Jeweler repairing diamond ring in workshop
Mere weeks ago, Bain and the Antwerp World Diamond Center (AWDC) issued their annual “Global Diamond Industry” report, recounting the diamond jewelry industry’s “brilliant recovery” from the pandemic downturn.
Covering the entire diamond value chain from production to consumer sales, it reported, “In 2021, revenue increased 62% [year-over-year] in the diamond mining segment, 55% for cutting and polishing and 29% for diamond jewelry retail – all rising above pre-pandemic levels, +13%, +16%, +11% respectively.”
Looking to this year, it predicted continued strong growth at a higher level than during the pre-pandemic period. “Demand for diamond jewelry and polished and rough diamonds is expected to grow through the first half of 2022.”
But with the breakout of war in the Ukraine and the resulting Russia economic sanctions, the supply of rough diamonds may be cut by over 25% as Russian-owned Alrosa, the world’s largest diamond producer by volume, was placed on the sanction list.
All told, the U.S. Treasury says Alrosa is responsible for 90% of Russia’s diamond production and accounts for 28% of global supply. The Russian government owns 33% of Alrosa and another 33% is owned by Sakha, the Russian Republic where the company is headquartered. In addition, Alrosa CEO Sergey Ivanov Jr. was added to the specifically-designated nationals sanction list.
The industry’s Jewelers Vigilance Committee (JVC) advised, “Effectively, this action bans U.S. businesses and persons from entering into debt transactions longer than 14 days with Alrosa but does not impose the harsher sanctions of an asset freeze and outright prohibition of all business.”
The JVC added, “For the jewelry industry, any open memo agreements previously entered into with terms longer than 14 days should immediately be amended to shorten the terms, and/or closed.” The Treasury’s order, however, does not apply to goods acquired from Alrosa or Alrosa USA before February 24.
Speaking on behalf of the AWDC, Tom Neys said, “Sanctions can have a significant impact on the diamond business. It is a blow that should hurt Russia, but there is a chance that we do more damage to ourselves. The Russians can easily trade their diamonds with non-EU countries.”
The diamond jewelry industry is going into the year with diamond supply at historically low levels, estimated by Bain at 29 million carats in 2021. “Upstream inventories declined ~40%, driven by high demand and slow production recovery, and are near the minimal technical level,” the report stated.
With sales of diamond jewelry reaching $84 billion in 2021, consumer demand kept surging even as prices rose. Rapaport’s RapNet Diamond Index showed the average price for a one-carat diamond advanced 17.4% throughout 2021. And prices continued to rise, up 6.9% in January.
It will take some time for the impacts of the Russian sanctions to be felt downstream, but higher prices for diamonds and diamond jewelry are bound to come.
Not counting the macro-economic impact Russia’s war on the Ukraine will have on consumer sentiment and spending, even higher prices for diamond jewelry could put its post-pandemic recovery on hold, if not turn back the clock.
And rising diamond prices may give the lab-grown diamond (LGD) market a welcome boost. LGD prices are already well under the price for a comparable natural mined diamond – Bain reports the average polished lab-grown retail price declined to 30% of natural diamond prices in 2021 – and supplies of man-made stones are up as more production capacity comes online and technology advances.
Consumers previously reluctant to consider LGDs may take a second look as the price difference widens. On the other hand, the law of supply and demand doesn’t always apply to luxury goods.
The 19th-century economist Thorstein Veblen did the seminal work on the subject in his book, The Theory of the Leisure Class. Veblen found that consumer demand for luxury goods increased along with prices because of their social signaling value, i.e. they become status symbols.
Bain notes, “Lab-grown diamonds continued to diverge into a separate, more affordable jewelry category.” In other words, natural diamond jewelry is a luxury whereas LGD jewelry is mass.
But that distinction may be tested this year. What was a growing divergence between the two may become a convergence, if mined diamond prices continue to climb.