Sep 29th, 2015

Diamonds – Industry Status

Diamond Prices

There has been a steady decline in diamond prices over the past year. Who do we blame for this? Basically the same dynamic that we find in the stock market namely greed and fear.

Historic pricing

Diamond prices used to be controlled by the CSO (Central Selling Organization) arm of De Beers. Having been in control of 80% of the diamond supply globally, supply was closely linked to global absorption. De Beers did a lot of advertising to lure couples to spend money on bridal diamond jewelry. The slogan, ‘A diamond is forever’ resonated well with consumers and entrenched faith in the value of their investment. Ernest Oppenheimer, the father of the diamond industry believed there should be enough margin for cutters, dealers and retailers. I still remember the golden years of the sixties, seventies and the eighties where everybody could make a bit of money.

Then came the Russians

With the development of mines in Russia, larger numbers of high quality diamonds came onto the market. Through negotiation, De Beers was able to market the bulk of the Russian production and things were still very much under control. By the late eighties, concerns were raised that demand is going to outstrip supply in the not too distant future. Once Alrosa decided to go it alone after their agreement with De Beers concluded, the market dynamics changed more to a supply and demand basis. Growing international population allowed for more diamonds to be absorbed downstream.

Then came the Canadians

The discovery of diamonds early in the nineties in Canada, allayed all fears that there might be an eminent shortage of rough diamonds. The Canadian mines in the Northwest Territories proved to be stellar deposits with very high yield of good quality diamonds. This catapulted Canada into the third position of diamond supply by value after Botswana and Russia.

The Indian diamond cutting industry

Through government backed financing, Indian manufacturers were in a position to ramp up production and to purchase diamonds with an insatiable appetite. In the process they have ameliorated their cut quality to be on par with the best in the world. The result was that an abundance of high quality diamonds came onto the market, so much so that triple excellent cut grade became the new norm. One would expect for diamond prices to come under pressure, but that did not happen.

Along came the Chinese

With the burgeoning economy and appetite for jewelry in China, diamond prices continued to rise as the world production was absorbed and everything seemed to be under control. China has become a very important market for diamond jewelry and the country has seen a plethora of luxury brands expanding across the country.

Stepping back

In the meanwhile De Beers stopped buying diamonds on the open market to ‘mop up’ supplies. De Beers also pulled back on the generic advertising of diamonds, for why should they continue to do so seeing that they only produce around 40% of global output. This resulted in a missed opportunity to grab the attention of millennials to compete for their spend and their appetite for smart phones and the latest gadgets.

Usurping the margins 

With the expansion of the global market, the diamond mines were quick to adjust their prices as soon as their was an upward move in prices. This resulted in huge profits for the mining sector, yet the Indian Manufacturers were prepared to purchase whatever they could to keep their operations going. Margins were under pressure like never before and many of the Indian manufacturers are facing tremendous stress to keep their business afloat.

Chinese market contraction

With the slowing down of the economy in China, the suppliers of polished diamonds are scrambling to find markets for their diamonds and are driven to B2B sales to keep some momentum going. Suppliers of polished are prepared to sell their diamonds at a loss in an effort to keep their operations going. There is a limit to how long any company can last in such a downward spiral.

Price correction

In an effort to retain customers and to get into lockstep with marketing realities, mining companies have lowered their prices to prop up sales with limited success. Time will tell when we will see a return to normalcy in the industry.

New supply

I recently visited a client of ours and and he showed me a collection of polished diamonds and added these words: ‘None of these diamonds were bought from diamond dealers or cutters’. I am talking of over $1 million worth of inventory. Where did these diamonds come from? Off the street! Baby boomers their children and grand children are cashing in old jewelry in exchange for cash or to upgrade to something more modern with better cut grades. How will this affect the supply line of diamonds? Radically, to say the least. Billions of dollars worth of these diamonds are going to be re-cut and polished to bring them up to the latest standard of cut and polished. This is going to be the new reality at least for North America and the USA in particular for the foreseeable future. This may cause the USA market for new diamonds and jewelry to stagnate or even retract.

New markets

Markets like China and India would need to be nurtured in order to increase the momentum for diamond sales. Other population rich countries with emerging economies will most likely become the driving force for diamond jewelry consumption in the future. This will mean considerable advertising investment by the whole diamond industry to create new markets for diamond jewelry. The latest global branding initiative would go a long way in maintaining existing markets and help develop new diamond markets.

Diminishing diamond supplies?

Many projections of diminishing diamond supplies have proven to be incorrect. It was projected by some ‘authorities’ that diamond demand would outstrip supply by 2014. This projection proved to be overstated. When it comes to economics, one can never forecast with precision what is going to happen in the future. Numerous diamond deposits in Canada have been discovered and I am of the opinion that many of these will be economically developed to help prop up supply as many of the existing mines go underground, which will result in a production reduction of 50% per mine. Some mines which are no longer economically viable will also close down. This may cause pressure on the supply side, but only time will tell.

In summary

Never underestimate market forces. Supply and demand still dictate market prices and volumes. Any attempt to jeopardize profitability in one sector will eventually take its toll on all the other sectors. The market will always correct itself! If mines cannot operate profitably they will be mothballed. If cutting houses cannot remain viable, they will migrate to lower cost centers  or close. If jewelers cannot maintain a profitable business with the existing supply lines they will differentiate or close. One thing is for certain, when the market is under pressure, it will spur research, re-invention and innovation to get the edge or to stay alive. These are exciting times indeed!