The Golan Diamond Market Report – Q1 2020

Edahn Golan Diamond Market Report-Q1 2020 - Featured image

Since we are living in such extraordinary times, I’ll start this report with an unusual opening – the conclusion.

Within a period of about a month, humanity reached an unusual and ironic decision. For the first time, nearly everyone in the world has decided to stay at home, quarantined. This is ironic because we decided to isolate ourselves from each other because we are a community, out of care for each other. We are currently alone because we are social creatures. Quite incredible.

If the Chinese timeline is a reasonable model, it will be a couple of months until the next new normal is created. There is no doubt at all that business must resume, or there will be no economy. Despite this grim description, diamond and jewelry sales are expected to rebound once the crisis is over. History has proven this time and again, as outlined here. Why will these sales rebound? Because of love. Because love is a human need. Scroll to the end of the report for the mushy outlook.

SUMMARY

The first quarter of 2020 was completely overshadowed by the COVID-19 outbreak.

An estimated three billion people are currently under lockdown, 1.3 billion of them in India alone. Millions of people have lost their jobs, and the extent of this impact on the global economy is difficult to assess.

The diamond industry did not escape the downturn, although business in the US continued late into the quarter, providing some relief.

  • Polished diamond prices were largely stable in March after rising in January and falling in February.
  • Wholesale inventories rose following large rough purchase and a drop in sales.
  • Demand plummeted to its lowest since 2009.
  • US: Despite continued activity deep into March, a rise in unemployment threatens to add an additional burden on future diamond sales, especially bridal.
  • India: The country is under full lockdown and diamond activity is down to a trickle.
  • Belgium: Government-backed support is elevating some of the pain, including an important agreement with banks on credit supply and interest rates.
  • Hong Kong: Long hard hit, yet in late March some activity resumed.
  • Israel: The worst hit diamond center. With no government support for the industry and a soaring 25% unemployment rate, the prospects are grim. The Mizrahi/Union bank merger is on hold.
  • Bank financing continued to decline during the quarter, mainly in Israel.
  • An exceptionally high rough diamond supply in January was reduced to near zero in March.
  • Rough diamond prices at tenders were down sharply.
  • LGD prices were stable until February, and then trade stopped.

POLISHED DIAMOND PRICES

Although sales were almost nonexistent, polished diamond prices remained stable. This is not surprising considering that the diamond industry is very small and tends to protect itself from price fluctuations. In past crises, such as 2008, polished diamond prices fell less than most other commodities and products. Every price decline in this slim margin industry is tough to manage, which explains the events that started to unfold on Friday, March 20 – the Rapaport price list decline.

Foremost on traders’ minds these days are polished diamond prices. A battle cry rose from the rank and file of polished diamond wholesalers and manufacturers after Rapaport, the benchmark pricing tool, reduced prices of polished diamonds nearly across the board by 7% on average. The perceived hit was so strong that it led traders to pull their goods from RapNet en masse and seek a new B2B platform. Oddly, they did not decide to abandon the Rapaport price list.

Whether the decline was justified is a matter of who you ask. One of the weaknesses of the Rapaport price list is its slow response to price changes in the market. Traders, for their part, should be better at communicating this to their clients. After all, traders have been reducing prices for a while. In February alone, prices were down on average 2.9%.

Diamond market Q1 2020 - Round Wholesale Polished Diamond Prices MoM Change Mar 2020 - Q1 2020 diamond market report Edahn Golan

Based on wholesale polished diamond transactions, prices rose practically across the board in January (+1.4%) following strong retail sales in December, fell in February (-2.9%), and were practically flat in March, down 0.03% month over month.

The reasons for the stable prices were limited transactions and the fear that further reductions would cause a wide-scale tumble in price, snowballing into mass business closures. 

One-third carats, which posted price increases of 0.6% in January and 1.6% in February, rose another 1.5% in March despite the global slowdown in trade and retail activity.

Size ranges from 0.70 to 1.50 carats declined, and larger goods sold at better prices in March, as the polished diamond price index below illustrates.

Diamond market Q1 2020 - Polished Wholesale Diamond Prices Jun 2019-Mar 2020 - Q1 2020 diamond market report Edahn Golan

MIDSTREAM

Polished Diamond Inventories

In the first quarter of 2020, wholesalers’ inventories started on the low side, partially explaining manufacturers rush to buy rough diamonds in in January. After freeing itself from its large stockpile in late Q4 2019, it started polishing again in January. Operation ran even as China closed down, and continued until a forced government halt on all activities due to COVID-19.

