We'll Ride This StormApril 02, 20
They say hindsight is 2020, but who could have predicted the tsunami of unusual circumstances the world - and diamond industry - have experienced since 2020 kicked off. The coronavirus has had a deep impact and unexpected consequence on every sector worldwide and the diamond market is no exception. The global pandemic came hot on the heels of several high value bankruptcies in India, known as "the polished diamond hub" where 80 per cent of diamonds get cut and dispersed. Banks in India consequently lost billions and as a result, their lines of credits have been reduced. This led to an over-supply of polished diamonds in the market and a decrease in prices.
Now, enter coronavirus. Diamond trading has declined sharply due to economic uncertainty surrounding the global pandemic. As international shipping and travel halt and entire countries are on lock-down, manufacturers and dealers face a severe liquidity crunch. Diamond equities have already discounted. Retailers have ceased in-store operations and shares of the largest U.S. jeweler, Signet (NYSE: SIG), are down substantially. South African mines have shut down. Major diamond trade shows in the U.S., Hong Kong and Switzerland have all been canceled and buyer traffic in the bourses has sharply declined. Stores have more inventory of polished diamonds than usual, while rough demand has dropped as manufacturers maintain low polished production. As these (and more) events perpetually unfold, diamond prices continue to slide.
What's more, as people deal with the fall-out of the virus - from unemployment to rising healthcare costs - an impending slowdown of the global economy will almost certainly have a long-term impact on consumer sentiment and spending, especially on discretionary items like diamonds, which are considered a luxury. The disruption in end-consumer diamond demand will also have a domino effect on industry supply-chain inventory levels.
All the while, all eyes are on the U.S. presidential election in November 2020. And while election years historically bring a certain amount of market volatility, they have historically delivered a slight boost to the U.S. economy. Data from 1948 to present shows that the U.S. economy tends to perform marginally better in election years. Coming off the unprecedented coronavirus pandemic and its ripple effect throughout the country and the world, the circumstances are different this time around.
The good news is that the diamond industry has proven it is resilient during times of crisis. It has overcome anti-trust legislation, threats from simulated stones like CZ, the negative perceptions generated by the popular movie Blood Diamond and ever-changing consumer preferences and priorities. In addition, the industry is better positioned to handle stocking today than it was in recent years as a mid-stream inventory deleveraging cycle already took place through most of 2018 and 2019.
In spite of a rollercoaster first quarter, I predict that the diamond industry will align supply with lower levels of demand and the market will rebound. By mid-summer we'll see diamond prices steady and even begin to rise. You can take that to the bank...or preferably, to your local jewelry store.