In general, it takes a major global event like the financial crisis of 2008. Also the pandemic of 2020 or Russia's invasion of Ukraine in 2022 to spur the market into immediate action.
The outbreak of Covid-19 forced the industry, along with the rest of the world, to turn to digital technology. The financial meltdown forced the trade to raise compliance and reporting standards. Even if it took a few years to fully integrate.
Now, the industry is adjusting to the consequences of the Russia-Ukraine conflict and the related US sanctions against Alrosa. Market forces have not yet allowed this to fully develop. The conflict is likely to become even more significant in 2023 than it was in 2022. As adjustment to supply-demand dynamics and source control programs gain traction.
Other factors will also affect trade in 2023. The US and Chinese economies are experiencing prolonged uncertainty.
While the laboratory cultivation market continues to grow and expand. Finally, De Beers and the Government of Botswana will sign an agreement that could have wider significance for the industry.
The following developments are forecast to have the strongest impact on the diamond market in 2023:
Supplies from Alrosa
When the US imposed sanctions on Alrosa in April 2022, many - including this report - predicted that shortages would follow. Given that the Russian mine accounts for around 30% of global crude production.
Instead, rough diamond stock levels remained stable at record levels throughout 2022. As seen in the volume of diamonds in RapNet (see graph). This was largely due to aggressive rough diamond buying towards the end of 2021 and early 2022. When the industry took advantage of the positive momentum of the strong recovery from the pandemic.
These stocks of raw materials kept the factories busy and raised the levels of stocks of finished goods. As recent products became available just as demand began to weaken in the second half of the year.
Prices of rough diamonds fell in the second half of the year and continued to decline in the new year. With the RapNet Diamond Index (RAPI™) for 1 carat diamonds falling by 0.2% in the first 12 days of January.
Manufacturers subsequently reduced their purchases of rough diamonds and factories drastically reduced their production of polished diamonds.
The volume of rough diamond imports into India had a decline of around 21% on an annual basis in the first 11 months of 2022. Though in value terms it had an increase of 8%, with an increase in average price of 38% at $138 per carat.
This was partly the result of lower Russian supply as it is a shift towards smaller volumes and higher value products. Alrosa produces a large volume of smaller, lower value diamonds.
We are starting to see shortages of these “Alrosa” diamonds. But overall, suppliers of rough diamonds have been left with significant quantities of less popular products that are difficult to move in the weakened market.
Manufacturers will continue to be cautious in the rough diamond markets at the beginning of the year. Especially if De Beers maintains higher price levels in its early markets.
A price reduction by De Beers may stimulate demand. For the time being, the company seems content to maintain levels. Even if they have reduced prices at auctions and on the secondary market.
It must take into account that in the inflationary environment of last year, production costs have increased. Which means that it has to protect its profit margins through pricing.
Nevertheless, the company had a strong year and benefited from Alrosa's absence from the market. De Beers' gross sales climbed by 20% and are estimated to reach $5.78bn in 2022.
But the Alrosa will gradually return to the market, even if they do not disclose sales. Indian banks have taken steps to facilitate rupee-based transactions with Russia. And Belgium has avoided imposing sanctions on Russia - its biggest source of raw rocks. There were already reports of a sale of Russian crude towards the end of 2022.
We expect inventory levels to decline to a medium level in the first quarter, following the decline in production in recent months. The low availability of new supply may impact jewellers' purchases in January and February. That's when they typically replenish the inventory they sold during the holiday season. Although demand for crafted is more cautious than usual for this time of year.
The US economy
US jewelers had a relatively good season, even if sales did not reach last year's high levels. However, there is no urgency to buy given the uncertainty about the short-term market outlook. And given that prices and therefore stock valuations continue to fall.
The reluctance to buy stems from economic uncertainty. As high inflation has led to cautious discretionary spending among consumers. Retailers are careful not to hold excess inventory. Thus they are able to offset this risk by taking more products in stock. They exploit the inventories of suppliers at a distance, while demanding more efficient delivery when they need it.
Retail inventory management will contribute to the slowdown in diamond trade activity in the first quarter. This will continue the trend we saw in the second half of 2022 of concerns about an impending recession. And that uncertainty may extend into the first half of the year. Diamond demand is expected to improve as market forces settle and the trade regains confidence for the year-end period.
