Industry Financing, Trade Shows – The July 2024 Market Update

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June was a whirlwind month. It started off with a group of trade shows in Las Vegas that offered a number of surprises. This month, we also focus on diamond industry financing. And it’s slimmer than what you might imagine.

We share some thoughts on De Beers’ JCK announcement and why President Masisi attended, the surprising turn of the jewelry index, highlights from Signet’s Q1 results, a look at the diamond midstream, a foreboding LGD gross profit forecast, and more.

Las Vegas Trade Shows Better Than Expected

The trade shows in Las Vegas were a success – of sorts. The mixture of traders’ low expectations and retailers’ plans for a good season led to a respectable number of orders.

De Beers and Botswana Headlined

The two events that grabbed the most attention were De Beers and Botswana. Heading a large delegation, President of Botswana Mokgweetsi Masisi made a point to meet as many people as possible at the trade show, visiting booths, giving interviews, and holding meetings at the House of Botswana booth, spreading his sparkle.

Masisi clearly arrived with a number of messages to deliver. These included a clarification that Botswana should be consulted and considered when the diamond industry’s path forward is charted. For example, when Anglo American is putting De Beers on the block, or when G7 plans to route all non-Russian rough diamonds through a single node in Antwerp. Masisi wants a node in Botswana.

A well-phrased sentence stated in a fireside conversation with JCK Editor-in-Chief Victoria Gomelsky, distilled the President’s entire purpose at the show into a few words: “We may be a small country, but when it comes to diamonds, we pull weight.”

De Beers’ Strategy

A little over a year after he entered the De Beers’ CEO role, and after somewhat of an internal shake up, Al Cook unveiled the company’s future strategy: Origins. Since Rob Bates and Michelle Graff have already captured it well, I’ll just point out the following:

  • De Beers has always maintained that it is a diamond mining company. Everything else has been a supporting effort. The new strategy seems to suggest that now they are a “book-end” company comprising both mining and retail.
  • The company is putting a greater emphasis on diamond jewelry sales.
  • Their high-end retail operation, De Beers Jewellers, will get far more attention, including another store in Paris.
  • De Beers is also building a polished division and appointed former DTC head Mahiar Borhanjoo to run it.
  • The company is overhauling its lab-grown (LG) strategy. Lightbox will be somewhat sidelined.
  • It’s not only that they will stop producing LG for jewelry. In a recent interview, Cook said, “We’ve got a lot of stones available to Lightbox.”
  • My guess: De Beers will never buy LG from the market. After all, they are not in the business of encouraging this market.
  • De Beers is deep in the process of goosing up the company, and that’s good news.

Trade Show Activity

Trade activity at JCK was mixed. Many of the exhibitors that reported good orders said these were larger than the orders they had at the show in 2023. However, those that reported good business sold higher-priced items. It seems that items with an average price point of $3,000 or higher were those that did well.

Does this mean that demand for the bottom end is shrinking, or that there is a move to pricier items? For diamonds, it’s clearly the latter. Consumers are buying larger diamonds.

Year over year, the number of all sold jewelry items priced $5,000 or higher was flat. The number of sold jewelry items priced below $500 declined 1%.

The high average priced items ordered at Vegas indicates that retailers know this, and expectations for a good season are found at higher-end retailers, and less so among average price point retailers.

One outstanding exception: sales of very high-end loose diamonds were low. Retailers currently prefer to keep in store a wider selection of finished jewelry items over a combination of loose diamonds and semi-mounts.

A large high-end retailer told me that this has to do with being able to deliver immediately to ensure a sale. Retailers do not want to tell a client to come back the following day after they set a diamond in jewelry and let the client walk out empty handed.

Lab-Grown Diamonds at the Trade Shows

My takeaways:

  • For the first time, there was a decline in the number of LG diamond exhibitors. This happens against the backdrop of an ongoing price crisis and the resulting financial crisis in the sector’s up- and midstream.
  • Prices keep decreasing, especially when placing large orders or paying up front.
  • A couple of exhibitors advertised $100-per-carat prices. While these were for a single stone purchase and not a large commercial purchase, the general perception is that these are the new prices. Now, try to fight that.
  • Many retailers are trying to decrease their LG mix of sales in a variety of ways. The challenge appears to be how not to lose consumers who keep asking for them.

Diamond Industry Financing: Ongoing Contraction

Over the past few years, diamond industry funding has gradually declined. Here’s a look at what happened, why, and what the situation is today.

Industry Financing Contraction Drivers

On the side of the banks, they have been taking a more cautious approach after a series of major failures with a very bad aroma associated with the failure causes.

