Diamond industry decoded: From supply to price to demand, everything you need to know

Rough diamond production has been impacted by practical issues of working safely in the COVID world and ensuring that we continue to operate safely and responsibly. In addition to this, global supply volumes have been impacted by some mines coming to the end of their operational lives, such as Rio Tinto’s Argyle mine in Australia. Rough supply has also been impacted by natural issues such as high rainfall preventing normal mine operations.”De Beers GroupWith decreasing supply and increasing demand, diamond prices, particularly the roughs, are exhibiting an upward trajectory, impacting all stakeholders of the industry, including the end customer, discovers Suneeta Kaul

AS the year draws to a close, the diamond industry finds itself in a unique situation – high consumer demand, sharp rise in rough prices, steady increase in polished prices, and a marked fall in supply of both roughs and polished stones. Add to this the onslaught of Omicron, the latest COVID variant, and the scenario becomes even more volatile.However, it is not an all-negative mix – there are many opportunities for all stakeholders and the industry as a whole. But the problems are very real, starting with the very pronounced demand-supply mismatch. The pandemic caused huge disruptions in mining operations, resulting in severe supply problems. The curtailed supply, in turn, has led to a sudden increase in rough prices, and an appreciable rise in polished prices as well.

Sharp spurt in rough prices
Historical data reveals that prices, particularly of polished stones, have been more or less stagnant for the past 8-10 years, and a rise was always around the corner. But what has upset the apple cart is the sudden sharp increase. The industry would have been more comfortable with a gradual upward trajectory, but it now has to face a three-pronged situation – fall in supply, rise in prices, rise in demand. According to a spokesperson of the De Beers Group, “Rough diamond production has been impacted by practical issues of working safely in the COVID world and ensuring that we continue to operate safely and responsibly. In addition to this, global supply volumes have been impacted by some mines coming to the end of their operational lives, such as Rio Tinto’s Argyle mine in Australia. Rough supply has also been impacted by natural 39issues such as high rainfall preventing normal mine operations.“Rough diamond sales have been influenced by positive consumer demand, resulting in positive recovery in downstream demand and pipeline inventory levels, which are lower, following the midstream de-stocking that took place in 2020, when limited amounts of fresh supply were entering the pipeline.”

“While it may seem, at first glance, that the diamond industry is experiencing exponential demand, there is more to the story than appears to be the case. If we compare pre-COVID data with the data available today, and check whether sales numbers are much bigger than before, or actually smaller, we might be surprised. Presently, the industry feels there is good demand, but that could be because of supply constraints. In the pre-COVID era, there was a continuous supply of diamonds and jewellers had a lot of stock. Things have changed drastically, manufacturers don’t have stock now, they don’t have supply of diamonds, so even if five customers come in, they feel demand is good.”Dheeraj Menda, Studio RêvesA point to note is that miners have not announced any new mine expansions, and the inventory of rough diamonds held by them is at historical lows. Midstream stocks are also at record low levels. With roughs becoming expensive, manufacturers are holding back their stock because of concerns about the prices they will have to pay for new rough supplies.Retailers are not getting a good margin as the hike in prices is making it difficult for them to re-stock. Everything put together, the fundamentals are supportive of a further upward swing in prices.

Manufacturers adopting wait-and-watch policy
The increase in rough prices is making sourcing difficult for manufacturers. Most of them are waiting for clear trends to emerge. Says Sandeep Kothari of KGK Group, “The increase in rough prices is corresponding to polished prices going up. So, there is some speculation going on, where people are paying more on tenders and outside market purchases to gain market share. That is something that will impact profit margins. But in general, if you are buying responsibly, and if you have direct supplies coming in from the miners, then your profit margins are relatively intact.

“There is a shortage of all kinds of categories of polished diamonds. The rough supply has been low. In India, production, because of Diwali, has been at a low level. It is a challenge to bridge the requirements of those wanting polished stones, but we are communicating with them on a regular basis/ It is, indeed, a challenge right now to fulfil all the orders. There is too much happening at the same time, be it the Omicron virus or the supply issues or the manufacturing issues. So, one has to be very, very careful and keep a sharp eye on what someone is booking, and how they will be able to supply the orders eventually.”

“The prices of polished diamonds have remained stagnant for many years. With the consumer demand being at record levels, we can safely conclude that a there is ample scope for an upward price correction.” Dinesh Lakhani, Director, Kiran GemsCommenting on the market situation, Kothari adds, “All shapes and sizes are doing well. This is for the first time in the past 10 years we have seen a huge bandwidth of goods that are moving across the entire category. Fancy shapes are doing fantastically well in the US, India has opened up to a very strong season, the North and the South are doing extremely well, the East and the West are also picking up, we are in a very good zone, where everything is doing well.

