Diamond prices plummet after the epidemic!Rough diamond prices plummeted 35% this year, and the industry cut off supply to radically rescue the market – Hong Kong Economic Daily – Financial Management – Personal Value-added

As the old saying goes, “Thirty years in Hedong, thirty years in Hexi.” The prosperity of the diamond industry moved from Hedong to Hexi, but it only took three years: diamond prices soared when the new crown epidemic broke out, and plummeted when the epidemic subsided. Consumers who were forced to stay at home due to the epidemic prevention lockdown once went online to buy diamond jewelry and other luxury goods. However, as countries lifted border restrictions and the economy reopened, people’s demand for luxury goods cooled rapidly, leading to The diamond industry has too many inventories, and most of them were bought “at the top”, reducing miners to “first-hand goods.” In order to stop the bleeding, the upstream and downstream, supply and demand sides of the diamond industry are taking the most radical measures to curb the severe decline in diamond prices.

Three major headwinds hit natural diamond prices, with rough prices plummeting by 35%

“Bloomberg” reported that diamond prices have plummeted due to the sharp drop in demand from traditional customers and the threat posed by synthetic diamond technology. The United States, the market on which the diamond industry relies most, faces recessionary concerns amid soaring inflationary pressures. On the other hand, China, a major emerging market, has been deeply hit by the domestic housing crisis, and consumer confidence has been greatly weakened. To make matters worse, the disruptive lab-grown diamond industry has begun to make significant progress in some key areas.

Reports indicate that this yearWholesale prices of polished diamonds fell by about 20% overall;The price of rough (i.e. uncut) diamonds plunged by 35%the sharpest declines occurred in the late summer to early autumn of this year.

The plunge in diamond prices and the weakening of the luxury goods industry happened almost simultaneously. The business of luxury goods leader LVMH Moët Hennessy Louis Vuitton Group (LVMH) has been dragged down by China’s sluggish economic recovery and cooling consumer demand in the United States. Its market value has shrunk by more than US$100 billion since mid-April. Richemont, the parent company of Cartier, reported an unexpected decline in profit on Friday due to an unexpected drop in revenue from luxury watches and as high-end consumers cut back on spending.

Two major leaders in the diamond industry strictly limit prices and tighten supply

The multinational diamond group De Beers dominates about 40% of the world’s diamond mining and trade. The group has always carefully selected buyers. The selected companies are called “sightholders” and are included in De Beers Global Sightholder Sales (DBGSS) to authorize a large number of rough diamonds. on the purchasing merchant list. De Beers will strictly limit buyers to purchase all contracted rough diamonds (i.e. unprocessed or simply cut diamonds) at prices set by the group. Those who do not comply with prices and quotas may even face penalties.

However, in the face of the sudden drop in global diamond prices, De Beers, which has a monopoly position, can no longer continue to “sell at high prices”. It lowers its profile to allow customers to enjoy greater flexibility in doing business, and even completely cancels the original restrictions: Sightholders can choose ” I just don’t want to buy it.”

Reports pointed out that at a De Beers auction in October, diamond buyers mainly from India and Antwerp, Belgium purchased only uncut rough stones worth a total of US$80 million. For auctions like De Beers, the expected turnover is usually US$400 million to US$500 million. Apart from a complete shutdown at the beginning of the COVID-19 outbreak, the group has never seen such low sales since it began disclosing its results in 2016.

In addition, De Beers’ main competitor, Russian diamond mining giant Alrosa PJSC, is more aggressive and has canceled all diamond sales in the past two months.

Why are diamonds so easy to burn?

The diamond industry has extremely elastic demand and is vulnerable to slowdowns in consumer demand. De Beers holds 10 auctions a year to sell its rough diamonds, and buyers with Sightholder qualifications usually have to accept the price and quantity set by the group. In other words, the transaction volume of a single auction can be quite large.

When diamond prices rise, especially in the early two years, buyers tend to speculate, betting that prices will continue to rise, betting that although the gems purchased now are temporarily unprofitable, they will pay off in the future. Buyers who make large purchases will also receive larger quotas in the future. This bold and desperate move is called “seizing position” in the industry.

Because the diamond industry has this purchasing mechanism, it often creates speculative bubbles. When consumer demand recedes and polished diamond inventories increase, the speculative bubble bursts.

Join forces to cut off supplyCan it “stop bleeding”?

In response to falling prices and slow sales, the Indian diamond industry has suspended imports until mid-December. One of the two industry leaders lets buyers go, while the other directly cuts off the supply of goods. However, De Beers emphasized that allowing customers not to purchase will not have any impact on the future distribution of the group’s last two sales this year.

“Bloomberg” stated that the two giants have long reduced supply or tolerated refusals when demand weakened. But outside of major events such as outbreaks, such rapid and large-scale joint action is unusual. So can this radical rescue measure work?

As some rough diamond supplies began to run short, diamond prices recorded increases of 5% to 10% in some smaller tender sales and auctions in the past week. Indian diamond processing plants will reopen next month after Diwali. Some people are beginning to think that the “Diamond Winter” is over. “The diamond industry has successfully taken action and stood firm.” Anish Aggarwal, a partner at diamond industry consulting firm Gemdax, said that the window to rebuild confidence has now opened.

Young people don’t like the diamond industry or face long-term headwinds

However, whether diamond prices in some regions can rebound and the extent of the increase will largely depend on sales during the peak holiday season from Thanksgiving to the Lunar New Year, as well as how large miners with overflowing inventories return their “crab goods” to the market. When the macroeconomic environment recovers, the diamond industry is most worried about permanent changes in consumer habits. There is not only the market threat from synthetic diamonds, but also the concern that young consumers of Generation Z will no longer regard diamonds as precious objects.

The diamond industry may face long-term headwinds. “We expect some cyclical recovery in the diamond market, but believe there are structural issues (in the market) that may lead to weaker than expected long-term demand,” Jefferies analyst Christopher LaFemina said.

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