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Bain and the Antwerp World Diamond Center (AWDC) released their annual "Global Diamond Industry" report just a few weeks ago, praising the diamond jewelry industry's "brilliant recovery" from the pandemic downturn.
The report covered the entire diamond value chain, from production to consumer sales, “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 ahead to this year, it predicted continued strong growth at a higher level than during the period prior to the pandemic outbreak. “Demand for diamond jewelry and polished and rough diamonds is expected to grow through the first half of 2022.”
Nevertheless, as a result of the outbreak of war in Ukraine and the ensuing economic sanctions against Russia, the supply of rough diamonds may be reduced by more than 25%. This is because Russian-owned Alrosa, the world's largest diamond producer by volume, has been placed on the sanctions list.
The United States Treasury estimates that Alrosa is responsible for 90 percent of Russia's diamond production and accounts for 28 percent of the world's total diamond supply. Alrosa is owned by the Russian government to the tune of 33 percent, with another 33 percent held by the Russian Republic of Sakha, where the company's headquarters are located. In addition, Alrosa CEO Sergey Ivanov Jr. has been added to the list of specifically designated nationals sanctioned by the United States government.
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.”
“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 JVC continued. But the order from the Treasury does not apply to goods purchased from Alrosa or Alrosa USA before February 24, according to the Treasury.
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 entering the year with a supply of 29 million carats, according to Bain. “Upstream inventories declined ~40%, driven by high demand and slow production recovery, and are near the minimal technical level,” the report stated.
Consumer demand for diamond jewelry continued to grow even as prices rose, with sales of diamond jewelry expected to reach $84 billion by 2021. According to Rapaport's RapNet Diamond Index, the average price of a one-carat diamond increased by 17.4 percent over the course of the year 2021. Prices have also continued to rise, rising 6.9 percent in January.
It will take some time before the downstream effects of Russian sanctions are felt, but higher prices for diamonds and diamond jewelry are almost certain to follow.
Even without taking into consideration the macroeconomic impact that Russia's war in Ukraine will have on consumer sentiment and spending, even higher prices for diamond jewelry could put the industry's post-pandemic recovery on hold, if not reverse it entirely.
Additionally, rising diamond prices may provide a welcome boost to the lab-grown diamond (LGD) market. Prices for lab-grown diamonds (LGDs) are already significantly lower than those for comparable natural mined diamonds – according to Bain, the average polished lab-grown retail price will be 30 percent lower than natural diamond prices by 2021 – and supplies of man-made stones are increasing as more production capacity is brought online and technology advances.
Consumers who were previously hesitant to consider LGDs may now be more willing to do so as the price disparity widens. The law of supply and demand, on the other hand, does not always apply in the case of luxury goods.
The seminal work on the subject was done by the 19th-century economist Thorstein Veblen in his book The Theory of the Leisure Class, which was published in 1895. Because of their social signaling value, or the fact that they become status symbols, Veblen discovered that consumer demand for luxury goods increased in tandem with price increases.
“Lab-grown diamonds continued to diverge into a separate, more affordable jewelry category.” according to Bain & Company. In other words, natural diamond jewelry is considered a luxury, whereas laboratory-grown diamond jewelry is considered mass-produced.
However, that distinction may be put to the test this year. If the price of mined diamonds continues to rise, what has been a growing divergence between the two could become a convergence in the near future.
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