The diamond industry is undergoing fundamental disruption as political, economic and social forces break the supply chain, reduce demand, and shift consumer attitudes. We are heading into a perfect storm with new realities, challenges, and opportunities.
Much of the change is external, beyond our control, sudden and shocking. Other changes have been building for a long time and are now activated due to the Russian invasion and sanctions.
So much is happening at once that it is difficult to process the consequences. The situation is confusing and creating great uncertainty about the future. What will happen? What should you do?
There are three primary forces impacting the diamond industry.
- Russian Invasion
- Economic Transformation
- Social Responsibility
Russian invasion
The Russian invasion of Ukraine is a global game changer. We are witnessing the start of an economic world war pitting the US and EU (West) against Russia and probably China (East). Sanctions are forcing countries and companies to cease economic activity with each other. International banks are refusing transactions with Russia out of fear they may be sanctioned and excluded from the global dollar-denominated financial system. Money is being weaponized.
The era of East/West free trade is ending. Globalization is bifurcating as national security interests define economic friends and foes. Getting the best products at the best prices is no longer the first rule of business. Who you do business with is more important. Compliance dominates decision making. Politics is more important than prices.
The war and resultant sanctions are intensifying shortages. Supply chains already under pressure due to Covid are now further disrupted if not entirely closed. Critical commodities are under increasing pressure. Since the invasion, oil and wheat prices are up and US inflation is up.
A primary economic impact of the invasion is global inflation.
Sanctions will have a dramatic effect on the diamond trade. In 2021, Russia’s Alrosa produced 32.4 million carats of rough diamonds valued at $2.898 billion. That’s 25.5% of global carats and 23.97% of the value of total global rough production.
India, the manufacturer of about 93% of the world’s diamonds, is trying to maintain a neutral position regarding the sanctions. But so far international banks are not willing to handle payments to Alrosa, nor are shipping and insurance companies willing to move the diamonds out of Russia to any destination. For now, there is no way to pay for or move Russian diamonds.
The powerful short-term effect of sanctions is mitigated by extensive polished inventory, India’s vacation season, and a slowdown in Chinese polished demand due to Covid. Indian manufacturers are also shifting production to synthetic man-made diamonds. Over the medium to long term, it is likely that payment and shipping solutions will be found, allowing the Russian goods to reenter the diamond markets.
A legal loophole in the regulations limits US sanctions to “Russian Origin” diamonds, which are rough diamonds mined or polished diamonds manufactured in Russia. If diamonds are cut outside of Russia from Russian rough, they are deemed to have been “substantially transformed” and therefore are no longer “Russian Origin” and not subject to sanctions. For example: If an Indian manufacturer buys US-sanctioned Russian rough diamonds and cuts them in India, such polished diamonds are not subject to any sanctions and can be legally imported into the US with no restrictions. We call these polished diamonds cut outside Russia “Russian Source” diamonds.
Another important factor is the role of China and the development of alternative non-dollar payment systems. China can purchase Russian rough that will then be cut in China or India. We expect Russian diamonds to find their way into the market and sell to buyers from China and other neutral countries not sanctioning Russia. Legally the US sanctions on Alrosa are ineffective due to the “Russian Origin” limitation.
The primary effect of the Russian sanctions will be the bifurcation of markets: separate markets for Russian diamonds and non-Russian diamonds. The issue of shortages will depend on the level of US/Western demand for “Russian Source” diamonds cut outside of Russia. If buyers don’t care and Russian rough diamonds become available through China or otherwise, then shortages will not be an issue.
On the other hand, if jewelry brands and other socially sensitive buyers demand “Ethical Diamonds” — which exclude Russian Source diamonds no matter where they are cut — then there will be shortages and higher prices for documented “Ethical Diamonds” from known legitimate sources outside of Russia. These diamonds may be in short supply and fetch higher prices.
Ethical challenge
The fact that the US has not closed the “Russian Origin” loophole is creating ethical challenges for the US diamond industry. Consumers are horrified by the images coming from Ukraine. They read about the sanctions on Russia’s state-owned Alrosa and they don’t want to buy Russian diamonds. Yet it’s perfectly legal to sell the “Russian Source” diamonds cut outside of Russia, even though the money from these diamonds goes to the Russian government and supports the war.
And so, the legal vs. ethical question arises. Should the diamond trade sell “Russian Source” diamonds that fund the war, or should the diamond trade take an ethical position and refuse to trade in “Russian Source” diamonds even though it is legal to do so? How ethical should our diamond industry be? Should we do more than what is legally required?
The ethical questions get more interesting when we consider the money factor. “Russian Source” legal diamonds will compete with higher-cost “Ethical Diamonds” that require supply chain monitoring. Since we cannot force everyone to be ethical, we will see separate markets and competition between legal and ethical diamonds.
A good way to think about this is that ethical diamonds are an added-value proposition. We can create value by creating a supply of ethical diamonds based on honest standards and capture that value by marketing them as better diamonds for higher prices.
The value of a diamond is not limited by its 4Cs. A diamond is worth more if it has a transparent, ethical supply chain. The challenge for the diamond trade is to add value to diamonds, not just find ways to sell them at cheaper prices.
The lesson for the diamond trade from the Russian invasion is that we need to differentiate our diamonds and add value for ethical diamonds through marketing.
