The diamond industry faced extraordinary challenges in 2020 as the coronavirus brought activity to a standstill throughout the pipeline. Mines were placed on care and maintenance, manufacturing units shut down, trade shows were canceled, and dealers and jewelers were limited to online selling as Covid-19 spread across the globe.
Not since World War II has De Beers had to cancel a sight, the company’s executives noted when lockdowns and global travel restrictions prevented them from selling rough in April. The pandemic left the trade unable to do business for an extended period.
Polished prices declined in most categories over the year, as the following pages of the Rapaport Diamond Price Statistics Annual Report show. The Rapaport Diamond Index (RDI™), which is based on changes in the Rapaport Price List, declined across the board — the exception being D- to H-color, IF- to VS-clarity goods in 0.30- and 0.50-carat sizes. The list price for D, IF in the 0.70-carat and 1-carat ranges also ended the year higher, signaling improved investment demand during the crisis period. And despite the overall reductions, the RapNet Diamond Index (RAPI™) for 1-carat diamonds increased 5.8% for the year (see graph on Page 61).
That said, the rise of the RAPI — which tracks average asking prices on RapNet — does not indicate that demand was stronger at the end of 2020 than at the end of 2019; it was not. Rather, the index shows that the market has a healthier supply-demand balance. Average discounts are lower, meaning demand is stronger relative to the supply available in the market.
Amid all the turmoil, the trade managed to deplete excess polished inventory that had weighed on the midstream over the previous three years, and that lower supply helped support prices.
The industry’s journey through 2020 was not a linear one, nor was the impact consistent across all categories. If anything, the coronavirus influenced the diamond market in different ways at different times of the year.
The first quarter
The diamond trade began 2020 in an optimistic mood after a relatively good 2019 holiday season. Rough buying was buoyant in January as manufacturers anticipated strong polished demand from dealers and retailers looking to replace sold inventory — as often occurs during the first quarter.
However, sentiment weakened as the coronavirus surfaced in China, shutting down the retail sector there during its most crucial time: the Chinese New Year. The lack of sales during the January 25 lunar festival left Asia Pacific jewelers with high inventory.
While the virus was initially confined to China, the global trade felt an immediate impact. The lack of Chinese tourists affected European and US luxury brands. Liquidity among manufacturers declined due to the dramatic drop in sales to China, and concerns arose about delayed payments from Chinese clients.
Polished suppliers considered deeper discounts to raise liquidity. Midstream inventory was on the rise due to lower sales and to manufacturers having raised production after buying so much rough in December and January. By mid-March, as the coronavirus spread to the West, discounts had increased to more than 45% below the Rapaport Price List. Polished prices dropped, with RAPI for 1-carat diamonds down 7% in the first quarter.
Economies in lockdown
Governments around the globe implemented lockdowns in April to curb the spread of Covid-19. Retail jewelers, diamond manufacturers, and trading and mining companies were forced to cease operations. De Beers and Alrosa canceled their rough sales, and polished trading was limited to online deals, with opportunistic buyers pushing for even greater discounts.
Meanwhile, China started to open again, with signs of pent-up demand in the bridal and female self-purchasing categories. But while dealers saw some orders from China and Hong Kong, they remained frustrated by the inability to engage in normal trading.
Bourses and service providers had resumed operations by mid-May, albeit with limited capacity. US retailers were planning to reopen, with some adjustments for the changes in customer engagement. In the new digitized, low-touch economy, jewelers had to invest in e-commerce and emphasize in-store hygiene, virtual consultations, and curbside pickup for their brick-and-mortar locations.
Nonetheless, travel restrictions kept cross-border trading constrained. De Beers started holding sights again, but with viewings in Antwerp and Dubai rather than at its Botswana home base. The major miners had kept prices unchanged since the start of the crisis and were prepared to sell fewer diamonds at higher prices. They were waiting for the market to recover before making an adjustment. Prices at rough auctions were down 20% to 30%.
Rough demand remained very low as dealers and manufacturers focused on how to reduce inventory. At the same time, the mining companies were building up their own inventories of rough as production resumed despite the dearth of demand. There was more than enough rough and polished in the pipeline to satisfy the market’s needs.
Polished prices stabilized in certain categories during the second quarter, largely due to the lack of trading activity. The RAPI for 1-carat diamonds rose 1% for the April-to-June period.
Scarcity emerges
By mid-year, the industry was slowly adapting to market conditions as Covid-19 infections continued. Governments renewed their restrictions, which disrupted efforts to reopen businesses in major diamond trading and cutting centers. Many Surat-based manufacturing units remained shut, leaving the midstream focused on selling and depleting their inflated polished inventory.
Shortages started to emerge in certain categories, and suppliers with the right goods did well. Expectations started to rise for the US holiday season, and cutters resumed operations, anticipating a more robust fourth quarter.
Sentiment improved as trading levels rose in July and August. Dealers struggled to fill orders due to scarcities and shipping delays. Sensing the uptick in polished demand, De Beers cut its rough prices by 5% to 10% in August. Lower rough prices enabled manufacturers to gain better profit margins just when demand was starting to rise. The reduced inventory levels supported polished prices heading into the holiday season, with RAPI for 1-carat goods up 8.2% in the third quarter.
Holiday optimism
The focus soon shifted to retail as consumers started their holiday shopping earlier than usual to avoid overcrowding in the final moments of the season. Besides, after such an uncertain year, there was always the possibility that another lockdown might prevent them from making those last-minute gift purchases. Jewelers placed a strong emphasis on e-commerce and focused their marketing efforts on social media platforms.
Polished demand was selective, and suppliers continued struggling to fill orders due to the scarcity of stones in the more popular categories. Rough demand spiked in the final two months of the year as manufacturers ramped up their polished production.
Diamantaires took their end-of-year break with some optimism that they could make a decent start to 2021, anticipating the usual post-holiday inventory replacement they’d missed out on in the first quarter of 2020. There was also some expectation that pent-up demand would break loose over the Chinese New Year amid reports of a swift retail recovery in mainland China.
Dealers and manufacturers now see the potential for better profit margins, following a drop in rough prices and a continued increase in polished prices for certain categories during the final months of the year. The 1-carat RAPI rose 3.8% in the fourth quarter.
Still, the continued spread of Covid-19 is tempering optimism, even amid the rollout of vaccines. But while the trade reflects on a year of crisis, it also has some positive takeaways. Most notable was the reduction of polished inventory, which ultimately left the industry in a healthier position at the year’s end than at its start.
The challenge moving forward will be to curb rough buying, as there is a lot of production that has been mined but not sold. Among the industry’s priorities will be to stimulate demand during the recovery stage of the economy, when most consumers will still be in survival mode, allocating more of their budgets to necessities than to luxury items.
Greater diamond jewelry sales will have a domino effect on the rest of the trade, empowering the miners to offload their rough inventory in a reasonable manner. Keeping that supply-demand dynamic stable will be vital for the industry as it navigates the challenging environment in the year to come.
Article from the Rapaport Magazine - January 2021. To subscribe click here.