An uncertain second half beckons for diamonds
Mbongeni Mguni | Thursday July 18, 2024 15:27
As bad as the diamond numbers are, some analysts on the retail end of the spectrum are seeing some positive signs.
And the retail end is where the light is required. The slump that caused a 5.3% contraction in the economy this year, largely traces back to oversupply of diamonds in the retail market from early 2023.
Driven by underlying factors such as uncertainties in the crucial United States market, a surge in the popularity of lab-growns, lower than expected recovery in China and the distaste for natural diamonds some consumers felt as sanctioned Russian stones continued trading in the market, the diamond downturn has been the worst in at least five years.
From the retail end, the oversupply moved to the midstream pressurising the cutting and polishing firms, mainly based in India, to ask the upstream miners to reduce their production and allow demand to recover elsewhere in the diamond pipeline.
A 28% drop in Debswana’s first quarter production and a slowdown in De Beers’ sales thus far show that the eagerly anticipated recovery is yet to firm, but analysts watching the retail end are seeing some shimmers.
“Based on data from Tenoris, which tracks retail activity at more than 2,000 jewellery stores in the US, consumers are spending more on natural diamonds,” said prominent diamond industry analyst, Edahn Golan, in a review released last week.
“Specifically, the average expenditure per diamond is rising.
“This is a long-term trend that indicates that even as consumers are buying fewer diamonds, they do find economic, cultural, and emotional value in it.”
The last point is key as there has been speculation around whether the downturn in diamonds is simply cyclical or structural. The diamond industry traditionally operates in boom and bust cycles, but as demand and prices fell by double digits last year, some analysts speculated that lab growns, in particular, had taken a permanent bite out of natural diamonds.
Martin Rapaport, the founder of RapNet, the world’s largest diamond trading network with daily listings of diamonds valued at $7.4 billion, expressed the industry’s unspoken fears during a webinar in September, as the downturn gathered pace.
“We are talking about an entire restructuring of the diamond industry and these changes will remain,” he said.
“The real diamonds industry will be reduced in certain areas.
“We are looking at a market that’s going down and the rate of increase is faster, and it’s scary and people are afraid and they should be and they should be worried.”
Going into the second half, producers such as Botswana are hoping to see retail inventories decline to support midstream activity and output from players such as Debswana.
Key to that will be developments in the single most important retail market for diamonds, the United States, which accounts for about 54% of annual sales. Analysts are specifically watching which way the US Federal Reserve will move in terms of interest rates, as stubborn inflation appears set to cool.
According to Bloomberg, a case is building for a Federal Reserve interest-rate cut in September, which would be the first since the historic series of hikes kicked off in March 2022. Such an interest rate cut would be a blessing for consumer confidence and spending power, the key drivers of appetites for diamond jewellery.
The rate cut would also coincide with another key factor that will determine the direction of diamonds in the second half of the year. De Beers is expected to unveil unprecedented holiday season marketing for natural diamonds around September, increasing its budget and partnerships to perk up demand and ease pipeline oversupply.
In recent years, De Beers has spent upwards of $100 million in increasingly sophisticated marketing campaigns targetted at the period between Thanksgiving in the US and the Chinese New Year, which covers the peak retail period for diamond jewellery.
The campaign this year is expected to be even more intense as De Beers leads the natural diamond industry’s charge against lab-grown diamonds. Last month, the diamond giant announced that it was ending its six-year gambit on lab-grown diamond jewellery to focus on naturals.
De Beers’ efforts are expected to be complemented by government’s own campaigns for natural diamonds, a strategic direction championed by President Mokgweetsi Masisi during a landmark visit last month to the JCK Show in Las Vegas.
Masisi and government’s efforts are anchored on Botswana being the global symbol of the enduring “diamonds for development” campaign.
“Our intention is to grow the value of diamonds and to make them as valuable as they have ever been and that demands a lot of responsibility,” he said in Las Vegas.
“So you kick out the bad players and the first bad players we want to kick out of the scene are those who pretend.
“They make for a contamination of the industry because they are not diamonds.
“Secondly, we want to associate with ethical do-gooders and being associated with those enhances and comes close to the level and value of our provenance in our diamonds because the whole value of our diamonds is derived from the provenance.
“I can’t think of any who come second to us, particularly measured against the length of time that we have been at this.”
Economic recovery in China will also be key to diamonds in the second half of the year. The Oriental giant is the second most important market for diamonds and this week, a panel of economists surveyed by Bloomberg estimated that China’s economy could expand five percent this year, up from the 4.9% projected in May.
However, consumer spending in China is expected to remain slow, a factor that will impact diamonds.
Even if policy shifts and campaigns fail to boost diamonds in the second half, the measures could help the industry rebalance going into the medium term. Analysts have said more stability is required particularly for the midstream which traditionally operates on razor thin margins and, particularly for Botswana, is reliant on precarious bank credit arrangements.
The retail sector’s preference for natural diamonds over lab-growns, meanwhile, will only improve as consumers respond to both the economy in markets such as US, as well as well-crafted campaigns from De Beers, government and other actors.
Natural diamond players are also looking forward to seeing a clear retail market distinction occur between Mother Earth’s productions and the ones coming from the labs, rather than substitution of some naturals by lab growns.
Producers such as Debswana are meanwhile depending on the second half to anchor a recovery that will allow more capacity utilisation and activity from 2025 and beyond.