This was partially what led to the departure of Antwerp Diamond Bank, Standard Chartered, Royal Bank of Scotland, Bank Leumi and several others from the diamond industry. Thus, several billion dollars in bank financing has evaporated from the diamond industry.

For diamond traders, the decline in midstream financing was due to their deliberate decision to becoming more self-reliant and less leveraged.

High interest rates and declining margins joined a few other reasons of late: the post-COVID boom, the following decline in demand, and declining inventory value – all of which played a role in traders’ decreased desire for bank financing.

Over the years, banks have changed some of their policies, which in turn supported their aim of seeing a less leveraged diamond industry.

One important change had to do with utilization. It used to be that if a company did not utilize the financing a bank allocated for it, allocation would decrease over time. That policy encouraged midstream companies to purchase more, which at times drove up prices – primarily of rough diamonds – to meet banks’ utilization demands.

Removing strict high utilization requirements allowed borrowers to utilize only the financing they needed, which ultimately reduced borrowing.

Current estimates are that utilization is between 40 and 50%.

Current Financing Levels

In 2010-11, a rise in polished diamond demand drove up prices, and with it, midstream borrowing, which fueled further price hikes. The increase in demand, mainly due to retail expansion in China and India, ended in August 2011.

According to Bain, financing peaked in 2013 at $16 billion. By 2022, that figure was sliced in half to around $8 billion.

However, according to our analysis, industry indebtedness further declined, and this is not a positive sign.

Currently, financing utilization is approximately $6 billion. The decline is primarily due to lower prices and diamond traders’ caution. The introduction of LG, which in addition to being cheaper also costs less to polish, is a contributing factor.

The discussion on financing tends to focus on banks and, to a lesser degree, on outside financing suppliers such as Guggenheim Partners. However, there is an additional significant source of funding, and that is the industry itself.

Industry financing is typically at 1% per 30 days and, according to one estimate, can account for up to 20% of market financing. Most, but not all, of it is rolled into the sellers’ bank financing.

A 12% annual rate may appear high, but if all costs and interest rates are considered, bank financing may cost as much as 10% annually.

Bank utilization by the diamond industry is now just $4 billion, with a quarter of this by a single bank, IndusInd.

Another $2 billion comes from outside sources. These include non-bank financial firms and inner-industry financing.

Estimated Industry Financing Utilization (USD Bln)

Diamond Industry Financing estimated June 2024 - © Edahn Golan research & analysis

Diamond industry financing veteran, Erik Jens, reminds me that jewelry manufacturers, many of whom belong to large diamond firms, have additional financial exposure.

Natural Diamonds: Waiting for A Turnaround

The natural diamond industry is continuing to suffer from a global decline in sales. The causes are known: China has yet to recover demand ever since the COVID outbreak, and the growth in demand for LG, primarily in bridal jewelry.

Overall, sales are declining in volume and value, a trend that started in the second half of 2022. This is leading manufacturers to reduce activity, polish LGDs just to keep their workforce busy, and manage inventory with great care.

Loose Natural Diamonds Sales Trend

US Loose natural diamonds sales trend Jan 2020 - May 2024 - Analysis Edahn Golan

 

And yet, there is some light. Based on data from Tenoris, which tracks retail activity at more than 2,000 jewelry stores in the US, consumers are spending more on natural diamonds.

Specifically, the average expenditure per diamond is rising. This is a long-term trend that indicates that even as consumers are buying fewer diamonds, they do find economic, cultural, and emotional value in it.

Average Consumer Expenditure Per Unit SoldUS Loose natural diamonds average retail trend Jan 2020 - May 2024 - analysis Edahn Golan

Lab-Grown: The Gross Profit Trap

The decline in the number of LGD exhibitors at JCK is likely also a sign of consolidation in the midstream, and possibly among growers.

It seems that a number of the larger growers are reducing prices almost by the hour – anything to get the goods out the door and off their books. The result is the decline in retail prices that follows.

When discussing retailers’ interest in LGD, it’s often about consumer demand and gross margins. Smart retailers see consumer interest and gross profits. Unlike the growing gross margin, gross profits are eroding fast.

In 2021, they were up 124% over 2020. In the next two-and-a-half years, they were diminishing double digits.

When retailers look at the income LGD generates, they first consider cash through the register – how much real income LGDs actually contribute over time. Then retailers look at the long-term trend and see the following: profitability growth is decelerating, and at this rate, will likely shrink by next year.

