Covid-19 stifles gold, diamonds, luxury goods supply
The pandemic added new features to the €1tn global industryIvan Mastagarkov
The global Covid-19 pandemic triggered an economic crisis that was unknown to humanity. Besides supply and demand, all markets had to figure the unfamiliar lockdown factor. Investors and even common individuals searched for the known safe heavens in the face of the crisis. But rules had changed. Supply was no longer tied to demand, expensive was no longer valuable and valuable was not at all vital.
The old formula - buy gold and stay low was not valid for the trying times of the pandemic. Countries unleashed low interest rate spending worth trillions of euros, and the most lucrative goods became unpopular things like vaccines and even facemasks. One big segment of the world market - the one dealing with luxury goods and experiences, was totally twisted.
If you wished to buy a diamond-encrusted gold watch, it was not enough to have the cash. Not when suppliers were struggling to find a way around quarantined gold and diamond mines and locked-down workshops and jewelleries.
Precious metals prices marched lately on their three-month long uptrend over new Covid-19 cases surge due to the Delta variant. Silver and platinum have benefited from a rebound in industrial activity following an easing of restriction measures. Gold prices continue to edge higher, reaching an all-time high of $1,902/toz on 24 July. They benefited from strong demand for safe-haven assets following record worst global uncertainty and widespread negative economic data stemming from the Covid-19 crisis. The gold to copper price ratio - a key barometer of global risk sentiment - reached a 40-year high in April. Supply bottlenecks have also supported silver and platinum prices. Silver production has been heavily affected by mine shutdowns due to Covid-19, particularly in Latin America. Mexico and Peru together account for almost two-fifths of global production. Meanwhile, mine closures in South Africa, the world's largest producer of platinum, and an explosion at a large smelting plant, unrelated to the pandemic, have significantly reduced its supply.
Over the short term, the mining companies that most successfully avoid or contain the spread of the virus throughout their operations while maintaining production levels will emerge with a stronger cash position as they take advantage of expected higher price levels and strong margins. In the longer term, the strong prices of gold provide a window for mergers and acquisitions to consolidate the industry, because the acquisition price per ounce of resources and reserves of an operating gold mine is far below the current spot price.
The luxury goods industry suffered a severe blow by the Covid-19 crisis in 2020 and recovery in 2021 is still far from certain. The core personal luxury goods markets shrank for the first time since 2008-2009. The industry posted an overall 23% fall to reach €217bn. The slump is the largest ever recorded. The overall luxury market, including both luxury goods and experiences, fell at a similar pace and is now estimated at approximately one trillion euros.
The pandemic called for a profound global change in the way we live, the way we choose and shop, and what we value. Tourists have remained mostly stuck at home. The pace gaining online shopping for luxury goods has surged, more than doubling its share of the market to 23% in 2020, from 12% in 2019. The chaos, panic and lockdowns linked to Covid-19 have been the catalysts for change in the luxury industry, which is on a path to recovery sometime by 2022-2023. Consumer demand for action with purpose and social impact is growing, and luxury brands are expected to demonstrate real and sustained commitment to diversity, inclusion and sustainability.
Uncertainty is expected to hover over the industry for some months to come. According to some studies, in 2021 the market is expected to recover 50% of the profit loss of 2020, but to remain still below 2019 levels. This is driven by requirement to continue and sometimes even accelerate spending on most cost items despite the drop in sales.
Mainland China has been the only region in the world to potentially end 2021 on a solid ground, growing by 45% to €44bn. Local consumption has soared ahead across all channels, categories, generations and price points. Europe, however, suffered worst from the collapse in global tourism. While local consumption remains, regional consumption fell by 36% to €57bn. The Americas experienced less impact and the market fell by 27% at current exchange rates to €62bn. Japan has seen a polarised performance among brands with higher resilience of those accepted as timeless and seen as long-term safe investments. The region shrunk by 24% to expected €18bn in 2021.
The rest of Asia also struggled, with Hong Kong and Macau among the worst performers globally. The region contracted by 35% at current exchange rates to reach €27bn. The impact in the Middle East was characterised by shorter lockdowns and repatriation of spending previously made abroad, though with different nuances among countries within the region. Overall, the rest of the world contracted by 21% to €9bn. The changes brought by Covid-19 increased the presence of online interactions in every aspect of human life. In the luxury market, online sales accounted for €49bn in the pandemic 2020, up from €33bn in 2019. The share of purchases made online nearly doubled, from 12% in 2019 to 23% in 2021.
All personal luxury goods categories have seen declines in 2020 and 2021. Shoes were cushioned by demand in sneakers, falling by 12% to an annual €19bn in the two-year period, while jewellery saw sustained demand in Asia and benefited from online sales. That category remains polarised with high jewellery and iconic entry priced items leading the recovery.
Watches and apparel both declined by 30% annually in 2020-2021. For watches, Covid-19 amplified the already critical secular consumption pattern shifts from the category. Formal wear demand was in sharp decline and apparel players faced increasing competition from social media direct-to-consumer brands.
The coronavirus pandemic send tremors through the global diamond industry, shuttering mines from Lesotho to Canada and disrupting supply chains. Demand for diamonds has plummeted during the pandemic, freezing sales and squeezing prices. With temporary mine closures at risk of becoming permanent, diamond miners are seeking ways to extract more value from their stones. “There are a lot more enquiries from people seeking to buy these luxury stones as a hedge,” said Chris Del Gatto, CEO of the DelGatto Diamond Finance Fund, the largest non-bank lender to the diamond, jewellery and watch industries.