In practical terms, the leap in unemployment, the store closures, unknown health risks, and economic concerns will have an impact on the number of weddings and their timing.
Despite turning down or deferring a large amount of supply from the main diamond miners, the continued purchases in February resulted in a growth in inventory. At this point, only a slow trickle to China and Hong Kong is aiding in reducing this inventory, yet it will remain larger than planned or expected.

Polished Diamond Demand

Polished diamond sales, which continued as normal in January and slowed down dramatically in February, tumbled in March, but did not come to a full stop. Small and mid-sized loose diamond wholesalers mostly reported a complete standstill in trade. Large companies, with a wide network of activity and supply contracts, were able to generate some sales in March, although clearly demand was slashed by a great degree.

With the Asian and European markets closed, the only real sales venue was the US. This was due to the slow response to the pandemic by the US government and the failure to communicate to the nation that COVID-19 is a real threat to life. Without that understanding, few foresaw the store closures, which allowed demand for polished from the US to continue.

In late March, we started to see a slow recovery in demand from China and even long-stifled Hong Kong. Yet, in terms of actual transactions, demand was at its lowest level since early 2009.

Diamond market Q1 2020 - Global Demand for diamonds continues to slide - Quarterly Changes in Wholesale Polished Diamond Demand Q3 2018 - Q1 2020 - Q1 2020 diamond market report Edahn Golan

US

The US unemployment rate skyrocketed in March. The number of actual initial claims under state programs, unadjusted, totaled 2,898,450 in the week ending March 21, an increase of 2,647,034 (or 1,052.9%) in a single week.

This news shocked Americans, especially the business sector. Imagine its surprise when a week later the Department of Labor announced that the number of unemployed had doubled, rising to 5.82 million.

Do yourself a favor and ignore the seasonally adjusted figures. They are misleading, as they try to account for cyclical changes and normalize the figures. The figures are depressing enough without any statistical manipulations.

US unemployment 1967-Mar 2020 - Diamond market Q1 2020 - Edahn Golan

Some of the hardest hit states were California, Pennsylvania, and Massachusetts – all COVID-19 related.

In practical terms, the leap in unemployment, the store closures, unknown health risks, and economic concerns will have an impact on US weddings. The size of weddings is expected to shrink, together with overall expenditures on these otherwise festive events. A good percent of weddings will be postponed. The question is – what impact will this have on purchasing bridal jewelry?

In the past, this did not tend to have as large an impact on expenditure on bridal jewelry as on other wedding-related expenditures such as venue, music, photographers, or flower arrangements. This was the case after the 2008 fallout for example.

One place where there is a difference between 2008 and 2020, is marketing. In 2008, the “a diamond is forever” campaign was still running, and De Beers reran its “Hands” campaign from 2006, replacing the dramatic string quartet soundtrack with a more appropriate cover of “Stand by Me”. It was emotional and powerful.

The following year, the company ran the Journey design promotion, which further promoted diamond jewelry sales. Today, such promotional efforts are missing, and are not expected to be resurrected, unless the Diamond Promotion Association is somehow released from its MIA status.

On the other hand, other things are working in our favor – love and action. Following hard times that include a real threat to life, we tend to wake up from our hesitance, remember that life is short, and rush to bond. More on that in the conclusions below.

The first quarter in the US saw plenty of changes. Immediately after the December holidays, satisfied storeowners started replenishing and thinking about Valentine’s Day and the wedding season.

Demand started picking up at the retail level with independents looking for bargains, willing to shell out for goods. The chains and majors were already focusing on their spring season offerings. Dealers supplying the US market were all geared up for the March shows in Hong Kong to sell “big”. 

Demand from retailers shifted to memo goods only, focused on 1.50- to 3-carat rounds and 1- to 2-carat ovals in top colors, VVS-SI clarities, and very good make or better. These are items in longstanding good demand and short supply.

By mid-March, traveling sales people stopped traveling. Some tried to continue doing business by phone. That did not work well. As stores closed, wholesale business stopped.

All major trade shows were cancelled, including JCK Las Vegas, AGS Conclave, and JA.

India

India is an important polished diamond supplier to China. The outbreak of the pandemic in China was the first blow to India’s diamond trade in the first quarter. Indian traders reported a sudden and full stop in orders in February. One trader described the situation at the time as “no one is answering the phones.”

