Demand is Shrinking for a Reason

Polished diamond imports into the US have declined once again. In 2017, the US imported $21.7 billion worth of loose polished diamonds, a 3% decline compared to imports in 2016. The sad part is that this marks the third consecutive year of declines in the import of polished diamonds. In 2014, imports stood at $24 billion. In 2015, they fell 4.6% to $22.9 billion, and in 2016, they declined yet again, this time by 2.5% to $22.3 billion. Cumulatively, imports declined by 10% during the four-year period.

The volume of imports has declined as well, falling from 11.8 million carats imported in 2014 to 9.9 million carats in 2017, a 20% decline. I am not entirely surprised by these continued declines. We saw hints of this in the form of price declines. Look at the price indexes in the graph below. All three of them, by Rapaport, IDEX, and our own Mercury Diamond, exhibit and share very similar broad trends. All three reflect the ongoing price declines that started in mid-2014.What do price declines tell us if not that consumers are exhibiting less enthusiasm for the offered product? And, in fact, this is the deeper issue: over the past ten years, we neglected to develop our main market, and as a result, consumer demand was hurt, as were we. Over the past three and a half years consumers bought fewer diamonds, clearly less of the bigger goods, and that pushed down demand from retailers. Retailers in turn, are no longer chasing us - the diamond traders and suppliers for goods. Instead, we are chasing them.

Last month, De Beers supplied the diamond market with $665 million worth of polished diamonds. Although it was a 9% decline from what they supplied in January 2017, it was up 46% over the last sight. ALROSA went all out and sold $499 million worth of rough diamonds, more than double what it supplied in December. Compared to January 2017, ALROSA’s supply was up 39%.

While the trend of declining demand for polished diamonds continued, rough diamond prices were all over the place. At times they declined, but they also increased. Even when rough diamond prices declined, at times, to my taste too often, they did not decline far enough to meet polished diamond price declines. When costs cannot be brought down and adjusted to revenue, the result is thinning margins at best and business failures at worst. That is what we saw in the diamond pipeline’s midstream over the past three years.

Such ills don’t come without side effects. During these three years, we witnessed a series of unacceptable trade behaviors. They included mixing of synthetics into parcels of natural diamonds, using financing for purposes other than diamond trading, and even suspected bank scamming as has been revealed in the news recently. All are unacceptable practices and must be eradicated from our industry.

In recent weeks, we have seen polished diamond prices improve a little. This is good news. Coupled with the decrease in inventories in late December and early January, it explains the rise in demand for rough diamonds. Diamond miners have largely not taken advantage of the opportunity and refrained from raising prices, a responsible move on their part. However, that may change if manufacturers keep demand high, and that is not an unlikely scenario. We have seen it happen before. Manufacturers need a supply of rough diamonds, they start to compete for it, and then some of the purchases are speculative, which means they buy rough diamonds only for the sake of selling them on the secondary market. This almost automatically pushes up prices, and quickly makes rough diamond polishing uneconomical. While this may cool the market at some point, before that happens many rough diamonds are being processed, which means that inventories start to rise. To get a rising amount of goods out - and generate cash flow to cover costs – manufacturers often lower polished diamond prices, which makes the cycle even less economical.

This is a vicious cycle and it happens time and again. It is also extremely unhealthy for the business. Can we avoid it? Yes. First, by being more cautious in our approach. Buy whatever rough you need for your own known needs and not beyond. Avoid the temptation of making a quick buck with speculative trading that is based on getting a fat premium from buyers who simply don’t have a chance of making a profit (because rough costs will be high and polished prices will be heading down). Another way to address the issue is by working on spurring demand.

During the Winter Olympics held in PyeongChang, South Korea, the Diamond Producers Association ran a series of ‘real is rare’ commercials titled ‘making a gem’ . They featured athletes competing in snowboarding, hockey, and ice skating at the Olympics, performing under pressure. It was a great idea that targeted a wide age group, sports enthusiasts, and fans. It highlighted the idea of greatness and beauty that shine through under pressure – just like a diamond. This and similar marketing initiatives are needed to promote diamonds, improve their image as perceived by consumers, keeping the idea of diamonds in their minds, and in time, encouraging them to consider buying diamond jewelry.

If consumer demand improves, we will have more room to work – higher margins, more real need for rough diamonds, and less of a need for some to act fraudulently. Marketing is but one approach. The diamond industry’s toolbox should include a variety of tools to ensure its vitality. Without them, we will linger in survival mode, instead of flourish.

  The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.