Loose Lab-Grown Diamond Gross Profit YoY + One-Year Forecast
Loose Lab-grown diamond Total Gross Profit YoY - 2021- Jan-May 2024 Source: Tenoris. Diamond market analysis: Edahn Golan

Jewelry index

Despite the continued rise in precious metal prices, the jewelry index declined in June, primarily dragged down by diamond prices.

The decline follows three consecutive months of increases.

The Jewelry Index: A Surprise Decline

The Edahn Golan Jewelry Index. A jewelry commodities weighed index Jan 2023-June 2024 line chart

 

Gold prices are continuing their upward trend as global economic uncertainty and central bank purchases continued. However, rough diamond prices showed price declines in key areas, leading to a 2.4% month-over-month price decrease.

Jewelry Commodities Year-Over-Year Price Change
Jewelry Commodities YoY Price Change June 2024. An Edahn Golan analysis

Company Reports

De Beers

Sight 5: Price Unchanged, Demand Low

De Beers was firm on pricing at Sight 5 and did not provide many price decreases despite the sentiment among Sightholders that rough diamond prices should be reduced to match wholesale polished prices.

Sightholders refused many of the goods, mainly 2 carats and up, as well as melees. In addition to the refusals, there were also many deferrals, which is a request to get the goods at a later Sight in the year.

The refusals alone are estimated in the tens of millions, and the broad consensus among many attending this Sight is that total sales were low.

Opinions on why De Beers decided to keep prices unchanged range from their attempting to protect polished prices to it making no difference as the market is slow anyway.

More importantly, De Beers is moving back to a stricter policy on sales. This includes ending the overspill into the week following the Sight, rolling back to a Monday-Friday buying window.

De Beers’ H1 Rough Diamond Sales Down 20% YoY 

De Beers H1 2024 Rough Diamond Sales Down 20% YoY - analysis Edahn Golan

ALROSA

The under-sanctions diamond miner is continuing to sell rough diamond in the market. Even though its activity is obscured, the company seems to be looking for new markets.

One thing is clear: Most of their clients are working hard at concealing their purchases.

Lucapa

The company which owns Lulo in Angola and Merlin in Australia, announced the sale of its 70% stake in Mothae, a diamond mine in Lesotho to Lephema Executive

Transport.

The company said it views Mothae as a non-core asset, sold to focus on developing their Angolan and Australian assets.

Okavango Diamond Company

ODC’s June auction totaled $66.6 million. All lots except 11 specials were sold.

Signet

Signet reported a 9.4% decline in Q1 sales. Surprisingly, the biggest declines were at the digital banners, James Allen and Blue Nile, down 20.5% year over year. This is possibly explained by the 12% dip in bridal jewelry sales and ongoing demand for LG-set jewelry.

In this context, Signet announced a shift back to natural diamonds, along with a joint marketing campaign with De Beers to support it.

Richemont

The luxury retailer reported a 3.3% rise in sales in the fiscal year ending March 2024. This was mainly driven by a 6% increase in sales by its jewelry houses, the most notable of them being Cartier and Van Cleef & Arpels.

Diamond & Jewelry Markets

US

Consumer demand for jewelry is improving. According to the latest US government figures, jewelry sales at all outlets rose for the eighth consecutive month. In May, US jewelry sales rose 1.5% year over year to $7 billion.

The May rise brought total jewelry sales up 2.4% for the first five months of 2024.

YTD, Total US Jewelry Sales Are Rising
Year to date US Jewelry Sales are Rising - US Fine Jewelry monthly sales Jan 2018 - May 2024 - Edahn Golan analysis

Specialty jewelers’ sales have also improved. By value, sales increased 2%, with the average expenditure per item rising 2.6% in May. The rise in average expenditure is a clear trend of recent months, most notably of fine jewelry set with natural diamonds.

Specialty Jewelers Sales Trend
Specialty jewelers sales trend - Jan 2020-May 2024 - source Tenoris Analysis Edahn Golan

Diamond jewelry trends are exhibiting a small year-over-year improvement; if the trend exhibited in the following graph keeps holding true, then we should expect continued improvement.

US Natural Diamond Jewelry YoY Sales Trend
US natural diamond jewelry YoY sales trend Jun 2021 - May 2024 - analysis Edahn Golan

India

India’s international diamond trade tells much of the story of the diamond industry.

With small exception, the largest diamond center’s polished diamond exports have declined by value and volume every single month this year. Year to date, exports are down more than 30% – a true sign of declining consumer demand.

India’s YoY Polished Diamond Exports
India's YoY polished diamond exports January-May 2024 - analysis Edahn Golan

Unlike polished diamonds, India’s rough diamond trade, shows some variations. The January and May jump in year-over-year imports are mainly against a dip in imports in 2023. It’s not that manufacturers experienced a sudden shortage. Some of it appears to be opportunistic with some very low-cost goods.

