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The diamond market to come back to normalcy

10 may 2021

The diamond market can return to normalcy after its impressive growth at the beginning of the year thanks to strong jewelry sales, rising profit margins for cutters and a shortage of rough diamonds. Midstream margins have decreased as the diamond prices continue to rise suggesting that the market is overheated. Clients become less loyal to the new price rises recalling that as the summer season approaches, the business may slow down. In addition to the seasonal lull, the downside risks in the diamond market are fueled by the data on the rise in COVID-19 infections in Europe and India.

But even a complete victory over the coronavirus does not guarantee a repeat of the Christmas 2020 sales as the beneficiaries of the global vaccination are likely to be such lagging industries as air traveling and cruises. We know the example of the plummeting ‘stay in home’ shares - that surged last year - in the second half of February-March (for example, the shares of Zoom - the organizer of video conferencing, Square - the operator of electronic payments, and DocuSign - the digital signature service) against the background of strengthening banks and companies in the real sector that receive advantages from the reopening of the economy after the pandemic.

The diamond miners, in turn, consider the current situation to be unique as the demand for diamond jewelry tends to grow in the long term, and the shortage of diamonds is increasing due to the lockdowns and the closure of Argyle. This point of view was expressed by ALROSA’s CEO Sergey Ivanov at the beginning of March during Capital Markets Day.

According to the ALROSA’s presentation, the demand for diamond jewelry is growing with the number of weddings in the United States that will exceed the usual level by 50% in 2021 after a pause caused by the pandemic. After a 15% decline last year, consumption of jewelry will rise by high single-digit numbers in 2021. ALROSA expects that the market in the Asia-Pacific Region will grow by 10%, the largest US market will grow by 3%.

The same-store sales of Signet, one of the largest US jewelry retailers, showed a 7%-rise year-on-year during the three months ended January 30. The online sales increased by 71% (and their share reached 23% of total sales), which offset the 4%-decline in the traditional stores. The average purchase amount grew by 6%. Signet expects the same-store sales in the next quarter to grow by over 80% compared to the same quarter last year, which was the peak of the crisis, and its revenues to increase by 67% to at least $1.42 bn.

The midstream now has sufficient cash resources due to the spread between the polished and rough prices, Ivanov says. According to Rapaport, the polished diamond prices rose by an average of 20% during six months, including January 2021, while the rough diamond prices were held back by the major diamond miners until December in order to do no harm to the market recovery. In this situation, the polishing business profitability that averaged around 2% in the 2010s showed a 5-percent increase.

The India’a exports of polished diamonds, which accounts for 90% of the market, increased in February by 26.5% to $1.75 bn compared to 2020. At the same time, the rough diamond imports turned out to be lower than in February last year, although the decline is very small (by 0.3% to $1.46 bn) and can be explained by the fact that the industry took a short break after the increased purchases in previous months, in particular, in January when they soared by 65%.

According to VTB Capital, the midstream will continue to replenish stocks throughout H1 this year, despite the record appetite in H2 last year. Last year, the net rough diamond imports to India reached $6.1 bn exceeding the global diamond supplies during this period. Given that India’s net polished diamond exports in November-December were on average 48% higher than a year ago, it can be concluded that the trade in rough diamonds was very significant, and the retail showed a great demand for polished diamonds. Thus, stocks of rough diamonds in trading centers, as well as the inventories of diamonds at retailers were lower than usual by the end of the year, which means that their replenishment will be required in H1 2021, VTB Capital believes.

The average inventories of the market participants in the industry are at the lowest level in a decade and correspond to a two-month production level, according to the ALROSA CEO. This was facilitated by the consistently strong demand for several months and the rough diamond deficit accumulated during the pandemic. At the same time, taking into account the closure of the Argyle mine in Australia, it is impossible to boost the production, Ivanov believes, and within the next five years, the market will lose 21 mn carats of diamonds (about 19% of the production in 2020). According to VTB Capital, while some mines are expected to reopen in 2021 (for example, Ekati has restored its operations since the end of February), the global production will grow by 5% only, as the growth will be offset by the Argyle mine depletion.

