The last year has instilled an idea into the minds of most diamond market analysts that the only obstacle for its growth may be the limited global diamond production. This thesis is strongly supported by diamond miners. Increasingly, their presentations focus on resource depletion and capital-intensive projects related to developing a few new deposits or extending the life of the existing ones.
At the same time, the final part of the diamond pipeline, jewellery retail, is expected to enjoy a steady consumer demand. There are certainly grounds for optimism as the key market, the United States, has been showing its double-digit growth in jewellery sales since July 2020. But as inflation rises, there are also growing risks that the deeper concerns at the prices can interrupt the jewellery retail’s steady growth dynamics. The big question is whether the diamond market players will be able to shift the burden of their rising costs onto their buyers while maintaining their desire to purchase jewellery.
Diamond production and sales
In 2020, the global diamond supply plummeted by 23% from a record 150 mn carats in 2017-2018 due to the closure of the Argyle mine and the mothballing of low-margin assets during the pandemic. In 2021, the global production will increase by 4% year-on-year to 112 mn carats, which is still below 138 mn carats reached in 2019, Renaissance Capital says in its review.
Last year, ALROSA brought the deposits that were closed or mothballed during the pandemic to their maximum productivity, and in the first half of this year, the company may make an investment decision to restore the production at its Mir mine that can produce 2.5-3 mn carats annually after 2025. Until 2025, ALROSA plans to add an average of 1 mn carats to reach the total production of 35-36 mn carats. Meanwhile, this will not change the situation on a global scale.
Other diamond miners are constrained in their ability to increase their production, and this means that the global diamond production will be stable, that is, significantly lower than 3 to 5 years ago, says ALROSA CEO Sergey Ivanov. In his opinion, due to the limited supply and the growing global jewellery consumption, rough diamond prices should rise in the coming years.
The statistics of the last trading sessions in 2021 confirmed the opinion about the shortage of rough diamonds available for sale against the background of the depletion of the diamond miners’ inventories (formed in previous years) by the middle of the year. The ALROSA’s sales in October were 7% below the historical average, and down 5% in November. The December’s figure ($254 mn) was 32% below the historical average, although this is partly due to the part of the trading session postponed to January.
De Beers’ revenue at Sight 9 in the run-up to Diwali was 5% below the historical average and its revenue at Sight 10 was 31% lower (and 26% below compared to 2020). The performance was affected by the seasonal closure of the beneficiation facilities in South Africa, commented De Beers CEO Bruce Cleaver. The top executives of both companies expect a strong demand for rough diamonds in 2022 as the miners’ inventories are sold out and the demand for rough diamonds remains strong.
The rough diamond prices are supported by a rush demand in the midstream and key jewellery retail markets, especially in the US and China, Petra Diamonds says in its quarterly report. Taking into account the continued pressure on the supply, the significant decline in the global production, and promising retail demand forecasts for the holiday season, Petra remains positive for 2022.
Rising prices
Amid the decline in sales at the last trading sessions held by the diamond miners in 2021, the rough diamond prices continued to rise. ALROSA announced a slight increase in prices at its October trading session, De Beers announced an increase in prices for small stones at its November sight. Meanwhile, the secondary market prices rose by another 5-10% at the end of November driven by concerns about the supply disruptions to the African countries amid the Omicron variant wave.
The diamond miners do not create an artificial shortage in the market, just demand exceeds supply many times, assures Sergey Ivanov, CEO of ALROSA. “Those signals from the demand side seen at the end of the last [2020] year have fully materialized, even exceeded our expectations. We sell all the rough diamonds we produce. We have a historically record low inventory level. Our customers are ready to buy 2-3 times more than we can offer,” he said.
According to analyst Paul Zimnisky, the balanced supply makes the upward trend in rough diamond prices more stable than it was in previous years.
In 2021, the global rough diamond sales, according to Renaissance Capital, grew by 63% reaching $13 bn, which demonstrated the best dynamics since 2010. The demand for diamond jewellery in 2021 increased by 20% to $82 bn and exceeded the level of pre-pandemic 2019. The diamond price index rose by 12% as a response to this increase in demand.
The rise in prices will continue in 2022-2023, according to Renaissance Capital. It is explained by the continuing gap between supply and demand. De Beers and ALROSA sold 19 mn carats of rough diamonds in excess of their diamond production in 2021, bringing their inventories down to their lowest level since 2008. As a result, in the coming year, the diamond miners’ sales will fall down to the level of 2012. At the same time, the demand for jewellery will rise up to $85-87 bn in 2022-2023. To balance the market, a 19% increase in the rough diamond price index in 2022 will be required and another 5% increase in 2023.
In 2024-2025, the rough diamond prices may decline due to a potential increase in supply amid the steady demand in jewellery retail; after that, Renaissance Capital expects a moderate price growth by 3% per year.
Record breaking demand
Rapaport estimates that the holiday season was the strongest one in recent years. In November, the sales in specialized jewellery stores increased by 51%. Thanksgiving holiday weekend jewellery spending increased by 78%, according to Mastercard SpendingPulse. In general, in November-December, the US jewellery sales grew by 32%, including an increase by 11% in e-commerce and by 8% in brick-and-mortar stores. Signet’s third-quarter like-for-like sales were up 19% year-on-year (and up 37% compared to 2019), also suggesting a positive holiday sales outlook.
