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The Road to Recovery

The diamond industry is in its healthiest state in over a decade, but it will need to be proactive if it wants to maintain that progress.

Jul 6, 2021 9:14 AM   By Avi Krawitz
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RAPAPORT... There is a buoyancy about the diamond market that has surprised many at the halfway point of the year. Considering the struggles the industry has endured in the past decade, diamantaires aren’t necessarily used to the positive forces shaping the trade in 2021.

“Coming off a difficult last year, there’s no doubt the diamond industry performed better than most [industries],” says Paul Rowley, executive vice president of diamond trading at De Beers. “The market has shown remarkable resilience.”.

Not that the industry grew in 2020; growth was still negative year on year, with jewelry retail sales down by about 10% to 12%, according to De Beers estimates. But by most accounts, the diamond trade — along with the broader luxury sector — gained market share during the pandemic as consumers spent less on travel and had more discretionary dollars for buying gift items. .

Rising engagement

This year, the industry is already seeing strong growth. US jewelry sales surpassed pre-pandemic levels between March and May, according to Mastercard SpendingPulse. Revenue from the category was up 30% in March compared with the same month in 2019, followed by increases of 14% and 45% for April and May, respectively, the credit card research company reports. Diamond jewelry sales over those three months were 30% higher than in 2019 and were triple last year’s levels, according to estimates from the Natural Diamond Council (NDC).

China has similarly bounced back from the lows of the Covid-19 pandemic. Jeweler Chow Tai Fook registered its highest annual revenue and profit in seven years during the fiscal year that ended March 31. Sales in the second half were its strongest on record for any six-month period.

Such a robust retail recovery in both the US and China — the two largest markets for diamonds — “was probably better than we could have expected,” Rowley says. The rebound also stimulated demand for polished goods in the midstream — manufacturers and dealers — as jewelers needed to replenish inventory they’d sold.

On top of the sales growth, there has been a notable improvement in consumer sentiment toward diamonds, observes NDC CEO David Kellie, whose organization runs marketing campaigns to bolster the public’s desire for diamonds.

Millennials are heavily engaged with the product, he reports, pointing to social media and other digital metrics such as spontaneous Google searches. Indeed, the coronavirus forced the industry to invest in digital, setting a new normal for doing business, Kellie notes — though he says it still has a long way to go and needs to do a better job of converting the interest into sales.

Supply shortages

In the midstream, steady trading and a positive mood defined the first half of the year. Yet there is still a debate over whether the force behind the recovery is a rise in demand, a shortage of supply, or a combination of the two.

Approximately 20% of supply made its way out of the system during the depths of the crisis, Rowley estimates. Manufacturers and dealers were able to diminish their inventory, selling online while freezing both rough buying and polished production for a relatively long time. Trading and manufacturing swiftly resumed as the spread of Covid-19 declined in the second half of 2020.

However, polished shortages emerged again when India experienced another wave of coronavirus infections this year, leading the government to impose restrictions on businesses in April and May. The diamond industry continued to operate, since it qualified as an essential service, but manufacturing output fell as many workers stayed away. A backlog of goods at the Gemological Institute of America (GIA) grading labs in Mumbai and Surat further aggravated the scarcities.

“Sourcing in certain categories is an issue,” remarks Russell Mehta, managing director of India-based manufacturer Rosy Blue. “The market is very shallow right now in those areas, and suppliers don’t have depth of inventory.” If there is a big order in the market from a large retailer, and those goods are difficult to find, it will naturally push the price up, he observes, adding that the scarcities are mainly in certified goods.

Elliot Krischer, president of the New York Diamond Dealers Club (DDC) and a partner at polished seller Esskay Gems, agrees that supply shortages are supporting the market. But he also sees high demand: Consumer spending went up after the government sent out stimulus checks, and people are now getting engaged again after putting off wedding plans during Covid-19. Those factors will continue at least until the end of the year, he predicts.

Rowley, for his part, believes “the fundamentals of the industry today are probably the best they’ve been for at least a decade.”

Slimming margins

With demand outpacing supply in the first half of 2021, polished-diamond prices have maintained their upward momentum. As of press time on June 24, the RapNet Diamond Index (RAPI™) for 1-carat diamonds was up 7.6% since the beginning of the year.

Furthermore, the polished shortages led to strong rough demand, even as rough prices increased and manufacturers’ profit margins slimmed. Rough prices have risen about 7.1% so far in 2021, according to Rapaport estimates, and by 13.6% since September and October 2020, when De Beers and Alrosa made the last of their pandemic-related price cuts. The two major miners had adopted a policy of keeping their rough prices stable and supply low in the early stages of the crisis, when people may not have had the liquidity or the courage to buy anyway, Mehta recalls.

But buying has been buoyant since August 2020 as jewelry retail and polished-diamond sales have steadily improved. The combined rough sales of Alrosa and De Beers more than doubled year on year to $3.9 billion during the first five months of 2021, and were 10% higher than in the same period of 2019. Both companies have reduced the inventory they built up during the pandemic.

Changes in sight

Still, recent De Beers sights have not been excessively large, Rowley points out. The company sold $385 million worth of rough in May and $470 million in June. The relatively low sales are partly due to production constraints, with disruptions at mining sites in southern Africa and Canada, parent Anglo American reported in its first-quarter update.

