How the War Has Shaken Up Diamond Supply

RAPAPORT... The diamond industry finds itself in the middle of many external forces. The Russia-Ukraine war has altered the supply situation and damaged US demand for Alrosa goods. Lockdowns in China have reduced sales in the most important Far East market. While spending is still robust on American shores, inflation has prompted some traders to worry. This combination of factors has created a complex dynamic. Inventories are down, but only a few categories are seeing significant shortages, explains Shimon Gerstensang, the Rapaport Group's in-house expert on the diamond market and pricing. As Western sanctions continue, scarcities will intensify in the items that Alrosa tends to produce, he predicts.How is sentiment in the diamond trade?There is uncertainty and a slowdown in sales in all markets around the world, but to different extents. The strong US market is the sole engine driving the industry. This is a cause for concern.How has the Ukraine war affected consumer demand?I don't think the war has had an impact on sales. However, it has had a big impact on consumer awareness and their sense of responsibility. We are seeing many companies boycotting Russian rough, above and beyond the demands of the US government.What is the impact of inflation in the US?Inflation has had no direct effect on the price of diamonds, as prices are in dollars. However, economic problems, including inflation in the US, can hurt diamond sales since consumers will have less money available to invest in luxuries.What is the effect of the lockdown in China?The lockdown has greatly affected business with China. It has created logistical and economic problems and has reduced morale. This has affected deals at the business-to-consumer (B2C) and the business-to-business (B2B) levels.How has the weakening of the Chinese yuan affected the market?Diamonds have become more expensive in China, as the international price is set in dollars. But since there's a diamond for every budget, the effect of the weakening of the yuan is that diamond sales are shifting to cheaper goods.Is there a shortage of rough?There is certainly less rough in the market, but there is also less demand. Buyers' willingness to pay crazy premiums for rough has decreased. However, premiums for small diamonds - under 3 grainers - are crazy on the secondary market once again. Note that De Beers, which is well aware of prices in the secondary market, has been in no hurry to raise its prices for melee. Let's see what happens at the sight next week.What about polished?Inventories are going down in polished up to and including 0.99 carats, but that doesn't necessarily mean there is a shortage of goods. It could mean the inventory was very high before, but now, with China closed and people losing a lot of sales, maybe there is no actual shortage. The question is how you measure shortages. Do you compare inventory to two months ago, or to a year ago? Or do you look at how much time it takes to sell it?While there isn't a shortage in most categories, there are shortages of diamonds up to 0.29 carats, especially up to 0.15 carats. The other items in short supply are selected American goods, such as oversized stones (for example, 1.25 to 1.49 carats), premium goods with no black inclusions on the table of the diamond, and beautiful fancy shapes.Did the Russia-Ukraine war worsen the supply situation?Yes, as there is no - or almost no - Russian rough on the market. The shortage of small-size polished is also a direct result of the sanctions on Russia. Working on the assumption that Russian rough will not be available any time soon, we expect to see a shortage in the categories for which Russia is usually the leading source. These are small diamonds, high colors, and square or rectangular fancy shapes.Can you expand on what is special about Russian rough?Russian rough has several characteristics. This is greatly affecting the polished inventories. In small diamonds, Alrosa's market share is over 50%. Alrosa goods also have a higher average color than De Beers'. It has more "crystal-model" diamonds - those that are good for cutting certain fancy shapes. This may create a shortage of emeralds, radiants, princesses and cushions. Russian production also has a high percentage of fluorescent stones.What is the long-term impact of the sanctions likely to be?The most stable thing in the manufacturing part of our industry was the supply of rough. Companies based their business philosophy on the fact that the supply of rough was safe and fixed. While the price of rough was set from above, it was the same for them and for their competitors. It also gave manufacturers surety about the polished outcome, as the rough assortments were stable.Another consequence of the sight system is that companies arrange their cash flow around ensuring they can make their regular rough purchases. This means manufacturers have monthly sales targets for polished but must also find the right balance between the price they sell for and the number of days it takes to sell. This pricing and selling philosophy may change if the manufacturer doesn't have a monthly commitment to buy rough.Buying rough in the secondary market is a completely different game. Companies seeking a replacement for Alrosa goods may change their business models.How is the manufacturing sector dealing with the lack of Russian rough?The shortage of Alrosa rough has offset the slowdown in sales. For some manufacturers, the timing was perfect. If global sales remain stable, the goods that are in short supply will become even scarcer. During the recent Indian summer period, factories granted more vacations than in previous years, and let's not forget that some have the option of shifting workers to lab-grown diamonds.Image: Rough diamonds. (Alrosa)