China's recovery
There is some renewed optimism for China after the easing of Covid-19 restrictions in December. Also after the announcement in January that it would also lift quarantine measures for travellers. While the move caused a new wave of coronavirus infections, the country is reopening before Chinese New Year on January 22. This was followed by a reversal of the strict Covid-19 policy with other measures to make China more investor-friendly and flexible.
This has created some expectations of a release of pent-up demand later in the year, if not during the lunar holiday. We believe the recovery will gain momentum in the second half of the year. It takes time for Chinese consumers to return to normalcy and gain confidence that the sudden shift in government policy is here to stay.
In addition, it will measure growth against last year's numbers, which were weaker in the second half. The prolonged absence of Chinese buyers was a major factor contributing to the global slowdown in diamond trading in 2022. Their return should help stimulate the market next year.
Laboratory-grown diamonds
There is no doubt that the growth of the laboratory industry affected the demand for natural diamond jewelry in 2022. At the same time, however, wholesale prices for synthetics continue to decline, largely due to increased supply as a result of technological developments. As such, demand has also been segmented for synthetics. Jewellers retailers have been pushing jewellery with lab diamonds. With wedding dresses being a surprising point for the category.
All this has affected the market for laboratory diamonds to be more diversified than expected. With jewellers demanding higher quality production and a general shift towards better colour and clarity products.
We expect this year to be another landmark year for the laboratory cultivation industry. Amid expectations that more jewelers and established brands will feature the product. The prices at which luxury brands can sell lab-grown jewellery will show where the value lies, in the product or in the brand's history. ‘This will show whether the appeal of synthetics can be extended beyond their lower price point.
Verification of origin
The rise of lab-created products along with the US sanctions on Alrosa have been important catalysts for the natural diamond industry to increase its sustainability and provenance verification programs.
The natural diamond industry has shifted its messaging to environmental, social and governance (ESG) issues over the past three years.
Undoubtedly as the producers and sellers of synthetic diamonds claimed to offer a greener option. Meanwhile, the war in Ukraine accelerated various source verification or traceability programs. Reassurance for brands and jewelers that their product offerings are within legal and ethical boundaries.
With the implementation of these initiatives, we expect to streamline the activities of most of the middle sector players. Even the use of these platforms to assure their customers that their sourcing is from ethical sources. We expect traceability and related source verification programs to gain traction in 2023. Also that they will emerge as an important talking point for the industry.
De Beers-Botswana Agreement
Another story of great interest is the negotiations between De Beers and Botswana on their supply and marketing agreement. The renewal of the agreement is once a decade and expired in 2020. A new contract was delayed initially due to Covid-19 and later due to some sticking points.
Currently, the deadline is June this year and it would be surprising if there were any further postponements.
It is difficult to understand the full scope of the discussions, as both parties do not wish to disclose details. But the issues could have significant implications for the rest of the industry.
It is understood that the government, owner of De Beers' 15%, wants more of the company's supply in Botswana to go to local sightholders for cutting and polishing.
It also seeks to boost sales of the Okavango Diamond Company, the government's arm for selling rough diamonds. And it wants stronger access to larger stones for Okavango, while exploring potential value-added deals with cutters.
Gaborone has steadily developed into a major rough diamond hub, from the first sightholders to set up factories in the city. And culminating in the transfer of De Beers' assembly and sales operations from London there around 2013.
As De Beers facilitates more diamond-related activities in the country, other cutting centres, notably India, are losing out. The emergence of Gaborone also affects a diamond's route to market. Perhaps companies manufacturing in Botswana will bypass the traditional trading centres of Antwerp, Israel and Dubai. Send their processed diamonds directly to New York or Hong Kong for distribution.
All of this is linked to a general effort to achieve greater efficiency in the diamond trade by shortening the stone's route from mine to market. It is also a response to the growing need to demonstrate social responsibility in sourcing. As Botswana is a prime example of diamonds making a positive contribution.
With the De Beers deal behind it, 2023 could be the year that Botswana consolidates its position in the diamond industry. Thus strengthening its brand and increasing its revenue from the trade.
Conclusion
The adage that there is never a dull moment in the diamond trade will prove true in 2023. However, the industry is expected to get off to a slow start.
We anticipate similar caution in the first quarter as it was towards the end of last year and that activity will improve in the second half of the year. Of course, there are factors outside the industry's control and could necessitate additional adjustments.
Indeed, geopolitical and macroeconomic developments are likely to have a strong influence on the market this year. However, other factors, and the experience of past crises, may help the industry in responding to potential volatility, even if other changes are adopted more gradually.
By Avi Krawitz