On the global scale, production volume was down by about 17% year on year in the first quarter of 2021, according to Rapaport estimates. It was only from April onward last year that the spread of the pandemic started to weigh on the market, so the base comparison for that period was still strong; total output for 2020 ultimately dropped by about 18%. Since most mines have returned to full capacity by now, forecasts for the whole of 2021 show production rising about 4%. However, that’s still well below pre-pandemic levels, and the recent closure of the high-volume, low-value Argyle mine in Australia has further depressed production.

Another factor in De Beers’ lower sales is the company’s recent policy of selling according to actual demand levels — part of a drive to improve efficiency in the market. The reduced supply is helping the market align with the new normal, Rowley explains.

De Beers has divided its sightholders into three categories for the contract period that began on April 1: manufacturers, dealers, and “integrated sightholders,” its term for clients that are retailers. The company is providing more rough above 0.75 carats to beneficiation centers — countries like Botswana and Namibia, which want to cut and polish more of their rough locally to diversify their diamond industries beyond mining.

That means De Beers is prioritizing clients with factories in Botswana and Namibia, followed by the integrated sightholders that pay an added fee for more specialized services at the sight, explains one sightholder, who has requested anonymity. Next in line would be international sightholders, or those that only manufacture outside of beneficiation centers, and then dealers. De Beers wants to see fewer boxes selling on the secondary market, and more going directly to manufacturing, the sightholder says.

De Beers’ client list for 2021 does include fewer dealers than before, according to a January report by Rapaport News. However, Rowley dismisses claims that the new policy is cutting out rough traders or the smaller manufacturers that rely on the secondary market for supply. “We spent a long time understanding where our rough is finally ending up and trying to consolidate the type of goods going to specific contractors and making sure they get the product they need,” he says. Besides, “we know that no one manufactures everything.”

There’s been “a change of dynamics in many different ways in the market,” he adds, resulting in “a tighter distribution and a more efficient route to market.”

The heartbeat of manufacturing

With all these efforts to tighten up the distribution system, some fear there may be job losses in manufacturing, particularly with the low-value Argyle supply no longer available. The Argyle rough required a different skill set, and no one else is going to replace those goods, comments a manufacturing executive who prefers to remain anonymous — though he acknowledges that lab-grown diamonds may fill that supply gap.

Both Rowley and Mehta expect Surat to remain the heartbeat of diamond manufacturing. India still adds value with its know-how — including its expertise in smaller stones — as well as its infrastructure and lower labor costs, they maintain. And while De Beers may be the largest supplier of 0.75-carat and larger goods to beneficiation countries, rough from other miners — such as Alrosa and those that sell on the auction and tender circuit — is still going to India for polishing, Mehta notes.

E-commerce implications

The shift to a more efficient pipeline is also changing the market dynamic for polished dealers, particularly since manufacturers have invested heavily in improving their online sales platforms.

“The model for selling certified goods has completely changed, especially with the push toward internet-based business,” says Mehta. “That’s a trend that won’t be reversed. It’s now always going to be more direct selling to retailers all over the world.”

The DDC’s Krischer recognizes the trend but is confident that dealers will maintain their place in the market. “The dealer is the most necessary part of the diamond chain,” he emphasizes, arguing that only dealers have the network to guarantee a volume of similar diamonds for a retail program. They are also the ones willing to provide credit for the length of time that jewelers demand, and to offer goods on memo, he says.

In today’s market, everyone needs to consider where and how they add value to the distribution chain, states Mehta. “Maybe you can get away without it in the short term, but unless you’re bringing value, you will be forced out in the long term.”

Proactive approach

Concerns about market consolidation reinforce the need to increase consumers’ desire for diamonds, says the NDC’s Kellie.

“If we’re selling more diamonds, then 98% of the problems facing the industry go away,” he contends, noting that the trade is naturally pessimistic and tends to focus on trade-specific “distractions” such as pricing, bank financing, and the threat of lab-grown diamonds. Instead, he says, the trade should concentrate on how to grow demand.

While the industry has rebounded strongly from the coronavirus slowdown, Kellie notes that it has “massively underperformed” global economic growth over the last 10 years. To reverse the trend and keep the market share it gained in the past year, the trade must continue to raise its digital standing.

Until the pandemic, he stresses, the industry was not only lagging in the digital space, it had not adapted at all. While most point to the 2008 financial crisis as the start of the industry’s decline, Kellie notes that the e-commerce and social media revolution began around the same time, with the launch of the iPhone and the development of platforms such as Twitter and Instagram. “For me, there’s a direct correlation between our underperformance [and] the lack of expertise in digital.”

The good news is that diamonds are an amazing product, and the industry has a wealth of interesting stories to tell, Kellie continues; it just needs to be proactive. “It’s really up to us whether growth is going to last or not — how we invest as an industry, how we take on digital, [and] how we associate with the culture of travel and experiences that are expected to return.”

This article first appeared in the July 2021 issue of Rapaport Magazine.
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Tags: ABN Amro, Avi Krawitz, Chow Tai Fook, David Kellie, De Beers, diamonds, Erik Jens, Esskay Gems, GIA, mastercard, Natural Diamond Council, paul rowley, Rapaport, rosy blue
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