Will Open Skies Spell Disaster for Diamond Prices?

OPINION 

Erez Jacob Rivlin is a diamond market analyst and mining consultant focusing on evaluations, acquisitions and operations of diamond mines. erezrivlin@yahoo.com

Hubert de Munck is financial and economic consultant, MBA of The University of Chicago, Booth School of Business.                                                                      

Senior veteran diamantaires remember the speculative diamond market of the end of the 70s. Starting in 1976, the better diamond qualities rose sharply, then doubled again and again. The price bubble kept inflating until 1980, which was the year that the inevitable crash finally blew up everything. The price of some qualities dove 90%, like the 1 carat D/Flawless that made at the peak 70,000 USD. This traumatic crash left many in bankruptcy, and during the following decades, the diamond industry, headed by De Beers' monopoly, wanted only stability. Fast-rising prices became nothing but a curse.

Soon after the initial pandemic shock of 2020, frustrated consumers who were sitting in endless lockdowns, reacted with a historic hike in jewelry purchases. Diamond sales kept increasing in 2021, and jewelry giants like Signet and Chow Tai Fook had their best results ever, with sales soaring more than 70%. In 2020 the world economy shrank by 3.3% (World Bank) but 2021 followed with a recovery of over 5% (IMF estimate). Some sectors enjoyed exceptionally good times, like the Internet and pharma, but one specific sector hardly recovered and kept on suffering from the virus symptoms till the present day.

Welcome to the tourism industry, the dark side of the Corona pandemic. It is hard for joyful diamond dealers to perceive how difficult the past two years have been for hotels, airlines, ski resorts, and restaurant owners. But diamantaires had little time to think about other sectors as they had to focus on the wildly surging prices and 'strike while the diamond market is still hot'.

However, diamond dealers must pay very careful attention to the giant tourism industry, which competes with the tiny diamond sector on the available cash that consumers have in their pockets. Especially so, when this giant got so sick, that it suffered in 2020 its worst year in recorded history. According to the UN World Tourism Organization (UNWTO), in 2020 international arrivals registered a colossal drop of 73%. Just to make things clear: This is a negative 73%, not like the above-mentioned positive 70% in jewelry sales. Tourism, after contributing about 3.5 trillion to the overall world GDP in 2019, crashed by more than 50% to only 1.6 trillion in 2020. The 20% "improvement" in 2021 still left the global tourism sector with a staggering 40% below 2019 levels.

The first signs of a revival of the giant tourism industry cast a big shadow on the short and mid-term future of the diamond market. Once the pandemic is really over, it seems obvious that experience-craving consumers will divert their starved preferences to sunny beaches, après ski gluhwein, or selfies on the Eiffel Tower. For a year or two, consumers will celebrate the end of holidays' restrictions and freedom of reopened skies. All this points out to one likely conclusion: The end of Corona will be followed by a major drop in demand for diamonds. But then, how bad could things go? Would it be a moderate correction of 10% - 15% or the potential risk is even higher?

Despite hyper-inflating prices of rough diamonds, we are not experiencing a speculative bubble like in the 70s. However, the diamond market could experience a similar massive crash in prices, once billions of consumers flood the holidays destinations. If the Corona pandemic ends as abruptly as it started, diamond demand will suffer even a sharper collapse, compared to a smoother decline in case of a more gradual ending of the pandemic. Without proper proactive steps from the supply side, prices could even suffer a 30% to 50% plunge, based on historical market volatility. On the positive side, diamond prices might suffer a lower correction in the phase of both a post-Corona economic recovery and relatively low mining production levels. But would these two factors be enough to prevent a short-term collapse in diamond prices?