Too Much Supply, Not Enough Demand: Worrying Trends in the Consumer Diamond Market

We know that prices of smaller polished diamond goods, 0.30-0.99 carats, have been rising lately in response to improved demand. The rough diamonds that yield them weigh 0.60-2 carats. We also know that the increase in demand is mainly for rounds, at the expense of other shaped diamonds. Further, the demand is coming mostly from the US consumer market, which is mainly interested in HIJ color, SI-I clarity goods.

This means that demand is only for the types of rough diamonds that generate these polished goods, a very narrow band of rough diamonds in terms of size, model (shape) and color/clarity combination.

Last Tuesday, De Beers announced a near 20% jump in rough diamond sales in the seventh sales cycle of the year. The company reported $630 million worth of rough diamond sales on a consolidated accounting basis.

ALROSA sold an estimated $350 million worth of rough diamonds during this period. Together with several other miners, the mining sector of the diamond pipeline supplied more than $1 billion worth of rough diamonds during the past month. What goods were sold, and what was the volume ratio between the different goods? There are no clear answers to these questions.

We do not know for sure what goods the miners have collectively offered to their clients, or what was purchased, versus what goods were left on the table. What percentage of the rough parcels manufacturers bought fit the demands in the market? Were the majority of purchases aligned with this narrow specification? Or did the miners simply sell whatever happened to come out of the ground – run of mine? If that is the case, there is a chance that the specific goods that should be in demand were just a small portion of total.

If the majority of purchases, say 80% of the total, were of the goods in demand, what impact will that have on the market? If only some of the purchases, say 20% of run-of-mine, were of the goods in demand, what impact will that scenario have on the market?

In the first situation, we will see a rising supply of the polished goods in demand, as many manufacturers work hard to satisfy that demand. But a supply of some $1 billion worth of rough diamonds means that we will see an oversupply of the needed goods, creating a surplus. The positive aspect of addressing a need will be outdone by the inevitable drop in prices that always takes place with disproportionate supply.

If, however the purchases of the needed rough diamond were a small portion of the total supply, we are still in a difficult situation. The demand will be met, but what will happen with all the polished diamonds that the rest of the rough yields? If these goods are not in demand, inventories will simply rise, and more capital will be tied down, instead of being used for other necessary operations.

Worse, we may find that the prices of other polished diamond categories decline further, due to the rising inventories, and the need to generate sales to create the cash flow that every company needs for continued livelihood.

Shrinking, changing consumer demand

The decline in consumer demand has a number of aspects. First, it is a general decline in interest in diamond jewelry. One reason for that is the near disappearance of generic marketing. This will be somewhat mitigated with an expected generic marketing campaign starting in October by the Diamond Producers Association (DPA). It is too early to comment, but I’m unsure about the effectiveness of a national US marketing campaign run on a relatively small budget.

Another aspect is the decline in average price point per jewelry item. This is not a new trend. American retailers have been reporting this for several years. The decline in average price point is responsible for decline in total revenue for the diamond industry. This coincides with another trend in the US market: consumers are buying fewer objects, and are instead investing in experiences. This means that in terms of share of expenditures, less is spent on jewelry overall.

Finally, lab-grown goods are slowly but surely gaining in popularity. Consumers who prefer the lower cost per item option are purchasing more and more lab-grown goods. These goods still have a very small market share, but the market is slowly growing, and this growth is likely  to continue.

Now what?

All of the above factors are building blocks. Individually, each has a certain yet somewhat limited impact on the industry. Together, they create a very worrying situation. An oversupply of rough diamonds, resulting in a disconnect between output of polished diamonds by the manufacturing sector and demand coming from consumers. This is leading, one way or another, to further price declines in the marketplace, as inventories rise and cash flow needs dictate the generation of sales.

The following are changes in polished diamond prices in the past month, as we at Mercury Diamond track them.

Our data in the table above show that smaller goods, below 1 carat, are seeing price increases, while larger goods, weighing 1 carat and more, are continuing to suffer from price declines. This is the trend we are seeing in the market on the eve of the rough diamond cycle that just ended.

Now, take a look below at the volume report we generated. It clearly shows the decline in availability (in green) of smaller goods, which is where the demand exists. There is an increase in availability of goods in the 0.90-2.99 carat range. Manufacturers continue to make these goods, but the consumer market is not taking them in.

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.