In China, the jewellery sales in November grew by 7% compared to 2020 and were 61% higher than in 2019. Industry reports show that the China’s retail is improving, and jewellery manufacturers are ramping up their production ahead of the Lunar Festival (January 31 to February 6, 2022), VTB Capital writes in its review. A strong final demand supported the polished diamond prices as during the month, smaller polished diamond prices rose by 1-3%, larger stone prices were up 6%-9%.
The retailers’ inventory turnover levels remain at a 7-year low, and online reports of out-of-stock items quadrupled in November compared to the same period last year. This means the need for significant replenishment of inventories throughout the value chain in the first quarter of 2022, according to VTB Capital.
A good demand is observed both in the US and in China, as well as in India, where the jewellery sales in the run-up to the Diwali season have declined for two years in a row, ALROSA CEO Sergey Ivanov states.
An important factor positive for demand is the active opening of new jewellery stores in China, the second largest diamond jewellery market, notes Paul Zimnisky. According to him, this is a feature of the Chinese economy transformation, which is moving from a focus on infrastructure to a greater focus on a consumer.
In the first ten months, US jewellery sales outperformed the 2020 ones by 9%. For the year, the sales will be between $94 bn and $95.3 bn, up 51% to 53% from 2020, industry analyst Edahn Golan predicts.
Rings dominated the US specialty retailer sales by value in November, followed by earrings, bracelets and necklaces, Golan said based on the data provided by Tenoris, a trend analysis firm that analyzes the data from jewellery retailers. According to the Tenoris statistics (Mr. Golan is among its founders), the rings accounted for almost half of all the jewellery sales in November and cost $1,855 on average. Among them, the engagement rings sales were the priciest ones, which jumped 44% year-on-year, and their average retail price was up 26% to $4,734.
“Jewelry sales were boosted by a need to spend, look good, and provide comfort. But the priciest items were often purchased as an expression of love,” concludes Golan.
In his opinion, two groups of buyers are behind the surge in demand for engagement rings - the couples who realized there was no point on waiting any longer and decided to tie the knot, and those who had already made the decision but whose weddings were delayed by the pandemic. “With a reduction in other expenditures, they could allow themselves to spend more than they would have otherwise,” Golan explains.
Possible impact of inflation
The risk in the short and medium term may rather be due to the macroeconomic factors, and the main one is the rising inflation, Paul Zimnisky believes. The mining costs rise with the higher labour costs, as well as the fuel, equipment and logistics costs, all of which will be shifted on to the polished diamond prices, affecting the consumer demand, he explains.
History abounds with examples when a rising inflation can have an opposite effect on the jewellery market, at least if this period is not too long. During the cycle of the rising inflation in the US from 1970 to 1974 (annual inflation then rose from 5.8% to 11%), there was a sharp increase in jewellery sales at the beginning, according to Renaissance Capital. And although the jewellery sales began to decline gradually as they followed the dynamics of the real disposable income of the population, they rolled back to the level of 1970 in 1982 only. So, we can conclude that the Americans have long considered jewellery as a defensive asset and a “safe haven” against inflation.
Will the situation repeat itself if the world economy enters a period of long inflation growth? According to most economists, the current surge in prices was caused not only by the disruptions in logistics due to the pandemic, but also by the monetary policy easing by the Federal Reserve System. In terms of duration, this stage can beat all possible records thanks to such a powerful pro-inflationary factor as the global transition to a “green” economy accompanied by rising energy and metal prices. The rising prices in basic sectors such as dwellings and cars will sooner or later put pressure on the consumers’ willingness to spend money on jewellery.
US retail sales data in December may evidence that the inflation may have already reached the point where it can decrease the consumers’ purchases. The retail sales unexpectedly fell by 1.9% compared to November, while the analysts expected just 0.1%. This figure fell for the first time in five months, and the rate of decline has been the fastest since February 2021. Among other things, this is due to an increase in consumer prices, as well as the spread of the Omicron strain. Without cars and fuel, the figure fell by 2.5%.
An important difference from the situation 50 years ago maybe that the global jewellery market entered that cycle of the growing inflation with a practically zero sales growth, while in 2021, it showed a 20% increase. If it was not possible to correct at those time, the situation is radically different now. Moreover, the “fuel” for the market growth - pent-up demand and the money saved during the pandemic restrictions - may decrease as the restrictions on flights are lifted.
And now, looking at the strong results of the holiday season sales amid the 7% annual inflation in the United States - a record one since 1982 - everyone couldn’t help but wonder whether the sales will stay at their all-time high level? In their optimistic analysis of the market based on the fundamental factors, the diamond miners rely on a persistent shortage of rough diamonds and consider the growth in retail demand as a kind of a constant resulting from this imbalance, but, perhaps, the households’ reluctance to spend on jewellery amid the inflation can spoil their game.
Sergey Bondarenko for Rough&Polished