Economic transformation
The recent changes in the US and global economy are not short-term fluctuations. They are fundamental, structural, and transformative. Powerful inflationary pressure has been building for over a decade due to artificially low interest rates, then over $5 trillion in stimulus payments, followed by Covid supply-chain shortages, and now Russia’s war and its shocking impact on energy and food prices. The strong jewelry demand we have witnessed since Covid has been the result of aggressive government monetary policy that overstimulated the economy. Lots of easy money provided lots of jewelry demand.
The situation is now reversing. Money is getting tight. We are coming off a period of strong demand driven by excess liquidity. The recent surge in inflation to 8.26% in April is the tip of the iceberg. It will set off a series of reactions that will decrease disposable income and reduce overall diamond demand.
Higher prices for basic necessities like fuel and food obviously leave less money available for luxury products. As prices go up, so do wages, which drives even higher prices. It’s a vicious cycle. Inflation must be stopped. The way you stop inflation is by raising interest rates. Money then gets even tighter. Think about what higher interest rates do to mortgage payments. So disposable income for most Americans is coming down.
But that’s not all. Higher interest rates increase mortgage rates, making it harder to buy real estate, so real estate prices will come down. Stock market prices based on high levels of consumer purchases will also come down. For many consumers, the reduction in wealth will make luxury purchases less desirable.
The go-go growth economy is shifting to a more conservative, realistic, value-based economy. This is certainly true of the stock market, but it is also true in how people think about risk, their jobs and their financial security. It’s a bit like what happened after the internet boom-bust cycle in 2000. The economy and the people in it grew more conservative and cautious with money. There will be a sea change in how people will think about luxury. They will take their buying more seriously. Many will focus on buying fewer and better products, focusing on quality instead of quantity.
So, what’s a jeweler to do? Be more meaningful. Recognize the emotional value of what you are selling. Create emotional value. It’s not what you sell that matters; it’s the symbolic value and the idea behind the physical product.
Society is changing, and the need for meaningful relationships is increasing. The isolation created by Covid followed by economic turmoil will bring people together. Millennials are getting older and maturing to the point where individuals are trending toward creating families and having children. The challenge for jewelers is to position jewelry in these relationships.
It’s worth noting that many rich people will enjoy greater income as interest rates rise. Retirees will benefit from higher interest rates on their savings. This is significant given the number of baby boomers reaching retirement age. We should also consider that millennials are due to inherit about $30 trillion from baby boomers over the next few decades. They will be more mature and will have much more money to buy jewelry.
The impact of economic change on diamond demand will be significant. It will affect prices and profitability. The challenge for the trade is to adapt to the new environment and focus on marketing the emotional benefits of buying and gifting diamonds. This includes adding value by creating and marketing ethical diamonds. It is important to focus on selling the idea behind the diamond and not just the sale of the physical product.
Social responsibility
Once upon a time, you could just buy and sell a diamond. Not anymore. Now, our customers want us to provide ethical transparency. What should we do?
Unfortunately, our industry has been relying on trade organizations that are incapable of setting honest, enforceable ethical standards. The Responsible Jewellery Coalition (RJC), World Federation of Diamond Bourses (WFDB), and International Diamond Manufacturers Association (IDMA) all point to World Diamond Council (WDC) guidelines that in turn point to high-level guidelines from the Organisation for Economic Co-operation and Development (OECD) and the UN that are not enforceable standards.
Furthermore, these organizations all support the Kimberley Process (KP) which certifies blood diamonds. The organizations publish complex guidelines that are largely incomprehensible to members of the trade. I challenge you to read through all their gobbledygook and answer the following questions:
Can members of the WFDB, IDMA, RJC, or WDC buy Marange diamonds? Can they buy “Russian Source” diamonds cut outside Russia from Alrosa rough? What happens if they do?
The leaders of these organizations, mostly the same group of a few nice people, are trying to do a good job protecting the industry. But it’s time to face the fact that they and their trade organizations are not capable of setting honest, enforceable ethical standards.
The guidelines created by the RJC are useful and important, but they are not sufficient. Of particular concern is their inability to enforce their guidelines. Furthermore, the RJC’s association and cross-directorships with the WDC and KP are unacceptable. They have serious governance problems.
There is a need to white-list companies that meet legal compliance requirements and — with their permission — share the necessary legal documentation. However, beyond legal requirements, there is a need to establish practical ethical standards on the product level. We must be able to trace the supply chain for specific products that have specific levels of social responsibility.
We should recognize that while all products produced by a company must be legal, they may not necessarily be ethical or at the same level of ethics. Therefore, supply chain source certification must be product-based.
As explained earlier in this article, there is demand for legitimate ethical diamonds. To meet this demand, product-based ethical certification is required. Such certification requires three critical elements:
1. Clear written standards that are transparent and auditable.
2. Reliable ongoing auditing of the product production cycle.
3. Rejection of diamonds and expulsion of members who fail to meet the standards.
Conclusion
The diamond industry is facing greater challenges and opportunities than ever before. It is important to recognize that we will be facing fundamental exponential change that will require us to proactively reinvent our business and our added-value propositions.
The future is not just about adapting technology and internet marketing anymore. The required changes are more fundamental and product-specific. How we source, create and merchandise what we sell — and to whom we sell — will determine our future. It’s not going to be easy, but it is going to be good.
