Factcheck: The Diamond Industry Isn’t Stockpiling
Is the industry stockpiling diamonds to drive-up prices? Factcheck:
Inventories of natural diamond producers fluctuate across periods of time, especially when they are broken down by size or quality of stones. This is because, unlike other industries, natural diamond producers cannot operate a just-in-time production model to match supply with demand. Inventories are also impacted by seasonal demand patterns and by external events such as the global coronavirus pandemic.
Comparisons of production and sales data for NDC member companies shows that over a business cycle, there is no evidence of deliberate stockpiling to systematically drive-up prices. This is because total production and total sales are in line with one another. Bain & Company compiled data from company reports and the Kimberley Certification process to estimate that upstream inventories (i.e. those at diamond mine sites and sorting offices) across the world fell by 40% in 2021, leaving them close to minimal ātechnical levelsā.
The factors impacting diamond inventories
There are multiple factors that cause diamond inventory levels to fluctuate over time.
Firstly, unlike other industries, there is a large variance in the size, color and quality profile of what diamonds are recovered each month. These characteristics are dependent on natural geological processes, rather than manufacturing decisions. It also takes several weeks and months for recovered diamonds to travel from mine to a point of sale.
This is because they must be sorted, typically into one of 15,000 categories of rough diamonds according to their size, shape and quality, before being sold or auctioned at sales that are typically held once a month by type of stone. Inventories therefore fluctuate particularly by type of stone.
Seasonal fluctuations in demand can also affect monthly diamond inventories. For example, consumer demand for jewelry is usually highest in the fourth quarter of the year, around seasonal holidays, which can impact the inventory upstream.
Additionally, external events like the global coronavirus pandemic in 2020 or the Financial Crisis of 2008 can cause a reduce in demand and therefore, impact inventories following such events when economies start to recover.
Recent trends
So, what has happened to diamond producer inventories in recent times? Natural diamonds are a finite resource and their recovery peaked in 2005 following the closure of legacy mines and finding new deposits. Production in 2021 was recorded to be 20% below the level of 2017.
Supply depletion, alongside the strong market demand of 2021 as the world emerged from the pandemic has reduced the inventory of mining companies to low levels.
Bain & Company compiled data from company reports and the Kimberley Certification process to estimate that upstream inventories (i.e. those at diamond mine sites and sorting offices) across the world fell by 40% in 2021, leaving them close to minimal ātechnical levelsā.
To review inventory trends, comparisons of published carat production and sales data over a business cycle can be assessed.
Whilst this does not provide a complete picture, when analyzed over a considerable time, it helps to demonstrate that total production and total sales are in line with one another and that therefore, there is no evidence of deliberate stockpiling to systematically drive-up prices.
According to Paul Zimnisky, upstream inventory levels remain at significantly low levels. Production data is available on companiesā websites and underlines how the industry is pursuing increased transparency when it comes to production and inventory management.
Through the UN and World Trade Organization mandated Kimberley Process Certification Scheme, explored in our chapter on ethical sourcing, international rough diamond trade is regulated and recorded. Data and statistics arising from the Kimberley Process indicate the levels of diamond recovery and paint a clear picture of the marketās production.
Source: Natural Diamond Council