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The main statistics used by the diamond market experts in April-May were the data on the number of COVID-19 infections in India. The restrictions on the activities of the Indian cutters could put pressure on the demand and become a key trigger for the market slowdown, especially during its traditional seasonal weakness.

In March, after the growth in the first two months of this year, the sales of the major suppliers, ALROSA and De Beers, were below their historical levels for this period by 26% and 15%, respectively. The reason for this is a structural reduction in their mining capacities, during which the diamond supplies this year will decline by 20% compared to 2019.

At the same time, the demand remains high, as there has been no overstocking in the midstream thanks to the demand for polished diamonds from retailers who are having great buyer traffic in the wake of the economic recovery. As a result, the rough diamond prices have increased by 9% since the beginning of the year. The rise in prices may continue, ALROSA says on the basis of the analysis of its clients’ behavior who purchase their maximum allocations and make advance payments for their future deliveries.

However, it is not excluded that the prices will reach a plateau in the second half of the year after the balance of supply and demand is normalized. According to ALROSA, this will not be due to the current problems in India, especially taking into account that the Covid-19 infection rates in this country began to decline at the end of May. Rather, the rough diamond market will slow down under the influence of the deferred demand for travel, restaurants, and cinemas, which is growing with the full reopening of the economy, the symptoms of which were already seen in March-April.

APRIL STATISTICS AND the BAIN FORECAST

The April statistics show that the appetite of the diamond cutters has not decreased yet, although there are reasons to believe that the consequences of the situation caused by the coronavirus in India will occur in May.

In April, the imports of rough diamonds to India increased compared to the same period in 2019 (in 2020, there were no imports due to the pandemic), as well as to March this year. Compared to March 2021, the rough diamond supplies increased by 21% (to $1.69 bn). India’s polished diamond exports in April were at a two-year high level of $2.25 bn, up 37% compared to April 2019.

The rough diamond imports to Belgium in April 2021 amounted to $932.75 mn, which was 5% higher than in March and 13% higher than in April 2019. The growth was driven by strong jewellery sales in the key markets.

As for jewellery sales in the US, April was the fourth consecutive month of the growth - by April 2019, the sales rose by 14%, and by 255% compared to a year ago, according to the SpendingPulse report made by Mastercard. The online sales also rose compared to April last year, despite the record growth in e-commerce at the time. However, according to the National Retail Federation (NRF) estimates, the April sales in the US in the apparel and accessories (including jewellery) category fell by 5% compared to March when the consumer spending using incentive checks was at its peak. However, NRF expects the sales to remain strong in the summer as more consumers will get vaccinated and start returning to work.

The China’s jewellery and watch sales in April were 31% higher than in 2019 (and 64% higher than in the previous year) driven by the further economic recovery and consumer confidence.

According to Bain, the global luxury sales could return to their pre-pandemic levels this year supported by the unexpectedly early economic recovery in the US and strong growth in China. In the first quarter of 2021, the luxury revenue was 1% higher than in 2019, mainly due to the growth in the domestic spending on luxury goods in China. According to Bain estimates, there is a 30% chance that the market will continue to grow throughout the year. However, the more likely scenario is that there will be a growth peak in the first quarter this year, and then the luxury consumption will slow down due to cooling dynamics within the key markets and still limited tourism.

IMPACT OF THE INDIA’S COVID-19 CRISIS

According to the review published by VTB Capital in early May, the fundamentals of the market look very strong, but the future midstream activity is now under threat, given the worsening situation with COVID-19 in India. The Indian diamond cutting sector did not close during the new restrictions in the country, however, the cutting and polishing units had to decrease their capacity by 10-50% in April, and the manufacturers of small polished diamonds were mainly affected. The main Surat cutting and polishing district in India saw an exodus of workers, which could also negatively affect polished diamond manufacturing in the near future. The Bharat Diamond Bourse, the main in India, was closed in April but later on, it continued to operate with restrictions.

With the onset of the second wave of COVID-19 in India, the industry participants optimized their capacities and adopted strict preventive measures, Deputy CEO of ALROSA Alexey Filippovsky said on May 18. “There is no quarantine, and if the Indian cutters and polishers take all necessary measures to combat the spread of COVID-19, there will be no new restrictions on the operation of their facilities,” he said.

Filippovsky said that 70-80% of capacities in the industry were loaded at present.

This is enough to process all the rough diamonds coming from the mining companies as the total supply of rough diamonds has declined since the pandemic started. “In the fourth quarter of 2020 and the first quarter of 2021, when most of the suppliers were actively reducing their inventories, the midstream was able to ‘digest’ all these volumes, despite the current COVID-19 restrictions. Therefore, there is no reason to believe that bottlenecks are currently developing in the midstream,” says the ALROSA’s top manager.

