The latest global diamond industry report from consulting firm Bain & Company‘s Oil and Natural Resources practice and the Antwerp World Diamond Center found despite the economic dislocations of covid, diamond demand as a luxury good and a physical investment point to long-term industry resilience–Brilliant Under Pressure, to borrow from the report’s title–thanks to early action on the part of industry players to cut supply and deleverage early on in the pandemic.
Bain and AWDC found that while revenues across the diamond production value chain declined 15 to 35 percent in 2020, diamond jewelry retail fared better than the personal luxury goods market, which dropped 22 percent last year, measured in U.S. dollars.
“In 2020 the diamond industry as a whole unexpectedly benefited as consumers, unable to spend on experiences or travel, used those funds for items such as diamonds, which are considered a tangible physical investment,” said Olya Linde, a partner in Bain & Company’s Energy and Natural Resources practice and one of the authors of the new report.
Linde’s team found that more than 75 percent of consumers intend to spend the same amount or more on diamond jewelery than before the crisis, pointing to “a strong, ongoing emotional connection with the diamond story.”
Rough diamond production has otherwise been in a downward trend for several years, averaging 5 percent year-on-year declines since peaking in 2017.
When the pandemic hit early last year, major diamond miners were quick to curtail production (cutting supply by 20 percent) and postpone purchases, helping midstream companies to better withstand the challenges of 2020. Additionally, the midstream companies lowered their net debt to $8 billion (50 percent below the 2013 peak) clearing existing stockpiles and reducing inventories by 22 percent by year end.
Bain and AWDC found that financing options decreased along with the decline in trading activity, with larger, operationally transparent midstream players able to fund themselves through big banks (particularly in the Middle East) and specialized funds, pushing smaller players into alternative financing platforms, such as peer-to-peer networks.
The analysts expect the widespread industry deleveraging that occurred in 2020 to speed up restructuring and consolidation across the midstream segment, something that will benefit the industry pipeline long-term.
Rough and polished diamond prices were also in a downward trend in recent years since 2018, 2019 and 2020 (fell by 11 percent and 3 percent).
As in other industries, Bain and AWDC found that covid-19 accelerated trends already apparent in the diamond industry. First was a faster shift toward digitalization, not just through online retail shopping–diamond jewelry retailers reported year-over-year online sales growth of up to 60-70 percent–but in the emergence of a digital pipeline for B2B commerce for trading rough and polished diamonds.
Despite this, Bain and AWDC noted that 90-95 percent of consumers still prefer buying diamonds in physical retail locations (where they can see, feel and seek expert advice on the merchandise), and that online’s share of diamond jewelry sales continues to other luxury and consumer goods.
Besides a bump in online sales in 2020, Bain and AWDC found that diamond demand became increasingly localized in 2020 as travel curtailed. This benefited sales in China, where consumers spent money with local retailers and Hainan duty-free stores for high-end purchases.
The researchers found an ongoing, widening price differential (of as much as 10x) between natural and lab-grown diamonds over the past two years. Prices of lab-grown gemstones have decreased dramatically due to increased supply from independent manufacturers, and a number of major fashion jewelry retailers have begun offering lab-grown diamonds, further adding to the appeal of these stones to price-sensitive consumers.
The report notes that 2020 diamond sales ended on a robust note, with holiday revenues up 5-10 percent in the U.S. and 15-20 percent in China over the previous year, leading to rising demand for polished diamonds. Most miners reported sales improvements of 5-8 percent for rough diamond prices and sales in January, which could point to a faster post-covid recovery based on earlier Bain/AWDC estimates of a return to pre-pandemic growth by 2022-2024. That said, the researchers say, much remains uncertain for diamond demand, as risks of a double-dip recession remain, and epidemiological, policy and consumer response factors will affect the course of the recovery. Long-term, however, rough diamond supply growth is expected between -2 and 2 percent per year in volume, then 1-3 percent growth per annum upon full recovery, with dynamic dynamics tracking GDP trends and discretionary income growth for the global affluent and high-net-worth consumer segments.
