Even as the reverberations of the pandemic-induced fluctuations in diamond demand recede, Paul Zimnisky foresees a simultaneous reduction in the consequential ripples.
As the pandemic-related whipsaw in diamond demand gets further behind us the ripple effect should continue to moderate as well. Generationally high economic growth in major consumer markets in 2021 and 2022 was met with proportionately hawkish economic policy in 2023 that will need to be digested in 2024.
The U.S. economy, the diamond industry’s largest consumer market, is forecast to grow at a real 1.0% (net of inflation) in 2024 which would be down from a forecasted 1.4% in 2023 based on an average of forecasts from the IMF, OECD and World Bank. This compares to as much as 6% in 2021.
The moderation in growth can, in part, be attributed to the impact of Federal Reserve’s economic-tightening policy aimed at quelling multi-decade high inflation. The Fed last raised its target Federal Funds interest rate in August by 0.25% bringing the range to 5.25-5.50% – marking the highest level since 2001.
A strict string of rate hikes which commenced in March 2022 has represented the most aggressive period of monetary tightening in the U.S. since the early-1980s.
Consequently, U.S. inflation is forecast to fall back to the Fed’s 2% (annual) target by 2025 which would be down significantly from a generational high of 8% in 2022. Such an outcome would allow for a more dovish economic policy in the medium term, as long as employment remains stable.
While diamond demand correlates quite highly with economic growth in the major consuming markets (led by the U.S.), a notable micro factor is expected to potentially offset some of the softening macro backdrop in the near-term.
A recovery, followed by a tailwind, in the U.S. engagement ring market in 2024 through 2026 is possible, which could act as a significant growth catalyst for diamond demand.
The premise is based on data that marriage engagements typically occur around three years after couples begin dating, so after adjusting for the impact of the pandemic which delayed the formation of new relationships, a new bridal cycle is expected to commence soon.
For context, on a recent analyst call, Signet Jewelers, the largest diamond seller in North America, noted that the pre-pandemic number of weddings in the U.S. was 2.8 million and the figure is expected to be about 2.2 million in 2023. Consequently, Signet’s management estimates that a simple return to a “normal” level of marriages is worth over $500 million to the industry annually –or an approximate 5% boost relative to 2023 forecasts.
Moving to China, the diamond industry’s second largest market, consumer demand has underperformed in 2023 relative to expectations – a trend that could carry over into 2024.
While China’s economic system doesn’t necessarily allow for an ideal relative comparison of growth when compared to more capitalistic systems, the nation’s economy is undoubtedly slowing – especially relative to the trailing 25-year average, i.e. of a high single-digit percentage annual growth rate as measured by GDP.
For instance, the Chinese economy is forecasted to grow at under 5% in 2024 – putting it more in line with the world’s more mature, large economies, a far stretch from the hyper growth enjoyed in decades past. (To put this into context, China has represented upwards of 40% of the world’s total economic growth over the last quarter century.)
There is mounting speculation (and a matching sentiment) that the Chinese economy is entering a longer-term structural moderation, which resonates with recent commentary from one of the market’s leading corporate entities, Chow Sang Sang.
During an analyst presentation in August, Chow Sang Sang’s management noted that going forward it will be “more selective and prudent with new store openings…(shifting the priority to) improving operating efficiency rather than expanding geographical coverage.”
This marks a notable change in trend as Chow Sang Sang has more than doubled its store count over the last five years to about 1,015 doors.
The other major corporate jewellers in Greater China, including leader Chow Tai Fook and LukFook, have also opened new stores at a similarly furious pace. For example, Chow Tai Fook’s current store count is over 7,500, which compares to about 3,550 just five years ago.
That said, China has a history of stoking its economy with government-induced consumption stimulus, for example its “Dual Circulation Strategy” and “Five-Year Plan,” which could certainly play in role in supporting the market, especially in the face of a lull.
Paul Zimnisky, CFA is a leading independent diamond industry analyst and consultant based in the New York metro area. For regular in-depth analysis of the diamond industry please consider subscribing to his State of the Diamond Market, a leading monthly industry report; an index of previous editions can be found here. Also, listen to the Paul Zimnisky Diamond Analytics Podcast on iTunes or Spotify. Paul is a graduate of the University of Maryland’s Robert H. Smith School of Business with a B.S. in finance and he is a CFA charterholder. He can be reached at paul@paulzimnisky.com and followed on Twitter @paulzimnisky.
Disclosure: At the time of writing Paul Zimnisky held a long equity position in Lucara Diamond Corp, Brilliant Earth Group, Star Diamond Corp, Newmont Corp and Barrick Gold Corp. Paul is an independent board member of Lipari Diamond Mines, a privately-held Canadian company with an operating mine in Brazil and a development-stage asset in Angola. Please read full disclosure at www.paulzimnisky.com.
