In the latest newsletter, Dinesh Lakhani, Director, Kiran Gems, has highlighted the latest and timely updates on rough diamond supply, price action and demand-supply analysis etc. related to the diamond trade in conjunction with the socio-economic and geo political backdrop. At the beginning of the year, he has shared how the lean midstream inventories, robust demand, and increase in consumer confidence coupled with sustained price spikes in rough has initiated the catch-up in the polish diamond prices as it was long due. He believes that this phenomenon is now deeply entrenched and will only grow stronger as there is a large gap that remains unfilled. Read on.
2022 and Beyond – Global Economic Growth – Forward and Higher
The global economy has picked up substantially from the lows of COVID-19 led disruptions. The GDP growth rate achieved in 2021 has been above trend in the large developed as well as emerging markets and this is expected to continue. The outcomes of this swift GDP growth are better spread through all sections of the economy compared to earlier growth era as the economic recovery effort this time around has been geared towards providing direct support to individuals, households, and small businesses apart from supporting institutions. This phenomenon has been manifested globally and has resulted in income growth and stronger balance sheets at the individual household level.
This has led to higher consumer confidence and widespread wage recovery giving confidence to the Central Banks in respective economies to begin the normalisation process as they now step in to protect the economic growth from over-inflation risk. The gradual retooling process has been put in motion with Interest Rate hikes expected in all the developed economies – barring Eurozone and Japan – to begin in 2022 itself.
A key point as communicated by the central bankers as they step in to stabilise the economies is that they envisage the gradual normalisation process and will target full employment levels to be supported by the underlying GDP growth while bringing down the risk emanating from the overheated financial asset prices. Containing the risk emanating from the overinflation while targeting full employment levels will make the GDP growth sustainable in the long term and well spread through all sections of the economy leading to higher distribution of income.
All major economies have come to sustain growth in the face of emergence of new Coronavirus variants, as the policy response has been calibrated to ensure that the COVID risk is contained without having an impact on the ongoing economic recovery. This approach has been successful and has further boosted the confidence of the policymakers that the underlying recovery is sustainable as they embark on the path of normalisation.
Consumer-facing Businesses – Resilience leading to sustained Growth Momentum
As organised retail grappled with the supply chain constraints and higher input cost pressures in the face of high consumer demand for goods and services – retailers rose to the challenge and were able to cater to the demand sustainably by being able to pass on the higher costs as well as being able to gather timely supplies catering to the demand spurt and an overall above-trend demand growth.
The utilisation of all modes of client servicing – offline, online, and hybrid is now a well-established phenomenon of any business strategy, and logistics management has been geared accordingly giving the desired flexibility to the end consumers.
The holiday season sales in USA & Europe across all channels rose to record levels, growing higher compared to even the pre Pandemic figures and the early indications for China festive sales are also encouraging.
The luxury and the premium consumer goods industry is performing quite strongly throughout and there is clear underlying momentum towards consumption of higher-value goods and services. The major players in fashion and apparel, luxury watches, and high-end jewellery like LVMH, Richemont, Kering are all seeing strong growth in sales and can achieve higher average selling prices along with higher net profitability. This trend is gaining long-term sustainable support as large swathes of young consumers across emerging markets with growing purchasing power add to the aggregate demand for premium goods and services.
Diamond Industry – Clear Path Ahead for Growth with higher realisations
As the sustainable growth in consumer confidence and purchasing power in the hands of the individuals and households become deeply entrenched globally, diamond jewellery as a category is poised to grow along and at a higher rate than the overall growth in consumer discretionary sales. As the business landscape has changed for the positive amongst widespread demand, it has led to an emergence of the following key themes:
Imminent catch up in Polished Prices
As already pointed out in our newsletters in early 2021 and as now widely known – significantly higher rough prices, higher input cost pressures, and an extremely lean industry-wide polish pipeline have led to a scenario where polished prices have no other direction but to go further higher. This has been fast-tracked after the recent spike in Rough prices – approx. 35-40 per cent since November’21 – on an already high base after the price rise in Rough throughout last year.
Unlike prior to 2020, now there is an extremely lean trade pipeline for polished goods as well as rough, hence any price spike in the rough has to have an immediate pass-through to the polished prices. It is imperative that the pass-through of this higher rough prices and input cost pressures is attained by the manufacturing sector to be able to sustainably support the demand from the retail side. This desired and utmost important attribute is all the more achievable now as there is strong and widespread growing demand at the retail counters across all geographies. Large Jewellery retailers covering wide sections of the consumer demand at all price points are aiming and achieving high volume growth (30 per cent – 50 per cent p.a.) in the coming years through new store openings, same-store sales growth as well as an increase in average selling price.
Capturing Growth is a function of securing polished supplies – The New Paradigm
The absolute amount of Carats of Rough Supply has not been increasing while the end consumer demand has been at a record high level. As the industry-wide polished goods pipeline is extremely lean, this has made the availability of desired polished goods a single most important factor for any retailer and jewellery manufacturer to plan their business. “As the diamond demand spurt across the price points has made sell-through to end consumers much easier, the securing of polished goods has become the first and foremost metric in planning the business strategy to be able to capture the growing business opportunity.”
Diamonds shining bright – Top of the mind recall for end consumers
Recent sustained efforts in brand and generic marketing during the economic recovery have added to the inclination of consumers to associate with diamond jewellery as an item of personal possession and sentimental value. This has led to diamond jewellery regaining a place of prominence. The end consumer has also seen the appreciation in their diamond jewellery purchases and has been able to identify that it retains value vis a vis other avenues of discretionary purchases like electronics etc. which quickly depreciate. These consumers have become accustomed to paying higher parity prices for higher value items, premium products with craftsmanship, and value retention. Diamond jewellery ticks all these boxes and has seen the value appreciating giving confidence for future purchases. This forges a clear path ahead for a widespread and growing demand for diamond jewellery across the price points along with higher net realisations for the industry.
We need to draw strengths from all the above factors and take cognisance of the fact that as an industry we are most favourably placed to increase realisations on our products. The polished prices have tremendous room to go higher and this momentum will only gather more pace going ahead.
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