International Diamond Market Snapshot – October 2021

What a fascinating diamond market. As predicted, the diamond trade has rebounded; and rebounded solidly. Yet clearly the world has not yet fully emerged from the terrible clutches of the COVID-19 pandemic.

As many countries still try to access and deliver vaccines, the two key diamond consumer markets of the US and China have almost returned to pre-pandemic ways of living and the sales of diamond jewellery have rocketed.

The natural rough diamond production is ‘back’ and demand is even stronger.

Coming out of the pandemic, producers returned to mining and unearthing product. As the traders and cutters in the middle market have enjoyed good cashflow, healthy balance sheets and improved liquidity demand and rough sales have surged since Q3 2020. This has resulted in the major mining companies being unable to produce enough product to satisfy demand.

Alrosa talks of operating on minimal stocks and is even buying rough from the Russian strategic stockpile at the Gohkra to complement is current production. De Beers also reports “production challenges” as it struggles to meet demand. Prices understandably are rising, and producers are enjoying excellent rough sales and for the ‘non-majors’, this is also great news.

Even the more economically marginal mines with high costs and/or lower value productions are benefitting from the rising tide. Rough demand has been relentless for the last 12 months and there is no sign of this abating.

As an example, Alrosa recently reported that its rough prices are up 22 per cent year-on-year, and up 10 per cent in the last quarter alone.

Almost all ranges of diamonds are in demand.

Even more surprising is that -3 grainer diamonds (below 0.66-carat) are seeing price increases. This is an area that has long been considered in permanent decline, principally due to the arrival of small lab-created diamonds and yet, today, prices are firming because there is demand.

This is a very healthy situation for the diamond miners and while the market ‘cooled’ a little in September we are approaching the key retail season of the year and the market is stronger once again. We can expect excellent results to be reported pretty much across the board for 2021.

The large stones bonanza continues from the usual miners; it seems almost a non-event these days when we see reports of 200 or 300-carat stones (or bigger) being discovered.

Rough trading and the middle market

Who would have thought that a pandemic would have been good news for diamond traders?

The middle market (traders and manufacturers), who have long suffered eroding operating margins and pressure from the strong opposing ‘book-ends’ of the diamond pipeline (mining companies and retailers), have exited the pandemic in robust shape with low stocks and healthy liquidity.

Since then, traders and manufacturers have enjoyed a profitable return to strong business activity. The fact that the surge has slightly abated has allowed everyone to take a slight breather. Traders need to keep an eye on the profitability of their purchases and their margins.

Polished trading and pricing

Of course, the real driver for polished sales is consumer demand, which ‘pulls’ everything else. Polished demand is extremely strong which has allowed the polished sellers to reduce inventories and rebalance their businesses. Despite the obvious challenges, a JCK trade event took place this year, and feedback was of a successful show, albeit with fewer overseas visitors.

Polished prices are up on average 7.7 per cent since January (see graph below). As rough has become more expensive, polished prices need to keep increasing. This is the largest challenge to the industry if we are to see a step-change in the diamond business.

Marketing and raising retail price points are the key challenges here.

Click chart to enlarge. Source: I. Hennig Market Report – October 2021

Diamond jewellery retail

The two most important markets, USA and China, are performing extremely well. This is being driven by a predicted ‘emotional rebound’ and surge in diamond jewellery acquisition/gifting post-pandemic.

In both markets, the key players are reporting excellent improved sales results. Chow Tai Fook is planning to increase by 2,000 its number of retail stores, in both Mainland China as well as through regional expansion into Malaysia and the Philippines. Tiffany & Co. is changing its marketing strategy under LVMH ownership and has even hired Beyonce as its new brand ambassador.

Unsurprisingly, online jewellery retail sales have shot up. This trend, which was happening anyway, has been accelerated in the last 18 months by COVID.

Expectations for the festive season are very high and growth figures will be impressive.

Lab-created diamonds

This segment is becoming increasingly important to the industry. Ignoring the issues of inter-segment disputes regarding nomenclature, marketing, and/or environmental impacts of mining production, it’s fair to say that rough lab-created production is definitely increasing.

Both De Beers and Diamond Foundry have increased production capacity. Diamond Foundry has recently announced a new production facility in Spain and is aiming for annual production of up to 10 million carats. These are not small numbers; for context, let’s take 2020 natural rough diamond production at 100 million carats; post-pandemic 2021 should be around 120 million).

In October the biggest lab-created stone ever graded by IGI was just reported as a 14.6-carat F col VS2.

Polished lab-created prices, meanwhile, have taken a big hit; prices are in continuous decline. This means the rough also drops in price. Lab-created prices are expected to fall even further.

That said, the lab-created market remains viable due to the extremely low production costs.

Increasingly, retailers such as Chow Tai Fook in China are trialling lab-created diamond jewellery ranges.

It is arguable that De Beers’ strategy of differentiating natural diamonds from lab-created is working. De Beers is selling larger lab-created stones now and have introduced a “Finest” range for higher-priced product, however; prices remain deliberately low.