DIAMOND MINERS’S SALES

As a result, ALROSA does not expect its sales to decline due to the coronavirus impact on the Indian cutting and polishing sector.

In April, ALROSA increased its sales of rough and polished products by 12% compared to March, up to $401 mn (of which rough diamonds account for $383 mn). The results were supported by the company’s successful high-quality rough diamond auctions, as well as by strong polished diamond sales amid the sustainable high demand for jewellery in the key markets.

Meanwhile, the De Beers’ sales during its fourth sight held from May 3 to 18 were by 34% below the historical averages for that period. The company sold its goods for a total of $380 mn, which is 15% lower than during the previous sight ($450 mn).

“We continue to see robust demand for diamond jewellery in the key US and China consumer markets,” Bruce Cleaver said in a statement. However, the scale of the second wave of covid-19 in India has led to reduced midstream capacity and subsequently lower rough diamond demand, during what is already a seasonally slower time of year for midstream purchases,”- said chief executive of De Beers Bruce Cleaver.

Rapaport estimates that the decline in the De Beers’ sales is due to the limited supply of rough diamonds following a sharp decline in the inventories in January-March and the coronavirus situation in India. At the same time, the prices remained unchanged in May, Rapaport said.

The reduction was quite expected, given the seasonal character of trade and the situation with the spread of COVID-19 in India, and could potentially give an idea of ​​the ALROSA’s sales results in May, BCS believes.

Despite the De Beers’ poor performance, in the event of a coming decline in the number of COVID-19 infections in India, the inventory replenishments in the midstream and the limited supply of rough diamonds could trigger a new diamond price rise, VTB Capital said.

NEW PRICE GROWTH

The prices for rough diamonds that have risen by 9% since the beginning of the year may continue their growth as the demand remains stable and the inventories are limited, Filippovsky believes.

“The market is in a structural imbalance, the supply is limited, going down by at least 20% compared to 2019. At the same time, the demand continues to exceed our expectations. Raising the prices is the only way to match supply and demand. I think there is still room for the continued significant rise in the rough diamond prices that we saw in the fourth quarter of the last year and the first quarter of this year,” he says.

At the same time, diamond production remains low. In the first quarter, the global rough diamond production fell by 22% to 24 mn carats, driven by the suspension of the operations at Ekati, the closure of the Argyle mine at the beginning of the year, and the 6-7 percent cut in the major miners’ production.

Even the relatively aggressive price increase that has been undertaken by the diamond miners over the past 6 months was accepted by the market surprisingly calmly, Filippovsky notes. The ALROSA’s clients preferred to buy 100% of their maximum allocations, although the company allowed its clients to completely reject the allocations.

ADVANCE PAYMENTS AND whether THE DEMAND is SPECULATIVE

Moreover, most of the customers made an advance payment for future deliveries, which was rather unusual. “Buyers are willing to make significant advance payments to secure the future diamond supplies. This practice started in the fourth quarter of last year and continued and even intensified in the first quarter of 2021. The majority of cutters and traders - amid the shortage of goods on the market - are concerned that they may not fulfill all orders made by retailers. Using the advance payments, they want to increase their ‘share of the pie’,” explained ALROSA’s Deputy CEO.

By the end of March, the advance payments for the rough diamond supply in April-May were estimated at 21 bn roubles (about $280 mn).

If the market continues its growth and the demand outstrips the supply, the advance payments may continue in 2022, Filippovsky predicts.

According to ALROSA, the strong demand is not speculative. “Judging by our communications with the cutters and polishers, the midstream learned a lesson in 2018 and 2019 and is not going to accumulate rough diamond inventories,” said the top manager of ALROSA. In turn, the “majors” are focused on meeting the real confirmed demand in order to prevent overstocking and price volatility.

deferred DEMAND FOR TRAVEL

Another risk for the rough diamond market is the outflow of funds from the jewellery to other luxury spheres, primarily, travel when the economy is fully reopened. In April, the American consumers spent most of their money in the spheres that previously faced the pandemic restrictions, especially, at restaurants, and the total spending for restaurants surges for the second consecutive month, according to Mastercard’s study.

As soon as the borders reopen and the consumers begin to travel, the diamond market will plateau, admits Filippovsky of ALROSA. “The question is when it will happen. Initially, we thought that this would happen in April-May, but, as we can see, it’s got a long way to go,” he says.

The moderate recovery in the tourist activity, which is already taking place, has not affected the consumer sentiment in the midstream that receives a large number of orders from retail, the top manager says.

Igor Leikin for Rough&Polished