“China is a tricky one, the fundamentals are strong, but it is not as buoyant as US and India, so we are seeing a stable, stagnant growth in China. And pricing is something where all the economies of the world are doing well, the stock markets are doing well, there is an influx of so much of stimulus money, which has created a lot of liquidity in the market. All luxury items are going up.”

With the overall industry situation being rather fluid, most manufacturersand processors are wary, and in a wait-and-watch mode. Some of them don’t even believe that the much-41talked-about high demand is borne out by ground realities.

“Right now, the rough and polished prices are very strong. There is tremendous demand for both. Even after the opening of factories post the Diwali break, not much production was happening till December. But the demand for polished stones is strong in the US as well as India. So, in the coming few months, price is going to be very strong, and I think it will stay that way. This year, you will see good polished price changes.”Piyush Patel, Partner, Dharmanandan Diamonds Pvt Ltd.“While it may seem, at first glance, that the diamond industry is experiencing exponential demand, there is more to the story than appears to be the case. If we compare pre-COVID data with the data available today, and check whether sales numbers are much bigger than before, or actually smaller, we might be surprised,” says Dheeraj Menda of Mumbai-based manufacturing house, Studio Rêves.

“Presently, the industry feels there is good demand, but that could be because of supply constraints. In the pre-COVID era, there was a continuous supply of diamonds and jewellers had a lot of stock. Things have changed drastically, manufacturers don’t have stock now, they don’t have supply of diamonds, so even if five customers come in, they feel demand is good.

“The number of suppliers of diamonds, small manufacturers, processors (who convert roughs into polished stones), factories -- everything has shrunk. It is really more of an illusion that the diamond market has grown exponentially. In my mind, retail has suffered in a very big way all over the world. Stores were shut for a long time all over the world, and the Internet took over.

“But the percentage of Internet sales that happened versus the on-ground sales is really insignificant. Internet sales grew by 4%, but the overall retail sales that got stuck was a much bigger number. What the industry is really experiencing is demand because of shortage, not because of more customers, especially in India,” he adds, painting a rather grim picture. The demand debate notwithstanding, the fact remains that there has been an unprecedented increase in factor costs – rough prices going up and wage inflation also exhibiting an upward curve. This has resulted in a substantial upward shift in the prices of polished goods as well.

There has been an increase in rough prices, and that is going to impact profit margins, and it is going to be very hard for diamond manufacturers. But we are very positive about how the market is moving, and we believe that if you are making the right mix, the right cuts, especially the fancy shapes, the consumption pattern is going to be great. Hopefully, the price incremental will be absorbed by the retailers and wholesalers across the globe.”Nilesh Chhabria,COO, Finestar Jewellery and DiamondsWorlDDinesh Lakhani of Mumbai-based Kiran Gems believes that polished prices are poised to go up further. “The prices of polished diamonds have remained stagnant for many years,” he says, adding, “With the consumer demand being at record levels, we can safely conclude that a there is ample scope for an upward price correction.”

Retailers, exporters agree polished prices will go up further
The rough supply having been low for a while has resulted in shortage of all categories of polished diamonds. Retailers and exporters have been feeling the pinch, and from the look of it, the situation is not going to ease out any time soon.

Says Piyush Patel of Dharmanandan Diamonds Pvt Ltd., “Right now, the rough and polished prices are very strong. There is tremendous demand for both. Even after the opening of factories post the Diwali break, not much production was happening till December. But the demand for polished stones is strong in the US as well as India. So, in the coming few months, price is going to be very strong, and I think it will stay that way. This year, you 43will see good polished price changes.”

“The increase in rough prices is corresponding to polished prices going up. So, there is some speculation going on, where people are paying more on tenders and outside market purchases to gain market share. That is something that will impact profit margins. But in general, if you are buying responsibly, and if you have direct supplies coming in from the miners, then your profit margins are relatively intact.There is a shortage of all kinds of categories of polished diamonds. The rough supply has been low.” Sandeep Kothari, Group Managing Director, KGK GroupWhile the US and India are leading the demand, countries such as China and Hong Kong are not too far behind. “Since September, China has become slower than what it was in the first half of 2021. But the retailers there are also very confident that the on-going season and the Chinese New Year will be a good period for sales, and they also see the first-half of 2022 as a good time to do business. India is doing well since July, and we will continue to see the economy improve. Exports have been amazing this year,” explains Ankit Shah of Ankit Gems

“Currently, the markets are doing very well. Polished prices have gone up in the past two to three weeks, post Diwali, and we have seen a rise in demand in the US markets as well. In November, the US had amazing sales, and retailers are stocking up again for Christmas, mainly solitaires.