It is a fact that some cannibalisation of the natural segment will happen. Indeed, itis happening now as consumers switch from natural to lab-created diamonds, and this is for bigger and bigger sizes too.

Watch this space!

Fancy colour news

The biggest recent development in fancy colours has to be the final Rio Tinto Argyle Pink Tender.

The actual results are never published publicly, yet the word on the street is that prices achieved broke all previous records.

A notable sale recently took place at Sotheby’s in Hong Kong; this beautiful ring with a 3ct VS1-clarity, type IIb blue diamond and two modified triangular brilliant-cut, fancy-pink and fancy-intense-pink diamonds sold for $4.5m.

Fancy prices across the board are reported by market commentators to have increased during the last quarter – blues the most (+4 per cent), followed by pinks (+3 per cent) and then fancy yellows (+1 per cent).

It will be interesting to see how the impressive ring with the 6.75-carat heart shape fancy vivid purple-pink does at the Christie’s Magnificent Jewels sale in November. The pre-sale estimate is US$10.8 million.

Looking forward

So…what does all this mean for the diamond market going forward?

For rough diamond production the ‘majors’ are playing a very smart game post-pandemic; keeping the lid on production will see rough prices keep increasing. All miners will benefit from this to such an extent that it might even make less desirable exploration/mining projects viable.

Some new productions might appear, such as from Luaxe in Angola; yet it is hard to see where any major new supplies will come from. Production is expected to be relatively stable globally for the coming few years. This means that all things being equal, rough prices will only increase further.

That signals good times ahead for diamond miners it seems!

For the rough trading and the middle market – always a vibrant, active space in the industry – these are good times. Disciplined buying behaviour and careful inventory management should be the buzzwords here.

Speculative buying behaviour always creeps in, as a natural phenomenon of this part of the pipeline – yet this time (post-pandemic) we may see more shrewd, and less reckless, buying behaviour.

Increasing polished prices can also help this.

Polished dealers are in good shape these days; the key-trading season is upon us.

If the major retail markets perform as expected, polished prices will also have to rise further. In the past, increasing rough prices meant tighter margins for diamond sellers. This time around, the rough (and therefore polished) supply is just not there.

Time will tell, but the middle market will benefit greatly if polished prices increase.

Lab-created diamonds

There are a number of important questions regarding the lab-created diamond market. For example, how big is it?

Some calculations suggest lab-created is now 5-7 per cent of the market by value, and 10 per cent by pieces, due to the volume of ‘smalls’.

Another question is; how quickly is this segment expanding?

Growth may slow at some point, but it’s estimated that lab-created is increasing at around 20% per annum; of course, this number could be much higher if production increases; and undoubtedly consumer demand will increase.

And finally, what will happen next to lab-created polished prices?

All the signs point to further price decreases; De Beers’ strategy is working; strong product differentiation between natural and lab-created could drive prices down by 50 per cent over the next 10 years. This will make lab-created a very cheap alternative to increasingly expensive natural diamonds.

Key trends in the diamond industry

Sometimes it is easier to look at facts and figures and analyse the industry in terms of pure numbers.

It’s also important to consider what changes might be taking place in the industry and trends that might impact the diamond pipeline:

• Consolidation of miners: there are so few mining projects that logic dictates there will be consolidation in some form bringing economies of scale and operational synergies to collective diamond projects
• Revival of old mining projects: this is happening already as there are even fewer new mines on the horizon; supported by increasing rough prices and continued demand
• The importance of Angola will increase: the prominence of this African county will rise in terms of rough supply; Angola has plenty of untapped resources still; increased foreign investment, greater transparency and security of tenure, improved sales and marketing channels coupled with a rising diamond market all bode well for this nation
• Declining production: this is an undeniable fact! The world has 2 billion carats of known resources – just think how long this will last at current production levels.
• Upstream integration: this is becoming increasingly common in these times; we see downstream players, at various stages of the pipeline, securing their access to rough supply through new contracts; the mining companies benefit from the greater transparency and get a financial uplift due to sharing the potential upside on the added value of the polished
• Fancy colours: strong players are dominating access to these goods while cutting out the traditional marketing players
• Increasing importance of the provenance of new stones versus old diamonds: this is an interesting one! What happens to the older diamonds with no provable provenance? There are a lot of diamonds (many millions in fact) from years bygone with no definite provenance, including many extremely famous stones. We have to wonder how values in the future will diverge between stones. Promoting new stones to the potential detriment of previous diamonds is an issue that needs to be considered.
• The application of new technologies: across the wider pipeline we see the use of new technologies such as carbon storage in kimberlite in Russia, blockchain, automated polishing, lab-created diamonds- it is happening everywhere!

Unexpected reality

To conclude, 2021 is shaping up to be an excellent one for the diamond industry. If retail performs as expected, we should kick off next year in robust shape with strong demand, a healthy middle market and continued optimism. Prices look set to increase further.

All the usual caveats apply, of course, but with strong business performance and many exciting things happening in the industry, it will be interesting to look back, and comment, in the coming months.