India’s YoY Rough Diamond Imports
India's YoY rough diamond imports January-May 2024 - analysis Edahn Golan

A less discussed issue affecting India’s industry is the decline in polishers’ pay. I’m referring to the multitude of laborers who polish lab-grown diamonds.

Adjusting to the lower wholesale pricing of LGDs, polishers’ pay per carat was squeezed. Because of the lower value of the raw material, manufacturers are less sensitive to polisher mistakes, giving room for a less skilled workforce.

Polishers aware of the lower cost sensitivity allow themselves to work faster. This raises the risk of making mistakes, but offers them a chance to make up for the pay decrease.

China

According to the country’s bureau of statistics, in May, China’s gold, silver, and jewelry retail sales declined 11% in yuan year over year. This is a change in direction from the rise reported In previous months – particularly for gold jewelry.

The decline stands out against a 3.7% increase in overall retail activity.

Hong Kong

For a third month in a row, Hong Kong’s jewelry and watch retail sales sank 28.7% to $478.7 million (HK$3.75 billion) in April.

Japan

Japan’s loose polished diamond imports declined in May to $33 million, down 17.3% year over year.

While the decline in polished imports may simply indicate a change in mix and overall price declines, Rough diamond imports tell a different story. In the first five months of the year, Japan’s rough diamond imports fell 77% by value and 68.5% by carats.

With no rough diamond imports, polishing in Japan has diminished significantly.

Japan’s Polished Diamond Imports Are Declining
Japan's polished diamond imports Jan 2023 - May 2024 - analysis Edahn Golan

Belgium

Politics: Belgian PM Alexander De Croo resigned following the European election results, and there’s a diamond industry angle to the story: De Croo and his government were very much in favor of G7’s single node policy that worried the industry and strained relations with its diamond-producing African partners.

With the EU’s new right leanings, Belgian support for this policy will likely be abandoned. This change will become even more plausible if Antwerp mayor Bart De Wever succeeds De Croo.

Trade: Belgium’s rough diamond imports fell 20% to 17.4 million carats in the first five months of the year. By value, the drop is 34%, as diamond prices declined.

Polished diamond exports also declined, down 11% to $3.94 billion in the five-month period.

Belgium’s 2024 YoY Diamond Trade Value Change
Belgium's 2024 YoY rough and polished Diamond Trade Value change - analysis Edahn Golan

Israel

Israel’s rough diamond trade was on the rise in May for the third time this year. Year to date, net rough diamond imports were up 5.5% and exports increased 7.2%.

The general consensus among Israeli manufacturers is that they want to avoid Antwerp at this point, which explains this upswing in rough diamond imports that are in contrast to the declining trend everywhere else. Some suspect that some of the imports are actually Russian, entering as mixed goods.

Polished diamond trade is only shrinking, Net imports plunged 37% in the January-May period, while exports sank 29% year over year.

The more critical issue about Israel is that its overall level of activity is shrinking.

Once the largest polished diamond exporter, today, the country hardly has any manufacturing, many of the skilled hands it once had have retired and were not replaced, financing was slashed by 65-70% in the last decade, and no forward-looking master plan was ever drafted.

Compounding its difficulties, the current war raging in the region further deters buyers from visiting the center. Based on past experiences, it will take years to restore this important traffic.

Israel’s Net Polished Diamond Exports January 2023-May 2024
Israel's net polished diamond exports January 2023-May 2024 - Analysis Edahn Golan

Wrap up

The diamond industry is going through some particularly challenging times. The rising popularity of LG, China’s extended economic downturn, De Beers’ uncertain future, and sanctions are not driving consumers to the category.

So while the trade shows do provide some hope for the near-term, the long-term underlying issues still need to be addressed.

Financing is the tell-tale concern. Despite the relatively smooth sailing, below the calm surface are some strong currents, as the continued shrinking utilization reflects not only self-reliance, but also decreased activity – and that is the issue that requires addressing.

PS – Kimberley Process figures on 2023 production were published shortly before press time. We will provide insights in the next report.

If you are interested in better understanding the diamond industry, including diamond industry financing, then by all means, please get in touch.

Photo by Nathan Dumlao

About the Author:

Edahn Golan
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Edahn Golan has 20 years of experience as a diamond industry analyst. He has a unique ability to provide a global view with context to the exclusive granular data he shares. The New York Times, Wall Street Journal, Business Insider, and other leading publications quote him regularly.

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