Editor’s Note
The global diamond industry faces unprecedented challenges as pandemic-driven disruptions create a massive inventory surplus. This article examines the market pressures and strategic dilemmas confronting producers and retailers in an era of diminished demand.
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Diamonds have lost their luster due to the COVID-19 pandemic. Inventory has piled up like a snowball because of economic lockdowns and closures implemented to prevent the spread of the virus. The industry is searching for clever strategies to reduce inventory while protecting the market, but it doesn’t seem easy.
Bloomberg reported on the 7th (local time) that the COVID-19 pandemic has devastated the diamond market. The diamond distribution structure has been completely severed.
Diamonds are mined by large mining companies like De Beers of the UK or Russia’s Alrosa, then cut and polished in places like India, and distributed through retailers like Tiffany & Co. in the US.
For months during the pandemic, jewelry stores have been closed, and Indian polishers have been unable to work. With the movement of rough diamond brokers halted, De Beers, the world’s largest rough diamond producer, had to cancel its scheduled rough diamond sales event in March.
Bloomberg reported that both De Beers and Alrosa have sold almost no rough diamonds since February.
According to diamond market consultancy Gemdax, the excess inventory held by the world’s top five diamond producers, including De Beers and Alrosa, amounts to $3.5 billion (approximately 4.23 trillion won). The excess inventory is expected to continue increasing until the end of the year, reaching $4.5 billion. This volume is equivalent to one-third of the annual rough diamond production.
The inventory buildup is also partly due to the stubbornness of the two major companies, De Beers and Alrosa. They have not lowered prices despite frozen demand. Instead, they unusually allowed buyers to freely cancel pre-arranged purchase contracts. They also reduced production, but it was insufficient to stop the inventory from piling up.
Unlike De Beers and Alrosa, smaller companies reportedly lowered prices even before the pandemic for survival. Sources said small companies have lowered rough diamond prices by up to 25% in major trading markets like Antwerp, Belgium.
Sergey Donskoy, an analyst at Societe Generale, pointed out, “Diamond miners are facing a double whammy of weak prices and a sharp drop in sales, reminiscent of the 2008-2009 global financial crisis.”
Bloomberg added that inventory management has been a headache in the diamond industry since the early 2000s when De Beers’ market monopoly ended. In the early 2000s, De Beers’ inventory reached $5 billion, and inventory surged across the industry during the global financial crisis and the European debt crisis.
From its founding in 1888 until it was caught by antitrust regulations in the early 2000s, De Beers controlled 80-85% of the global rough diamond market. It is famous for reviving diamond demand, which had shrunk due to the Great Depression and World War II, with the late 1940s advertising slogan ‘A diamond is forever’. Its recent market share has fallen to around 30%.
The diamond industry is seeing some hope as Chinese retailers have recently reopened, and polishing operations have resumed, albeit at half capacity, in India.
The problem is that a lot of work volume was already secured in January-February, so there is little room for additional demand to arise immediately.