Today, such promotional efforts are missing, and are not expected to be resurrected, unless the DPA is somehow released from its MIA status.
After the outbreak in Italy, exports to Europe and trade with Belgium were sharply curtailed as well, leading to a major slowdown in February. This harmed rough diamond purchasing and polished exports. By March, polished diamond trading in India came to a complete standstill. Traders have reported “zero activity” since mid-March, stating that this is across the board.

Prime Minister Narendra Modi announced a three-week lockdown in India, starting March 30, which closed diamond polishing and jewelry-making factories.

The measure followed a finance ministry decision to raise the minimum value of a default that could trigger bankruptcy proceedings for small- and mid-sized businesses.

Belgium

The Belgian government took a series of measures to help business through this period.

They include postponing VAT payments, and a payment plan for taxes such as the Carat Tax, including exemptions and penalty waivers.

The government will also provide the unemployed with 70% payment of salaries, plus compensation for water and energy bills.

The federal government also reached an agreement with banks to postpone payments of existing credit lines until September 30, and decided that it will be possible to receive new additional credit lines guaranteed by the government. The annual interest on these new credits and credit lines are capped at 1.25%.

Trade through the Belgian diamond center highlights global diamond trends well.

In January, polished diamond exports fell year over year, and rough diamond imports rose strongly. In February, polished diamond exports tumbled and rough diamond imports increased, though at a more moderate rate.

Diamond market Q1 2020 - Belgium diamond trade Jan-Feb 2020 - Q1 2020 diamond market report Edahn Golan

These figures also highlight the drop in the average price of rough and polished diamonds, down nearly across the board.

That said, and despite Belgium being hard hit by the virus, many diamond operations continued to work. The Diamond Office, tasked with overseeing international diamond trade, kept working as well, although at a much reduced volume.

To stave off the drop in trade, at least within the diamond midstream, the Belgian and Israeli diamond industries organized a joint virtual trade show to compensate for cancellation of the large trade fairs. According to initial reports, a majority of offered goods were sold.

Hong Kong

Hong Kong was hit early by COVID-19, and started to make its way out from under the effects in mid-March. However, after the virus outbreak, diamond and jewelry business activity was put on hold. Many retailers decided to close until April. As with large areas of China, Hong Kong was also under tight lockdown, including a ban on all non-resident arrivals.

From a retail perspective, jewelry and watch sales fell 41% year over year in January. They then fell 79% in February. These figures are in line with a 70-80% drop in overall diamond trade activity estimated by local traders.

And yet, traders reported that in late March some activity started to take place.

With no international travel, the March Hong Kong jewelry show was delayed to May, although a further delay is very possible.

In China, New Year’s and Valentine’s Day were lost due to the outbreak, and there is no additional jewelry buying holiday soon, which will hurt the recovery of diamond centers.

Israel

The year started strong in Israel following the 2019 holiday season, providing a sense of optimism in the local market. Solid demand from the US market continued from December with a focus on typical American goods: GHI colors in SI-I1 with a focus on over-sizes. Third-quarter rounds were in continued demand as were small pointers, and shortages were reported. Good demand was also reported for emerald and pear shapes.

All that came to a complete stop as soon as COVID-19 hit the US market. The halt in flights, social distancing, and then the store closures hit the Israeli diamond industry hard.

Israel’s international diamond trade was slashed in half in Q1 2020, with February trade cut by 75% year over year. With less reliance on bank financing, the drop in the stock markets was another blow, adding to diamond traders’ lack of confidence. The fear of an eminent and drawn out recession led diamond companies to send most of their employees home on forced vacation.

With companies delaying payments and asking suppliers to not cash checks, the fear of a series of bankruptcies is very real.

Currently, more than one million Israelis, 25% of the country’s workforce, are unemployed. The impact this will have on Israel’s economy is unimaginable.

The current situation also places doubts about the Mizrahi/Union Bank merger. At best, it looks to be delayed. The required sale of the diamond financing unit by one of the two banks looks further away than ever. Without it, the final merger approved won’t be granted.

BANKING

Diamond market Q1 2020 - Changes in Diamond Industry Financing Q2 2019 - Q1 2020 - Edahn Golan

Bank financing of the diamond industry continues to shrink, a trend that will probably continue in the near future. Efforts by various diamond organizations to increase cash supply were unsuccessful, but continuing.

