H1 2020 was difficult for the diamond sector. See what analysts make of the volatility and what they expect for the rest of the year.
After a challenging 2019, many market watchers anticipated a better diamond outlook in 2020.
As Avi Krawitz, senior analyst at Rapaport, explained during a Q2 diamond market webinar, the linear nature of the diamond market was drastically eroded by COVID-19. Read on to learn how he and other market participants view the diamond market right now after a trying first half of the year.
Diamond market update: COVID-19 impacts sector
Unlike gold, which tends to see demand increase during challenging times, diamonds tend to be considered a luxury purchase.
During economic uncertainty and financial hardships, they are often one of the first categories to experience a drop in sales activity as consumers look to tighten their purse straps and rein in unnecessary purchases.
This behavior was exacerbated during the early stages of the COVID-19 pandemic through country-imposed shutdowns and supply chain disruptions.
“The industry was pretty much closed from March through May, which has really limited the ability of industry participants in all segments of the industry to conduct business,” said diamond analyst Paul Zimnisky. He anticipates a deep decline in new mined diamond supply in 2020.
“For context, I expect production this year will be the lowest since the late 1990s. That said, I actually think the shock that the industry is going through is significant enough to act as a catharsis of sorts, meaning the significant supply cuts could really be supportive of prices in the medium and longer term.”
Yaniv Marcus, who specializes in fancy colored diamonds, noted that the industry, which thrives on human interaction, was deeply affected by measures to curb COVID-19 as trading halted in the sector.
“This was especially felt during March and April when there was the lockdown. May was no different. From various trade sources and government statistics, trading was down 75 to 97 percent due to many constraints such as shipping and social distancing,” he said.
While the fancy colored segment makes up a small fraction of the larger diamond sector, it also felt the effects of the market disruption.
“Many dealers have held their asking prices strong and prefer to wait longer than to sell at discounts like colorless diamonds,” explained Marcus, noting that as a result only a handful of unique pieces were offered at auction during H1.
This led to the assumption that some dealers may sell fancy colored diamonds at a discount.
“By the reduction of volume we can see that this is not the case,” he said. “It is normal to think that there are many opportunities right now and that you can find many items cheap during hard times, but this is not the case for rare fancy color diamonds.”
Diamond market update: Supply and demand trends in Q2
While diamond supply has experienced setbacks due to COVID-19, jewelers have had enough inventory to meet demand, and that has kept them from having to purchase off the polished market. As a result, US imports fell dramatically in the second quarter.
“And similarly in India, the largest producer of polished diamonds, exports in the second quarter fell 75 percent, again indicative of the of the level of demand and the ability to ship goods and physically engage in and make the transaction,” said Krawitz.
Like demand, sales were low during the first six months of 2020. “With retailers closed for much of the (first half of the year) and with global travel restrictions and quarantines significantly impacting business-to-business diamond transactions, diamond sales were notably down in H1 on a year-over-year basis,” said Zimnisky. But some retailers were able to turn a profit.
“Many retailers have shown to be quite nimble in transitioning to digital sales during the pandemic lockdown. For example, Richemont (OTC Pink:CFRHF,SWX:CFR), parent of high jewelers Cartier and Van Cleef & Arpels, said the company saw up to triple digit growth in ecommerce sales in China in May 2020, which is even after brick-and-mortar stores in that market reopened,” Zimnisky said, pointing out that online sales are expected to account for 20 percent of Richemont’s total global sales in 2020.
Krawitz pointed to Richemont’s strong sales in China as well, but warned about extrapolating too much hope for other markets with the data.
“Their second quarter, the April to June quarter, showed 60 percent declines in most markets in Europe, the Americas and Japan,” he said. “There is some expectation that if China is showing a 49 percent increase (and because) it’s two months ahead of the rest of the world, that we’re going to see that increase in other markets. I don’t think that’s the case.”
Not all luxury diamond companies were able to rely on higher sales in China. Sector major De Beers, which is also a miner, reported a Q2 sales decline of 94 percent.
According to Krawitz, the company, which has operations in Africa, usually sells US$2 billion worth of stones, but reported sales below US$400 million for H1 2020.
Krawitz then recounted how the sector shifted following the 2008 financial crisis. Before the market crash, retailers happily stocked inventory with the hope of selling it at higher prices.
That changed in 2008, and the manufacturers were the ones with stockpiled inventory, as retailers were wary of being weighed down by surplus stones.
“(Manufacturers have) really endured some very difficult years of teething pains in dealing with that excess inventory that they’ve held and had difficulty in getting rid of,” said Krawitz. “The coronavirus in a very short time has shifted that inventory to the mining sector.”
For Krawitz, this shift has presented the sector with a unique opportunity to realign and rebalance its inventory management throughout the supply chain.
Diamond market update: The road ahead
As the diamond sector continues to deal with the long-term implications of half a year’s worth of disruptions, there is a chance to make the industry better than before. But the consensus seems to be that this will rely heavily on the sector’s ability to build its digital presence and utilize online technologies.
“Because it’s such a beautifully human product, we need to be able to humanize that digital experience,” Krawitz told webinar attendees. “And part of that is that consumers are looking for trust in the brands, in the products that they’re buying online. And we need to feed into that trend and ensure that we’re a trustworthy industry and product to the consumer.”
He also mentioned virtual appointments and the increased use of social media as ways the industry can be more interactive. He believes Lucara Diamond (TSX:LUC), which is one of the few mid-tier producers with a digital diamond-buying platform, is doing interesting things.
For Marcus, the current market is presenting companies with the chance to adapt or decline.
“Many participants that want to survive and stay open must change and increase their digital presence,” he said. “I don’t think the diamond industry will be wiped out. I believe it will need to transform itself to remain an important luxury item for purchase.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.