The other headache facing diamonds

Mbongeni Mguni | Thursday February 1, 2024 10:29

The numbers from the horror year diamonds experienced in 2023 are coming in and as expected, they make for grim reading. De Beers, the diamond giant whose partnership with Botswana produces the world second highest diamonds by value each year, saw its sales drop by 38% last year.

Government, for whom diamonds make up the lion’s share of export earnings and about a third of the budget revenues, will publicise the impact on February 5 when the budget speech shares provisional figures and forecasts.

On the retail side, analysts at New York-based trend analytics firm, Tenoris, estimate that natural diamond jewellery sales in the United States were down 5.9% in terms of units and 4.8% in value for 2023. The United States accounts for about 54% of global diamond jewellery sales annually.

As chilling as the situation is, the numbers get darker because the bad news in diamonds were not uniformly shared across all players.

According to the Tenoris analysts, in 2023 in the US, lab-grown diamond (synthetic) sales were up 40.6% in value and 56.2% in units.

This trend, above nearly all others, is most worrying for the diamond industry as it makes the 2023 crash dissimilar to the previous cyclical downtrends in diamonds.

The rough diamond industry operates in cycles or alternating boom and bust periods when supportive economic conditions see consumers snap up diamond jewellery, clearing the midstream and encouraging more production, before the inevitable build-up of inventory and often, some economic slowdown, raises inventory and impacts producers.

Despite the booms and busts, the long-term fundamentals of natural diamonds have remained positive over the decades, primarily being linked to declining global production, the lack of Jwaneng-sized discoveries, and steady demand, especially from growing middle-classes in countries like India and China.

However, late last year, more industry analysts began suggesting that rather than simply being a particularly nasty trough in the cycle, the downturn in diamonds in 2023 was shaping up to become more structural, a “settling in” of what could become the new normal for the shiny stones.

Synthetics are the major difference, as the increasingly dirt-cheap lab-grown diamonds take up more space in the diamond jewellery market. The structural change is also driven by the distaste ethical consumers have developed towards the continued flow of sanctioned Russian diamonds in the market and synthetic producers’ claims that their products are more environmentally friendly.

While natural diamonds have anchored their long-term fundamentals on the burgeoning middle-class, Gen Zs could upend those forecasts. The younger generation are the emerging consumers of diamond jewellery and they prefer synthetics, both because of the price and the ethical claims touted by the laboratories.

Over the decades, natural diamonds have been successfully marketed as the greatest gift possible, the ultimate expression of enduring love and the perfect symbol for weddings and engagements. The diamond jewellery market is valued at about $80 billion per annum and much of this is sourced from the bridal market.

In 2022 in the US however, one in every three diamond engagement rings sold was a synthetic, a jarring wake-up call to natural producers and their retail jewellers.

Natural diamond producers and their midstream partners, who cut and polish the stones, have not been walking about with their hands on their heads.

Responding to the downturn last year, producers restrained either production or sales in order to deal with the oversupply in the market. De Beers has also been cutting prices in order to support the midstream and manage inventory without have to sharply cut production.

In late September, India, which cuts and polishes at least 80% of the world’s rough diamonds announced that it was banning imports of the stones for two months in order to “better manage the balance between supply and demand”.

The Okavango Diamond Company, a major player globally with “output” of six million carats annually, suspended its final two auctions of the year to help the industry recover, while De Beers gave its buyers unlimited flexibility to take up or not take up stones in the final sales of last year.

Whether the initiatives are sufficient to perk up the natural diamond industry, depends on who you ask.

Al Cook and Gina Drosos are two of the most powerful executives in the natural diamond industry and both were brimming with confidence on the outlook when they spoke to local media recently.

As the De Beers’ CEO, Cook represents the world’s biggest producer, while Drosos, as Signet CEO, represents the world’s largest diamond jewellery retailer.

Signet estimates that it is responsible for selling about half of Botswana’s diamonds, through its retail stores. For Drosos, the retail market is due an uptick in demand, which is linked to the key bridal market and the COVID-19 slump.

“The average point of time from when a couple starts dating, when they meet, to when they decide to get engaged is 3.25 years,” she said.

“However, because people were in a lockdown from COVID, we predicted that 2023 would be a significant drop-off in the number of couples getting engaged.

“For the US market that was true and 25% fewer couples got engaged in 2023 than in a typical year pre-COVID.

“But the good news is that the trough of that COVID-induced decline in engagements has now passed and it passed at the end of October or early November.”

She added: “Now we are on a three-year upswing of the number of couples who will be getting engaged in the world’s largest diamond market and that’s a tailwind on the natural diamond business that we should all be excited by and encouraged by.”

For Cook, the fundamentals of the natural diamond industry far outweigh any momentary slowdowns and downswings.

“The downturn that we have seen in the market in 2023 has been very challenging and very tough on the financials,” he said.

“In De Beers we look at diamonds in the long term and when we do, we see that the world has passed the point of peak production.

“Diamonds have always been rare, but they are just getting rarer and rarer and production globally will continue to decline even as demand grows.”

Cook said this confidence was shown in the recent decision to pump $1 billion into advancing the Jwaneng Mine underground project this year. With a total budget estimated at $6 billion, the underground mine at Jwaneng will be the country’s single biggest project ever by value and, according to Debswana, will create the world’s largest underground diamond operation.