In the meantime, ABN AMRO, the leading diamond industry financier, announced that it won’t collect principal and interest payments from clients with a credit facility of up to €50 million from April through September.

For commercial banking clients with a credit facility of up to 2.5 million euros, payment of interest and principal will be automatically deferred for six months.

UPSTREAM

Rough Diamonds

The first quarter of 2020 started well for diamond miners. Strong December retail sales resulted in strong demand for rough diamonds, providing miners with a much needed cash flow and an opportunity to start offloading their huge rough diamond inventories of rough diamonds, estimated at around $5 billion.

In January, miners poured more than $1 billion worth of rough diamonds into the market, which were purchased enthusiastically by the midstream. But the midstream went overboard, biting off more than it could chew. Bankers were somewhat alarmed by the financial outlay and the commitment that comes with it.

The cooldown that followed in February made sense. This is when the meaning of the rapid spread of COVID-19 was starting to set in.

Like most of the activity in the diamond industry, rough diamond trade came to a screeching halt by the end of the quarter. In March, with jewelry retail activity down to a trickle, and forced lockdowns in the manufacturing centers in place, the diamond midstream had no need for rough diamonds and no ability to process them anyway. Even if it did, with no polished sales, how could it pay for the cost of polishing, especially when the achieved price of polished was an unknown?

One possible outcome of the cessation in rough diamond supply is a shortage. As soon as the lockdowns are over, and factories return to business, there will be a deep need for rough diamonds, which may have an upward impact on prices. This is a cause for concern.

De Beers

In the first two sights of 2020, De Beers did not reduce prices. Preferring to reduce sales over prices is an old policy at the company, although it has made concessions in the past, some in roundabout ways.

During the first cycle of the year, De Beers sold $551 million worth of rough diamonds, up 29% from December and 10% year over year. This was a huge quantity of goods, but their clients took it in with surprising enthusiasm, even buying some extra goods when possible.

Sitting on a large inventory with a weakening cash flow, the large offload was a welcome relief from De Beers’ perspective. However, it proved too much for the midstream, and in the second cycle, requests for deferrals were already popping up. Sales fell 36% to $355 million, a precursor for March.

Sight 3, scheduled for March 30-April 3, was hit from all directions. It started with Sightholders demanding greater flexibility in purchases. Then South Africa, the main air travel gateway to Botswana, closed its borders. Botswana followed suit, and in India, the government shut down business, forcing a closure of polishing plants. De Beers, after already agreeing to a 100% deferral, had no choice but to cancel Sight 3.

De Beers Group Rough Diamond Sales Declining 3 2017- 3 2020 - Edahn Golan Q1 2020 diamond market report Diamond market Q1 2020

The next Sightholder contract was another issue keeping De Beers, its brokers, and its clients busy. While Sightholders have submitted their applications, De Beers is in the final stages of deciding what form the allocations will take. Some changes forced by the times are due, and the company has already concluded that the current system needs updating.

ALROSA

Although sitting on an exceptionally large inventory of rough diamonds, ALROSA in effect also cancelled its April sales period for long-term clients (April 6-10) by offering them a 100% deferral of their allocation. The change required some legal wrangling, as long-term clients are required to buy a percentage of their monthly allocation or risk losing their contract.

ALROSA also kept its prices steady, preferring to decrease the volume of sales and protect value. One reason is that raising prices after a reduction is difficult and lengthy. Another reason is that a decreased supply helps price recovery. This is an age-old practice, one perfected by De Beers and adopted wholeheartedly by ALROSA.

Earlier in the quarter, in support of its long-term customers in the current situation, ALROSA in March reduced the limit of mandatory buyout to 50% of contracted volumes, with an opportunity to delay buying of up to 10% until the end of May. With travel restrictions imposed around the world, ALROSA held an online auction of special-sized (over 10.8 carats) diamonds from March 23 to April 6. All other sales are currently on hold.

In January, the Russian miner sold $390 million worth of rough, the most since April 2018. This was an 11% month-over-month increase and a 28% year-over-year jump in supply. In February, that supply declined 12% to $342.3 million, and fell to $148.7 million in March.

Diamond market Q1 2020 - ALROSA Rough Diamond Sales Sliding 17-Mar_2020 - Edahn Golan Q1 2020

Rio Tinto

Following decisions by local governments, the Australian miner has slowed down mining and exploration activities, including in Canada. As with De Beers and ALROSA, the good sales that started in January ended in March.

