ABN AMRO's Diamond Market Outlook: Diamond Trade Has Turned the Corner

Market Analysis
29/11/2016 10:36

The diamond market has been going through difficult times for a while now, but diamond trade data paint a far more optimistic picture than in June, signalling that trade has turned the corner, writes Georgette Boele of ABN Amro in their "Insights" report. Back in June when ABN last published their diamond insights report, Boele still doubted if global diamond trade would improve, but trade data have clearly improved in all centres, most noticeably in Antwerp, Israel and India. Exports of rough diamonds from Antwerp to China and Hong Kong have stabilized, and if all goes well, demand should pick up next year. ABN's analysis is based on the general improvement in global trade also filtering through to a niche market like diamonds, only a modest slowing of the Chinese economy and the effects of the Chinese anti-corruption campaign on jewelry demand fading out.

ABN also expects jewelry demand to improve slightly in 2017 driven by a lower US savings rate and an improvement in Chinese jewelry demand. Rough and polished prices will likely rise at a modest pace in 2017, reflecting an improvement in end demand. The main markets for diamond jewelry are the US, China, India, Japan and Europe. The US is by far the largest market for diamond jewelry, accounting for 30-40% of the market. Demand for jewelry highly depends on households' net worth. Home equity, stocks and savings are important components of household net worth and the changes in value of these components affect an individual’s financial capability to purchase jewelry, writes Boele. An increase in a household net worth fuels demand for jewelry, and demand in the US has improved over the recent quarters. Going forward they expect jewelry consumption to improve further. ABN's US economist expects president elect Trump’s fiscal stimulus to increase US economic growth and to support equity markets, so ABN expects the main sources of net worth to remain supportive. Taken all together, they expect US jewelry sales to rise further over time.

Concerning China, Boele writes that there are some tentative signs that the overall outlook is improving. "First of all, diamond trade data show that Antwerp diamond exports to China are improving. In addition, the Chinese economy has been more resilient than investors feared earlier this year. Even though the risks of a hard landing of the Chinese economy remain, our China economist thinks that such an event is not likely in 2017. [ABN] has recently upgraded its growth forecast for 2017 from 6 to 6.5%. She further states that the overall diamond price index is in the process of bottoming out. The price decline compared to 2015 is slowing down, but prices are still moving lower. This reflects that demand for polished diamonds remains weak. They expect demand for polished diamonds to pick up in 2017 driven by an improvement in US and Chinese jewelry demand.

On the mining/production front, ABN for 2017 expects global production to remain stable at 2016 levels. However, they believe over time rough diamond production will decline on average by 1% per year. Lower ore grade, the depletion of existing deposits and the failure to find new deposits will result in lower global mine production. Meanwhile, for 2017, the behavior of the large diamond mining companies will have a more crucial role in the direction of diamond prices, but they expect end demand to drive polished and rough prices slightly higher. "Recent years have been dominated by the divergence between rough and polished prices. We think that we are currently at an important juncture and that price behaviour will more reflect end-demand."