Diamond world takes radical steps to stop price plunge

The industry was one of the great winners of the pandemic, as stuck-at-home shoppers turned to diamond jewellery and other luxury purchases. But as economies opened up, demand quickly cooled, leaving many in the trade holding too much stock that they’d bought for too much money.

What looked like a cooldown quickly turned into a plunge. The US economy, by far the industry’s most important market, wobbled under rising inflationary pressure, while key growth market China was hit by a real estate crisis that sapped consumer confidence. To make things worse, the insurgent lab-grown diamond industry started making major gains in a couple of key segments.

While there are many different diamond categories, broadly prices for wholesale polished diamonds have tumbled about 20 per cent this year, firing a more dramatic fall in rough – or uncut – stones, which have plunged as much as 35 per cent.

The industry’s response was to choke off supply in an almost unprecedented way, which finally seems to be working.

Speculative bubbles

Prices at some smaller tender sales and auctions have risen between 5 per cent and 10 per cent in the past week as shortages of some stones start to emerge. With Indian factories set to reopen next month after prolonged Diwali closures, there is now renewed confidence that the worst has passed.

“The diamond industry has successfully taken action to stabilise things,” said Anish Aggarwal, a partner at specialist diamond advisory firm Gemdax. “That now creates a window to rebuild confidence.”

The plunge in prices has coincided with weakness across the luxury space. LVMH, the luxury titan with 75 labels including Christian Dior and Bulgari, has disappointed investors this year as China’s recovery underwhelmed and US consumers cooled. Its shares shed have more than $US100 billion in value since mid-April. On Friday, Cartier owner Richemont reported a surprise decline in earnings as revenue.

Yet, there are specific peculiarities to the diamond industry that make it more vulnerable to slowing consumer demand. De Beers sells its gems through 10 sales each year in which the buyers – known as sightholders – generally have to accept the price and the quantities offered.

When prices are rising, as they did for much of the past two years, these buyers are often incentivised to speculate, betting that paying for unprofitable stones now will pay off if prices continue to rise. Buyers are also rewarded for making big purchases by being given bigger allotments in the future, known in the industry as “buying for position”.

These mechanisms often lead to speculative bubbles, which pop when consumer demand slows and polished diamond inventories build up.

In response, Alrosa stopped selling diamonds altogether for two months, while the Indian diamond sector introduced a halt on imports that will run to mid-December. De Beers has allowed its customers to refuse all purchases without it having any impact on the future allocations for its last two sales of the year.

While the two dominant diamond miners have a long history of curtailing supply or letting buyers refuse some goods when demand weakens, the speed and scale of the combined actions is unusual.

While prices have stopped falling – and in some areas are rising again – much will depend on the crucial holiday season, which spans from Thanksgiving in the US to Chinese New Year, and how the big miners who have accumulated large stocks of unsold gems feed them back into the market.

There also remains uncertainty in the industry about how much of the slowdown is being driven by macroeconomic weakness, versus a more worrying shift in consumer choices. Lab-grown diamonds have made rapid progress in some key segments of the market, while there are lingering concerns in the industry about whether Gen Z consumers look at diamonds the same way as previous generations do.

“We expect there to be some cyclical recovery in the diamond markets,” said Christopher LaFemina, an analyst at Jefferies. “But we believe there are also structural issues here that could lead to weaker than expected demand for the longer term.”

Bloomberg

Bloomberg