“Overall, prices have gone up a lot in a very short period of time. Polished prices went up steeply in the last three-four weeks in a short period of time. But rough prices have been going up since the last six months. So, considering this, there is still a gap in the rough price and polished price. There are fewer chances of rough prices remaining stable, but polished prices may stay stable. Or they will go up; going down is not going to happen. Until the first half of 2022, we will see either stable polished prices, or rising prices,” he adds.

Manufacturers are of the opinion that the hike in rough prices is going to compress their profit margins. Says Nilesh Chhabria of Finestar Jewellery and Diamonds, “Yes, there has been an increase in rough prices, and that is going to impact profit margins, and it is going to be very hard for diamond manufacturers. But we are very, very positive about how the market is moving, and we believe that if you are making the right mix, the right cuts, especially the fancy shapes, the consumption pattern is going to be great. Hopefully, the price incremental will be absorbed by the retailers and wholesalers across the globe. Thankfully, the Omicron variant has not had much of an impact on the diamond market. Looking at what we have been hearing from South Africa and other places, this is not as detrimental as the previous variants. We feel there is going to be a surge in the business of natural diamonds in the coming few months.” Opines Dhawal Jain of Unialmaz, the Jaipur-based diamond manufacturing, retailing and exporting house, “If the current scenario continues, the prices will increase no doubt to a certain limit, and it might impact loose and studded sales. But there is a limit to the extent to which rising prices will be accepted. The situation of polished diamonds we are witnessing at the moment has never been seen before -- a sharp rise in prices might shake the confidence of the consumer, as no one can predict if the increased prices will sustain. Diamond prices have been pretty much stagnant in the last seven to eight years, plus-minus 5%. The increase in price was due, but it should have been steady and over a period of time. Due to the current situation, prices have increased suddenly, which shakes the confidence of both the manufacturer and the consumer. This has made a major impact on ongoing orders for which diamond prices have already been fixed with buyers.”

“If the current scenario continues, the prices will increase no doubt to a certain limit, and it might impact loose and studded sales. But there is a limit to the extent to which rising prices will be accepted. The situation of polished diamonds we are witnessing at the moment has never been seen before -- a sharp rise in prices might shake the confidence of the consumer, as no one can predict if the increased prices will sustain. Diamond prices have been pretty much stagnant in the last seven to eight years, plus-minus 5%. The increase in price was due, but it should have been steady and over a period of time.”Dhawal Jain, UnialmazGlobally, a beneficial side-effect of 45the pandemic has been that inventory levels have reached a healthy level and are much more aligned with actual demand. Says Ari Epstein, CEO, Antwerp World Diamond Centre (AWDC), “Demand is not becoming less, but, in fact, figures from the largest consumer market, the US, indicate that this holiday season is likely to outperform previous years significantly. We believe this trend will continue in the short- to mid-term. Predicting prices in the diamond industry is a dangerous game. It’s often hard to say, and much depends on how production develops and how the economy will grow in a post-pandemic situation. In the near future, we can say that 2022 will be a good year. Does that mean that we can expect rising prices for the next decade? We can’t say. It’s clear that the prices for rough diamonds today are historically on the high side, it remains to be seen if they stay on that level. On the other hand, production will be decreasing steadily as it has done over the past decade.”

Summing up the India situation, Colin Shah, Chairman, GJEPC says, “India’s gem and jewellery export performance through 2021 has been far ahead of our expectations this time last year. The good news is that the world’s biggest jewellery consuming nation, the USA, has increased purchases from India this year. We expect to achieve the export target of USD 41.65 billion this fiscal year. And we have recommended to the Government a few policy reforms to consider in the Union Budget 2022-23. These include the reduction of import duty on cut & polished diamonds, gold and other precious metals, and an amendment in taxation provisions to allow the sale of rough diamonds in the Special Notified Zones in Mumbai and Surat – this would help the industry to achieve its export target of USD 70 billion in the next few years.”

In the end, the picture will be clearer only by the middle of next year. But one may safely conclude that the days of low/stagnant prices are well and truly over. With supply being short, and end-customer demand going up, it is a simple matter of economics.