Historically, late May has seen a rise in demand for polished diamonds across the manufacturing and wholesale sectors of the diamond pipeline, which has then been accompanied by an increase in prices. However, this historical cyclical trend did not take place this year.
The cause of this cyclical trend is the JCK trade fair held in Las Vegas during late May/early June. It is one of the largest diamond and jewelry shows and the most important one for the US market. Ahead of the show, traders usually round up goods which drives both demand and prices. So why did demand and prices not increase this year?
The cyclical trend was disrupted this year by a combination of weaker demand from consumers and growing inventories of polished diamonds. You may remember that in the start of the year, I warned that the strong demand for rough diamonds is misplaced. That demand for polished diamonds was limited and focused on some very specific goods. Pouring large quantities of run of mine rough diamonds (which means diamonds of every color/quantity/size and shape) into the market creates an oversupply that the retail market won’t be able to absorb. That is exactly what we are seeing now.
The rough diamonds supplied in January and February are now ready as polished diamonds and the midstream of the diamond pipeline has large quantities of polished diamonds with very few buyers. Demand is very limited as the following grid shows.
Every year just before the Las Vegas trade show, rooms are of limited availability, flights are fully booked and the aisles between the booths are heavy with foot traffic. That is not the case this year. Flights could be booked last minute, prime hotel rooms were available a week before the show and the aisles are not packed with buyers. This is a sign of the times.
Of the many questions this situation raises, two require immediate attention. Why is demand so low, and why was the supply of rough diamonds so large? The answer for the first question is complex, but at its heart are the drop in marketing and changes in consumer behavior. Consumers not only view diamonds differently than their parents did, yet they are also less capable financially to purchase high ticket items. Consider the following graph. It shows monthly changes in savings as a percent of disposable income in the US over the past 10 years.
Source: US Bureau of Economic Analysis
Following the 2008/2009 financial crash, Americans increased their savings for several years. In early 2013, there was a dramatic change in pace, and Americans decreased their savings. It currently stands at 5.4% of disposable income. This is a very low figure. This is not even 5.4% of their income, but rather of what is left after paying their monthly mortgage bill, car loan payment, utility bills, buying groceries and making credit payments.
The graph represents savings by all Americans. But what about those in their 20s and 30s? Many of them are in heavy debt to pay their student loans. They have a lot less discretionary income than most other age segments of Americans. Some of them are saving for buying their first house, and so whatever they do save is largely earmarked already. Therefore, the age group that is the most targeted for diamond purchases, bridal in particular, is financially preoccupied with other expenses.
Consumer demand is on one end of the supply/demand imbalance. The other end is rough supply. From just $248 million supplied by De Beers, for example, during the December 2015 cycle, supply more than doubled in January 2016 to $545 million and to $617 million in February. When most industry professionals knew (or at least should have known) that consumer demand is limited, why was the supply of rough diamonds so large?
Clearly, we are in business to generate a profit. In early 2016, the mining companies offered goods at reduced prices, compared to a few months earlier. Responding to demand on the part of manufacturers, the miners were willing to sell rough diamonds, especially after the hardships of the second half of 2015. The problem was not with the mining companies, but rather the willingness of some companies in the midstream to buy run of mine production. They bought not only the rough that results in the necessary polished diamonds, but everything else as well.
Backed by easily accessible bank financing, some companies did not buy rough diamonds mainly to satisfy consumer demand, but rather to generate exports of polished diamonds with the aim of perpetuating and protecting a credit line. This financing leads to rough diamond purchasing that is out of line with consumer demand. It leads to rough diamond buying that does not make economic sense and results in wild price fluctuations.
This is a very unhealthy situation for the diamond industry at large. It results in instability in the industry. Many companies that were in a fragile state to begin with were unable to cope and were forced to close. On the retail side, retailers who saw the abundance of supply adopted a wait and see attitude that has the potential for driving polished diamond prices down again and is delaying the industry’s resurgence.
I’ll dive further into this next week, but meanwhile I would like to point out the decline in profit by some of the leading companies in the industry. Tiffany reported a decline in sales, as did Chow Tai Fook. Online retailer Blue Nile also reported a decline in first quarter sales, and the number of specialty jewelers in the US continues to decline.
Collectively, this is a very bleak outlook. We must regenerate interest in diamonds and diamond jewelry, and curb the urge to rough whenever possible in disregard to consumer market realities. If we fail to do so, we may pay a very dear price.
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.