the Black Friday. The total US jewellery sales during this period fell by 54% as the consumers avoided traditional stores and their purchasing activity was rather flat throughout the second half of the year, smoothing out the traditional purchase peaks. At the same time, the e-commerce during the Black Friday, according to Adobe Analytics, grew by 22% to $9 bn.

According to the Bain estimates, the share of the e-commerce will grow this year up to 23% from 12% in 2019, and by 2025, it will become the leading distribution channel as the traditional stores will stagnate. Even in India, where this segment is still insignificant, the GJEPC estimated that it doubled during Diwali and reached 10%.

Major retailers such as Signet are positioning their traditional stores as their long-term competitive advantage, noting that most of the online shopping is done within 30 miles away from a store.

CONSUMER Sentiments

The De Beers survey results show that shoppers are willing to return to stores if all safety precautions are followed. According to the National Jeweller, these safety precautions include shopping by appointment or receiving pre-ordered goods in addition to the standard preventive measures.

Since visiting the stores, as well as other public places, is associated with some risk, a customers’ average purchase amount increased, National Jeweller notes.

This fact reflects that the purchases are still based on a solid foundation of consumers’ incomes. Many households have strong balance sheets, boosted by a strong stock market; increasing home values; and growing savings, aided by government stimulus checks, NRF chief economist Jack Kleinhenz says. In addition, energy costs are low, and consumers aren’t spending on personal services, travel, and entertainment.

According to a study in August cited by the De Beers Diamond Insight Report, 6 out of 10 US consumers were not affected by the Covid-19 pandemic, although it caused significant economic uncertainty. In China, 4 out of 10 consumers admitted that they have completely returned to their pre-pandemic work, income and life style. Three quarters of the respondents expressed optimism about their financial situation over the next three years to come.

The diamond jewellery is a perfect match for consumer preferences that have changed due to the pandemic, De Beers concludes. According to the company’s study, more than half (56%) of the Americans surveyed will prefer a ‘meaningful’ gift to something more practical or funny in this holiday season. And 90% will choose a gift that does not lose its value over time. “For many consumers, the purchase of a diamond and all it stands for has taken on even greater meaning, due to the impact of lockdowns and an increased desire to show appreciation for loved ones through timeless gifts of nature that are a store of emotional and financial value,” says De Beers.

In July, two out of five Americans (38%) said they would choose a diamond jewellery as a gift they want to give or receive. The research in August found that one out of eight Americans would choose diamonds over all other options to mark a special event.

In August, half of the US consumers said their jewellery spending was back to normal. Four out of five consumers looking to buy diamonds during this holiday season have been shopping in this category for the past two years, so the key source of demand remains those customers who have already bought diamonds earlier.

In the United States, three out of five men in the high-income group plan to purchase a diamond jewellery piece for the beloved girl. In China and India - four out of five men. Likewise, in China and India, four out of five women intend to self-purchase jewellery pieces for themselves, in the United States, there are about one third of women going to do this. Young working millennials are still interested in such a purchase.

The preferences for a jewellery design, as in other periods of crisis, are based on classic options, but with some special appeal.

Igor Leikin for Rough&Polished