Market Uncertainty Fuels Caution

Posted on August 31, 2022 by Jon C. Phillips, GIA GG, CG (AGS)

Summer slowdowns and declining prices are the state of the industry. Inventories are robust and the sanctions on Alrosa do not seem to be impacting supplies. Only melee is in short supply. The summer is here and we are experiencing the usual lumbering pace of the summer shutdowns especially in the mid-market segment of the diamond pipeline. While the slowdown was predictable as it happens every year, what we are seeing that doesn’t usually go hand in hand with the summer shutdowns is the slowly declining whole- sale prices of polished diamonds. Peak prices were in late spring and early summer. These declining prices from the diamond market analysis perspective is counterintuitive. However, when you look at the bigger picture and the dynamics at play you can easily see where a luxury business like diamonds would start to waver. Worldwide, we are experiencing inflation, increased interest rates, declining stock markets and job uncertainties just to name a few of the outside influences putting pressure on the diamond market. US disposable income is under pressure and consumer confidence is dropping as inflation rose to 9.1%. The US Federal Reserve hiked up interest rates by 0.75% in July. With all this said, the US market still seems to be less affected than the rest of the world and is still the major player for polished diamond sales. I wonder why US buyers are just looking the other way as the rest of the world holds back on its spending on luxury items. We are finally experiencing shortages in the melee sizes, which I believe are the first indications that the Alrosa sanctions are finally reaching the marketplace. The other larger sizes are not suffering as far as I can tell but I predict we will start to see shortages starting this fall and into early winter of 2023. I am finding right now that overall polished inventories are still quite robust. The number of stones listed on RapNet as of August 1 was 24% greater than a year earlier. The record volume indicates that the lack of Alrosa goods has yet to impact the overall polished market. An interesting statistic released by Tenoris.bi showed that while in May individual diamond sales dropped 24% year- on-year, the good news for retailers was that the average sale value was up 18.7%. So, is it the increased cost causing the decline in volume? Or is the declining volume due to buyers that are reticent to spend more than they can afford. Or is the volume decline due to lack of availability? All good questions. Clearly by these stats there are fewer buyers but those that do buy are willing to spend more. I wonder if today’s buyers are willing to spend more because they are aware of the inflationary times and the market dynamics with the higher costs associated with that. Alrosa’s share of the world’s rough diamond market at the time of the sanctions was reported at about 33% and I thought, when the sanctions took place back in February and March, that we would be feeling the effects by now in the western world diamond markets. But we have not, and big industry players in India and China have found a workaround that allows them to purchase Russian rough and sell to countries that are not concerned with provenance but concerned with profits. The expected shortages in rough due to the Alrosa sanctions has been a focus of the De Beers Group and...

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