Coronavirus May Cut Chinese Demand, Diamond Companies See Better Times
February 10, 2020
Images of empty commercial streets and shopping malls in China fill the news as the coronavirus spreads throughout the country. The management of the Hong Kong Gem and Jewellery Show has moved the event from early March to mid-May because of concerns about the epidemic. In addition, the Hong Kong government has cut off 10 of 13 entry points at the Hong Kong-mainland border and many flights have been suspended in an effort to slow the spread of the disease.
The impact of this will likely cut deeply into the economies of mainland China and Hong Kong, where stock markets have plunged more than 8% after reopening following the New Year’s break. Mainland tourism accounts for about 70% of Hong Kong’s retail business. Retailers, including jewelry sellers Chow Tai Fook and Pandora, have shut stores throughout the country.
While it is too early to get specific data from retailers and suppliers, gold dealers said demand from China hit “record lows” in the last two weeks of January ‒ usually a time when the New Year boosts sales. On the mainland, the government extended the New Year holiday to keep people home – and home they stayed, with city streets deserted, even in the capital of Beijing. The government has injected some $22 billion into the economy in the form of credit to tide it through the crisis.
The World Health Organization predicts that the virus epidemic is only in its early stages and that it will spread well beyond the affected areas of the country. According to economists, this could have a profound effect on the world economy. Beyond its leading consumer market role, China is an integral part of the global supply chain and prolonged disruptions there could adversely affect many markets around the world, especially electronics which, in time, could slow world economic growth several percentage points. Hyundai, the Korean automaker, announced that it is closing its factories because they have run out of key components from China.
The major diamond producers believe the crisis in the rough market ‒ oversupplies bringing softening prices and cutbacks in bank credit ‒ has eased. Some diamond cutting firms who find their credit restricted and cash flow spotty aren’t so sure, but for now De Beers, Alrosa and others have reopened the spigots.
De Beers’ January cycle of $545 million was 9% higher than the first sale of 2019 and the highest in nine months, reflecting the company’s confidence that the supply overhang that depressed prices and demand last year has abated. Alrosa has not yet announced the results of its Jan. 17-21 sales, but the company stated it believes the diamond market is close to “alignment.”
De Beers’ CEO Bruce Cleaver said in a statement that demand for rough diamonds was up following the fourth quarter holiday season because clients needed to restock. De Beers’ sales plunged by 25% last year.
The company, however, clearly has no plans to go back to business as usual. It has been widely reported that De Beers will be shaking up its client list at the end of the year. While few details have been forthcoming, it is probably a 2020 version of its “fewer, stronger, hands” policy that it adopted following the 1980s crisis, with goods that flow more toward dealers without large factories to support, rather than manufacturers.
De Beers’ criteria for becoming a client, which it calls “demonstrated demand,” basically requires firms to purchase a contracted quantity of rough each cycle during the length of the agreement. Many clients, however, had to defer purchases last year, or even sold goods back to De Beers, because they were unprofitable to cut.
Indeed, the 2019 crisis was hardly the first crisis set off by overstocking ‒ it also happened in 2015 and, of course, 2009-2010, when the world economy itself was in crisis. Even before then, many analysts believed that there was an excess of diamond manufacturing capacity of 20% or more, but with the banks supplying credit, manufacturers could afford to store the excess stones.
Alrosa, the world’s largest producer by volume, stockpiled diamonds last year instead of trying to sell them to over-stretched clients – its rough inventory increased by 33%, according to Alrosa’s latest earnings announcement.
The company’s sales were down 26% by value at $3.27 billion, and 12.4% by volume (33.4 million carats) last year. Its inventory grew by five million carats to 22.6 million – or two-thirds of its 2019 sales volume. The size of Alrosa’s inventory suggests that, ironically, it has taken De Beers’ former role of market custodian, stockpiling goods in slow times.
Rio Tinto, the third largest diamond producer, announced that its diamond production declined 8% to 17 million carats last year as the company shifted production to lower grades in both Diavik (Canada) and Argyle (Australia) – often a strategy to avoid over-production.
While Rio Tinto’s Argyle Mine is known for the few hundred carats of fancy color pink diamonds it produces each year, the majority of the 14 or so million carats it produces are small, lower quality stones that have been under considerable price pressure.
It is encouraging, however, that Rio Tinto wants to stay in the diamond business after Argyle closes at the end of this year and Diavik closes in 2023. It wants to take a 60% stake in the Canadian Orion South project, which is a producer of higher-value diamonds. The deposit could be an important source of Type IIa colorless diamonds.
Weakening currencies and slowing economic growth pushed demand for gold jewelry to its lowest point in a decade during the final quarter of 2019, according to the World Gold Council.
The group reported demand in India fell 17% in the final quarter of the year, compared to the same period of 2018. Chinese demand also fell 10% as trade disputes with the U.S. and rising prices took their toll. In addition, young buyers have been shying away from plain gold toward more fashion-oriented designs that use much less of the metal, according to the Council.
In the U.S., demand for gold rose 2%, but that was not enough to offset the declines in India and China.
Global demand for gold from all industries – electronics, financial, medical and investment ‒ fell 1% for the year.
Russell Shor is senior industry analyst at GIA in Carlsbad.