Basic Materials
Diamonds: UBS Evidence Lab inside: Robust '21 outlook intact
Holiday season jewellery sales look robust and despite near-term risks from additional COVID restrictions, we remain constructive on the outlook for diamonds.
Near term: 4Q sales season robust & 2021 outlook remains constructive
Near term: 4Q sales season robust & 2021 outlook remains constructive
Rough diamonds were the commodity hardest hit by COVID-19 but sales recovered to pre-COVID levels in 4Q20 & initial reports from the holiday season are supportive; we expect this to underpin solid rough diamond demand in 1Q21. Further COVID restrictions could impact near-term jewellery sales, but we expect the market to look through this & focus on the potential for a sustained recovery in jewellery demand as vaccine roll-outs lead to easing of restrictions in mid-2021. In our view the outlook for rough diamonds remains positive.
- Rough diamond supply is set to fall >20% in 2020 & is unlikely to get back to 2019 levels due to depletion; we expect companies to bring mine supply back over 1-2yrs to allow them to reduce inventory.
- China jewellery demand bounced back quickly & preliminary data from the US sales season is encouraging. We expect pent-up jewellery demand (particularly bridal) to support a sustained recovery in jewellery demand as COVID restrictions ease.
- Despite some restocking in 4Q20, inventory across the large diamond supply chain remains healthy.
- Some companies cut prices in 2H20 but are likely to continue to adopt value over volume strategies supporting pricing in 2021.
Long term: UBS Evidence Lab Diamonds Survey key findings
Long term: UBS Evidence Lab Diamonds Survey key findings
Consumer preferences appear to be stable over the last 12m and responses from China vs US consumers are surprisingly similar. Key takeaways:
- Natural diamonds remain the largest category of purchased jewellery in US & China and the proportion of natural vs synthetics is stable.
- Engagement/marriage is the key reason for purchasing a natural diamond. Synthetic diamonds/other jewellery are increasing in popularity in 'other categories'.
- Natural diamonds remain dominant in the engagement category & synthetics do not appear to be gaining significant share.
- Environment & ethical reasons are the most common drivers for buying synthetics vs natural.
- Natural diamonds are perceived to offer better value for money vs synthetics. We acknowledge that diamonds face potential long-term structural headwinds from synthetics, but surveys do not suggest material changes in consumer behaviour over the past 2yrs.