Diamond Market Forecast: Declining Credit, Soft Prices and Lab-Grown Diamonds
February 18, 2019
Despite the generally strong year for jewellery retail, the diamond industry continues to face problems with ever-tightening credit, patchy demand and softening prices due to the continued overproduction of some types of goods.
Trading sites report that prices for polished natural diamonds declined by 2% to 5% in the second half of 2018 due to overproduction and a slow-down in Chinese demand. This caused stocks to climb more than 20% during the year, according to Rapaport estimates. Some analysts speculate that demand for lab-grown diamonds has begun to erode the market for lower-quality natural stones.
In India, local press reports say that available bank credit is half of what it was five years ago and that the decline of the rupee against the US dollar has raised borrowing costs.
De Beers began the year with cautious cycle sales of $505 million (£387 million), which is down 25% from the same period in 2018 and well below the December cycle, normally the smallest of the year. De Beers will probably follow with a cautious February/March allocation. The company held the line on prices after reducing rates on small, lower-quality goods in the autumn, and is likely to continue hold prices, despite the high probability that some clients will leave some allocations on the table.
De Beers sold $5.39 billion (£4.13 billion) worth of rough in 2018, an increase of $8 million (£6 million) on the previous year according to the company, and will release volume data later this year.
Alrosa, the world’s largest diamond miner by quantity, sold $4.412 billion (£3.381 billion) worth of rough in 2018, an increase of 6%. By quantity, sales were down 8% to 36.6 million carats. Alrosa held back on selling small, lower-quality diamonds that were in over-supply.
A report from ABN-Amro Bank predicts that this year will see increased pressure on natural diamonds from lab-grown diamonds. The bank says lab-grown diamonds are a game changer in the industry that will ultimately reduce demand for natural diamonds – even larger, better quality stones. The game, according to the report, was changed by De Beers’ low prices ($800/£613 per carat) for Lightbox lab-grown diamonds, coupled with improving technology to grow larger, better quality diamonds. These lab-grown diamonds will enter the market in ever-increasing numbers.
The bank report states that this pressure may expand to larger natural diamonds with more attractive margins and notes that, while De Beers has been careful to position lab-grown diamonds as a different product, consumers are likely not to see them as such.
Analysts are looking at a mixed year for retail sales, including jewellery.
In the US, the National Retail Federation (NRF) predicts that retail sales will continue to grow throughout 2019, though at a slightly slower pace. The retail association says the US economy will remain strong and sales will increase 3.8% to 4.4% for the year, compared to 4.6% last year.
The NRF’s total includes all sales channels, but excludes petrol, restaurants and vehicles. Non-store sales, which includes online, grew by 10.4% last year. The NRF is predicting a similar increase this year.
The organisation noted that consumer confidence remains high and that any problems in the economy are likely to be “self-inflicted”, such as trade wars and government shutdowns.
In China, the results from the top retailers quantify the economic slow-down there. The largest jewellery retailer, Chow Tai Fook, saw its sales fall 7% (gem-set pieces were down 5%), while Luk Fook’s revenues took a 10% hit in the final quarter of 2018. Retailers blame the trade war between the US and China – and no one is predicting an upturn.
Russell Shor is a senior industry analyst at GIA in Carlsbad.