“We are very conscious that companies are cancelling projects, cancelling exploration and new developments, but the thing we are very proud about as De Beers in our relationship with Botswana, is that we are together for the long term,” Cook said.

“We know that the diamonds that will come out from the Jwaneng underground will not be recovered for the market that we see today.

“The investment that we are making will result in diamonds that will be recovered in the 2030s, 2040s and 2050s and that gives us the confidence to make a really big investment at a time when others would not have the confidence to that.

“It’s borne out of our long term belief that diamonds and particularly diamonds from Botswana will always remain precious and rare.”

For both executives, natural diamonds’ recovery this year and into the future, will depend on strong storytelling, one that focuses on the rarity of natural diamonds, their impact on economies such as Botswana and their generational store of value.

“It’s our job to tell the story of why natural diamonds are so special, why they are rare, why they are passed down from generation to generation and are imbued with so much meaning,” Drosos said.

“We believe the combination of the trough that has now passed and the focus on telling the story, is a positive for the future of natural diamonds.”

Not everyone shares the optimism Cook and Drosos have for natural diamonds this year and beyond.

Martin Rapaport, a global diamond industry veteran known for his outspoken views, expects demand and revenues for natural diamonds to fall by as much 20% this year. He says synthetics could take-over about 40% of the US engagement ring and bridal market.

Rapaport is the founder of RapNet, the world’s largest diamond trading network with daily listings of diamonds valued at $7.4 billion. The Rapaport Price List is the primary source of diamond prices, providing benchmark asking prices used by the global diamond trade to compare, and negotiate diamond prices.

The industry veteran is a firm believer of the view that the 2023 crash was a sign of structural change in the industry, rather than the usual cyclical downturn.

“Natural diamonds are in a dangerous serious time and I have been in the market for 45 years,” he told a webinar on Wednesday evening.

“This is not just a short-term perfect storm, but fundamental change and restructuring that will have a long-term effect on the industry.

“The challenges we face are not going away and we are going to have to fight to survive.”

For certain segments of the jewellery market, the reasons why consumers would opt for naturals over synthetics are being challenged strongly. For instance, in fashion jewellery, the arguments that can be made for the sentimentality of naturals, can be strongly challenged by the rock-bottom price and fancy designs readily available for the synthetics.

For smaller jewellers, investing in an expensive natural diamond might mean sitting with stock on your shelf for up to year, burning a hole in your finances, while cheap, fancy synthetics fly off the shelfs of a competitor’s shelves. The situation is worsened by unscrupulous jewellers who market their synthetics as real, dragging the entire industry and the price separation so desperately sought by natural producers, into murky waters.

There are many other factors driving the dynamics in the debate between synthetics and naturals at retail level.

“People may not buy a $5 copy of something when the real is $100, but they may buy a $150 version of something that costs $10,000,” Rapaport explained.

“They crave that overall aesthetic. The world is a crazy place.

“We then have the factories that are knocking out lab-growns using renewable energy and consumers are saying they prefer those.”

He added: “I don’t want to see that 20% decline but I think it’s going to happen.

“This thing is like a three-alarm fire for the numbers at De Beers and Botswana.

“Lab growns I expect, could take a 30% bite out of natural diamonds.”

Not all is lost however, says the industry veteran. Rapaport advises that the primary way for natural diamonds to compete against synthetics is by increasing and capturing the emotional added value of diamonds. This is best done by focussing on the diamond engagement rings market.

Rapaport told the webinar that this particular segment of the market is the most emotional and also features conspicuous consumption where “many grooms don’t want to buy their fiancés a cheap diamond”.

As synthetic prices plummet, a downtrend that has grown stronger every year as their production explodes, the less attractive or suitable the lab-growns will be for engagement rings, Rapaport said.

The bifurcation or “separation into two” that the natural market has long desired, will be clearer. Natural diamonds will have a clear price point and market positioning, without the threat of substitution by synthetics, which will also have their targets in the market.

Rapaport believes natural diamond retailers should not compromise in fear of synthetics, but rather should understand the value of what they are selling.

“Natural diamonds are not for everyone.

“If you want to be in the real diamond industry, you have to respect the product and respect your customer, but you cannot be everything to everyone.

“If you cheapen your diamonds, you don’t deserve to be in this industry.

“Natural diamonds are special and should be expensive.

“The celebratory dinner following the engagement should not cost more than the ring.”

According to Rapaport, demand and desire for real diamond jewellery should be aspirational, like a Birkin bag for $20,000, seven-star hotel stay or dinner at an exceptional hotel.

“Price warriors should buy synthetics,” he said.

That sentiment by the industry veteran echoes Cook’s own thoughts on how to approach the natural diamond story and why these stones will not only bounce back, but thrive going forward.

It’s all about the magic of diamonds, he says.

“A lab-grown diamond that can be produced at any volume you like, will never, ever be the same as a natural diamond that’s rare and natural and unique.

“The thing about diamonds is that we have to help people understand the magic of them.

“We can’t take customers for granted.

“We have to make sure we tell that story and the diamond dream of why people chose the hardest and most beautiful gemstone ever created on planet Earth, created over billions of years, each one with its naturalness, its uniqueness, it’s little birthmarks in there, as symbols of the most important moments in our lives and our commitments to our relationships and the most precious things that happen in our lives.”