Just a few weeks ago, Bain and the Antwerp World Diamond Center (AWDC) published their annual report “Global Diamond Industryrecounting the “brilliant recovery” of the diamond jewelry industry after the pandemic slowed.
Covering the entire diamond value chain, from production to sales to consumers, he reported: “In 2021, revenues increased by 62% [year-over-year] in the diamond mining segment, 55% for cutting and polishing and 29% for the retail sale of diamond jewelry – all exceeding pre-pandemic levels, +13%, +16%, + 11% respectively.
As for this year, he 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 increase in the first half of 2022.”
It was before, it is now
But with the outbreak of war in Ukraine and the resulting economic sanctions on Russia, the supply of rough diamonds could be cut by more than 25%, as Russian company Alrosa, the world’s largest diamond producer in volume, has been placed on the sanctions list.
All in all, the US Treasury says Alrosa is responsible for 90% of Russian diamond production and accounts for 28% of global supply. The Russian government owns 33% of Alrosa and a further 33% is owned by Sakha, the Russian Republic where the company is headquartered. Additionally, Alrosa CEO Sergey Ivanov Jr. has been added to the list of specifically designated domestic sanctions.
The industry’s Jewelers Vigilance Committee (JVC) said, “In effect, this action prohibits U.S. businesses and individuals from entering into debt transactions older than 14 days with Alrosa, but does not impose the sanctions more severe with a freeze on assets and an outright ban on all business.
The JVC added: “For the jewelry industry, any previously entered into open memo agreements with terms longer than 14 days should immediately be amended to shorten terms and/or closed.” The Treasury order, however, does not apply to property acquired from Alrosa or Alrosa USA before February 24.
Speaking on behalf of AWDC, Tom Neys said: “Sanctions can have a significant impact on the diamond trade. It’s a blow that should hurt Russia, but there’s a chance we’ll hurt each other more. Russians can easily exchange their diamonds with non-EU countries.
The diamond jewelry industry is entering the year with diamond supply at historically low levels, estimated by Bain at 29 million carats at 2021 level,” the report said.
law of supply and demand
With diamond jewelry sales reaching $84 billion in 2021, consumer demand has continued to rise even as prices have risen. Rapaport’s RapNet Diamond Index showed average price of a one carat diamond rose 17.4% throughout 2021. And prices continued to rise, up 6.9% in January.
It will take some time for the effects of Russian sanctions to be felt downstream, but higher prices for diamonds and diamond jewelry are inevitable.
Not to mention the macro-economic impact that Russia’s war on Ukraine will have on consumer sentiment and spending, even higher prices for diamond jewelry could put its post-pandemic recovery on hold, or even backtrack. .
And rising diamond prices could provide a welcome boost to the synthetic diamond (LGD) market. LGD prices are already well below the price of a comparable natural mined diamond – Bain reports that the average retail price of lab-grown polish has dropped to 30% of natural diamond prices in 2021 – and man-made stone supplies increase as production capacity increases online and technology advances.
Consumers who were previously hesitant to consider LGDs might take a look as the price gap widens. On the other hand, the law of supply and demand does not always apply to luxury goods.
The 19th century economist Thorstein Veblen did seminal work on the subject in his book, The Leisure Class Theory. Veblen found that consumer demand for luxury goods increases with price due to their social signal value, i.e. they become status symbols.
Bain notes, “Lab diamonds have continued to diverge into a distinct, more affordable category of jewelry.” In other words, natural diamond jewelry is luxury while LGD jewelry is mass market.
But that distinction could be put to the test this year. What was a growing divergence between the two may become a convergence, if the prices of mined diamonds continue to climb.