Mid-Size & Junior Miners

South Africa’s President Cyril Ramaphosa announced a 21-day lockdown from March 26 to April 16. Some mining operations received limited exceptions to a full shutdown, taking into account the cost of restarting a mine.

In response, Petra Diamonds and other local miners announced a reduction in operations, depending on the type of activity: open pit, underground, or alluvial. In addition, Petra decided to cut short its tender in South Africa by three days.

Gem Diamonds reported an 18% drop in prices at its small rough diamond tender that ended on March 18 in Antwerp. A week later, it reported placing its Letšeng mine on care and maintenance during a three-week (March 29-April 21) lockdown period in Lesotho.

The South African State Diamond Trader (SDT) office closed on March 27 and will reopen on Friday, April 17.

Rough Diamond Tenders

Tenders went well in January with strong prices, then slowed down before ending in March. Prices have fallen by an estimated 20% since mid-February. This was the most drastic price reduction among rough suppliers.

At Grib’s tender in Antwerp, prices were down an estimated 18%, and more than 80% of the goods were sold.

A decrease in the number of bidders characterized all tenders held in March. This was not surprising, and it usually tends to result in lower prices.

LGD

Healthy lab-grown sales were reported in January and deep into February. Rough LGD supply from China was halted due to the Chinese New Year vacations that started in mid-January. Factories were due to open in February, however, production did not start until late in the month, and then only partially.

The travel ban posed an obstacle to purchasing, with producers willing to ship only if buyers were willing to accept parcels without seeing them first. That kind of trust is limited. And by mid-March shortages in HPHT were reported.

According to LGD manufacturers and wholesalers, sales of polished ended abruptly in early March and in early April was yet to resume.

LGD prices kept steady in the first couple of months, while business continued. The exception was a price decline in thirds and quarters over a supply/demand imbalance.

In addition to the pandemic induced impact, patent issues also impacted CVD activity, evident in February. As a result, HPHT was in better demand, leading to firm pricing.

It is difficult to predict what will happen to LGD demand and prices once the COVID-19 storm passes and trade resumes. One LGD jewelry manufacturer said he expects prices to decline at first as loose LGD traders will be incentivized to renew their cash flow as quickly as possible.

OUTLOOK

Did COVID-19 kill commerce? It clearly brought it to a near full stop, especially at physical locations. But it probably gave online retailing a major boost that will propel it much higher in the years to come.

“Paradoxically, the ability to be alone is the condition for the ability to love.” Erich Fromm, The Art of Loving
Economic stimulus policies are already starting to be deployed, and more will, of course, be presented once the main battle against COVID-19 is over. They will take many forms, likely impacted by countries’ economic philosophies.

Ever since the 1930s fallout, the US has had a fear of deep unemployment, which drives many of its economic decisions, just as the hyperinflation of the 1920s drives Germany’s fear of inflation to this day. Therefore, keep an eye out for moves in the US geared to generate work.

Some thoughts to keep in mind: Eventually, there will be a vaccine. Eventually, there will be a cure. Until then, we’re entering a challenging period that none of us has ever experienced before. We don’t know yet what it will be like, or even what it means. When it is over, we will probably be different in many ways – in how we live our lives, in how we do business, in our priorities, and in our expectations from our society. 

Expect diamond jewelry sales to rebound fairly quickly based on past major crises as detailed in this report. In retrospect, I realized that the report gave a historic explanation of why this is to be expected. However, it did not yet discuss the underlying power that drives this: It is because of love. Because love is a human need.

According to Erich Fromm, “Paradoxically, the ability to be alone is the condition for the ability to love.” As soon as humanity feels that it’s surviving, that it’s starting to make it through, that we are no longer forced into isolation, we will burst forward with a reassessment of our lives.

We will confess hidden loves because, hey, life is short, so we might as well be bold. We will stop stalling and propose because we just came back from the brink and don’t want to lose any more time. We will have that baby because we will have a deeper desire to perpetuate our lives. And because of all this, we will get that piece of jewelry that symbolizes that momentous point of our lives. Or a tattoo. Maybe both. 

On a different note, I’m available and more than happy to help with any questions, advice, needed data, or any other help I can extended.

Further details on all the above are available upon request.

Diamonds in the Age of COVID-19
Ruin to Resurrection, the Perpetual Path

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