Industry heavyweights, De Beers and ALROSA, got off to a strong 2020 with January diamond sales that were up 9% and 44%, respectively, over 2019. Demand driven by a relatively strong 2019 holiday shopping season in the U.S., the industry’s largest consumer market, and a favorable global supply picture should continue to bode well for diamonds in the near-term. Despite imminent demand uncertainly surrounding the impact of the coronavirus in the ever-important Greater China consumer market, in general, diamond fundamentals appear to be shaping up following a disappointing 18-month stretch for the industry.
After a vibrant first-half of 2018, the following year-and-a-half posed challenging for the diamond industry. A tightening of credit to diamond manufacturers in part led to accelerated industry-wide mid-stream inventory deleveraging throughout H2 2018 and 2019. An estimated $10 billion, or approximately 25 percent of all inventory held by the midstream segment of the industry, was forced downstream as many manufacturers were unable to retain previous levels of finance and were pressured to scale down operations and cut-back balance sheets. The flood of excess mid-stream supply more than offset a 5 percent year-over-year decline in mined diamond volume in 2019.
(A Luk Fook diamond jewelry ad on a bus in Hong Kong in November 2019. Source: Paul Zimnisky)
While the industry has since actively worked through much of the indigestion, lingering demand challenges, including only a partial resolution to the trade spat between the U.S. and China, the industry’s two largest end-consumer markets, has stifled the process. Further, widespread protests in Hong Kong, referred to as the Anti-Extradition Law Amendment Bill Movement, and more recently, travel bans and jewelry store closures in Mainland China and surrounding regions in response to the coronavirus outbreak, has impacted retail sales and B2B trade in the industry-important market. In addition, indications of a broad economic slowdown in Europe and a global trend towards negative interest rates have boosted the U.S. dollar, which has pressured global end-consumer diamond demand in recent quarters.
Looking at the remainder of 2020, without any further unforeseen demand shocks --the impact of the coronavirus outbreak would likely need to be contained to Q1-- the diamond industry could finally find itself on more stable footing as industry-wide inventories approach more sustainable levels following the recent indigestion.
In addition to the more macro developments mentioned above, here are three specific catalysts that could also have a noticeable impact on diamonds in 2020:
The DPA’s “3 Billion Years in the Making” Campaign
In the fourth quarter of 2019, the Diamond Producers Association (DPA), the diamond industry’s joint category-marketing effort, debuted its latest campaign titled “The Diamond Journey” with the tagline “3 billion years in the making.” 2020 marks the fifth year since the group was established and the third consecutive year that the budget exceeded an estimated $50 million. The 2020 budget alone is estimated to approach $100 million, which would likely be the highest yet, but is still short of the estimated $200-250 million in inflation-adjusted dollars that De Beers was spending annually during the monopoly-era via the “A Diamond is Forever” campaign.
The result of large category marketing strategies such as this can be slow and gradual but can leave a lasting impact on a consumer’s perception of a product if communicated effectively. It has now been over a decade since the “A Diamond is Forever” campaign was retired, and consumers’ positive perception of diamonds has seemingly faded. However, now a few years into the reintroduction of generic diamond marketing, results should begin to show, especially in the three primary target markets: the U.S., China, and India.
(A DPA campaign unveiling event in New York in September 2019. Source: Paul Zimnisky)
ALROSA’s “Luminous Diamonds” campaign
In September 2019, ALROSA said it was in talks with several jewelers about joint-marketing the company’s strongest fluorescent diamonds as “Luminous Diamonds.” Fluorescence is most prominent in Russian and Canadian diamonds, which are mined predominantly near the Arctic Circle. However, fluorescence is also found in diamonds mined elsewhere and is estimated to be present in as much as a third of all diamonds globally. Diamonds with “strong” fluorescence, the focus of ALROSA’s campaign, represent as much as five to 10 percent of global supply.
Traditionally, fluorescence has been seen as a negative attribute as it can make a diamond appear “milky” or “oily” in direct sun or UV light. The characteristic also makes a diamond mysteriously glow under a black light, ideal, for example, for a club or party scene. This meshes well with the industry’s intention of directing more marketing towards younger demographics. Furthermore, most natural diamonds fluoresce blue, while most lab-grown diamonds (LGDs) fluoresce orange, green or blue-green. As such, fluorescence is another potential attribute that the natural diamond industry can use to differentiate its product from LGDs. ALROSA said it expects the product line to be available in early 2020, with the U.S. and China being the initial target markets.
The Argyle mine officially closing
Easily the industry’s most anticipated supply catalyst, Rio Tinto’s Argyle mine in Australia, is finally set to close officially in 2020. In June 2019, management told media outlets that in “late 2020, we’ll be stopping operations and will start the rehabilitation of the site.” The mine, which at one point accounted for almost half of global diamond output in volume, has produced 10-15 million carats in recent years, representing a high-single-digit percentage of the world’s output. An estimated three-quarter of Argyle’s output is brown in color, lower-in-quality or smaller in size, the categories of diamonds that have been under the most price pressure in recent years.
Argyle supply coming offline will further balance what has been an oversupplied diamond market for most of the last decade. No doubt, the diamond industry and trade views Argyle’s end as a positive development. Also, Argyle’s closure is drawing broad media attention and therefore is likely to reinforce the consumers’ perception that natural diamonds are a fleeting, non-renewable resource and a rare and valuable product.
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About Paul Zimnisky
Paul Zimnisky, CFA is an independent diamond industry analyst and consultant based in the New York metro area. For regular in-depth analysis of the diamond industry please consider subscribing to his State of the Diamond Market, a leading monthly industry report. Paul is a graduate of the University of Maryland's Robert H. Smith School of Business with a B.S. in finance and he is a CFA charterholder. He can be reached at paul@paulzimnisky.com and followed on Twitter @paulzimnisky.
Paul will be speaking on diamond industry fundamentals at the Prospectors & Developers Association of Canada (PDAC) Convention in Toronto, Canada on March 2, the Antwerp World Diamond Centre’s 2nd African Diamond Conference in Durban, South Africa on May 6 and at the Jewelers of America National Convention in New York on July 27.
Disclosure: At the time of writing Paul Zimnisky held a long position in Lucara Diamond Corp, Mountain Province Diamonds Inc and North Arrow Minerals Inc. Please read full disclosure below.
Website:
www.paulzimnisky.com