ALROSA expects that the supply growth rate in the diamond market in the next two years will not exceed 2% per year, which in any case will be behind the growth in the global demand for jewelry (5-10% per year). As a result, a shortage of rough diamonds is formed that will reach 30% by 2025, the diamond miner believes.

“This is a unique situation from the point of view of the supply and demand balance, which can contribute to the rise in rough diamond prices in the medium term,” Ivanov believes.

ALROSA and De Beers consistently raised their prices in December, January and February, which resulted in the rough diamond price rise by 10% from the beginning of the year, and the prices reached their pre-crisis level, while the large-size and high-end rough diamond prices exceeded the pre-crisis level. Before the March trading session, ALROSA increased the prices again - by 4-5%, mainly for the stones weighing 1 carat and above. The ALROSA’s spokesperson says that the prices will “follow the real confirmed demand from the midstream sector”.

While the largest supplier considers the next price increase as inevitable, not all the market players consider it appropriate. The Rapaport agency cites some ALROSA’s clients who believe that this measure is unnecessary and untimely, and they are skeptical about the market prospects in the coming months.

“[The miners have] taken away all the profit margin from the manufacturing pipeline, because when the polished is ready, the polished market will be slightly weaker than today,” an Alrosa customer explains. “Probably, we will all lose some money, and not even make the costs.” He notes that the ALROSA partners have to take all their allocations in order to preserve the contracts for the future contract period that will begin on April 1.

“Since the rough market is so strong, everyone accepts the [prices], but it’s becoming a bubble that might explode,” one of the market players cautioned Rapaport. According to him, the rough diamond prices have lost the connection with the polished diamond prices, which could be a problem for diamond suppliers, given the fact that a strong demand for jewelry is in question during the seasonal lull in the market.

But besides the desire of suppliers to maximize their revenues, the price increases can also be based on a lack of supply, which is already beginning to affect the market. The results of the February trading sessions held by De Beers and ALROSA ($550 mn and $361 mn, respectively) against the backdrop of rising prices were significantly lower than the January record figures - by 17% and 16%, respectively. The Rapaport’s sources expect the miners’ sales in March to be even lower due to the reduced rough diamond availability, in particular, the sales by De Beers will drop to $400 mn. The De Beers production target has been hit by the lockdowns and operational difficulties and is expected from 32 to 34 mn carats (below the previous estimate of 33-35 mn carats). By the end of last year, the ALROSA’s inventories dropped sharply after its strong sales in Q4 - by 32% to 20.7 mn carats, and by the end of March, the company expects the sales to be at an all-time low.

A shortage of diamonds at a time when the market is at its peak upsets the suppliers, but can prove to be an important argument for maintaining the balance if the market situation changes significantly, as it was many times last year. Traditionally, the industry pins its hopes on a global economic recovery that fosters the people’s desire to give gifts and celebrate their memorable events by purchasing jewelry. Nevertheless, most of the signs indicate that the economy has not fully recovered yet, and the diamond market is experiencing an unprecedented boom. Paradoxically, it was the closing of the economy that became an important trigger for the industry’s growth at the end of 2020. While traveling was limited or completely stopped amid the pandemic, customers preferred to spend the money saved to buy other goods on the luxury market. Among them, jewelry was preferred because of the emotional connection with the exciting moments of a proposal and the possibility of a kind of the value conservation. As a result, the demand for jewelry last year declined less than for the personal luxury in the apparel and watch markets, by 15% only compared to 23% and 30%, respectively.

That momentum becomes less with the economy reopening, Signet warned in its report. “As the vaccine rollout progresses, there could be a shift of consumer discretionary spending away from the jewelry category toward experience-oriented categories, - says Signet adding that “the magnitude and timing of which is difficult to predict”, but Signet predicts a slowdown in the jewelry market growth in H2 2021.

As the economy reopens and international travel resumes, the diamond industry will face renewed competition, particularly among the younger consumers it has been seeking to attract, according to Kirill Chuiko, head of research at BCS GM. “A diamond ring will get you one or two pictures on Instagram,” he said. “But if you go on holiday to Spain you might get 10 pictures per day.”

Igor Leikin for Rough&Polished