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The Global Diamond Industry 2018: A Resilient Industry Shines Through

diamond world news service

Bain along with Antwerp World Diamond Centre (AWDC) presented its 8th annual report on the global diamond industry. The highlights of the report include the increasing influence of digital technologies, the growing trend of lab-grown diamonds & the shifting preferences of younger generations of consumers. Over all, the report suggests that the long-term outlook for the diamond market remains positive.

Recent developments in the diamond industry
Every segment of the value chain improved in 2017, with industry revenue growing around 2 per cent. In 2018, the report expects revenues to continue to trend upward, and project accelerated growth in the mining and jewellery segments. Revenue for rough diamonds increased, continuing a climb that started in 2016. Revenue growth for rough diamonds is largely attributed to increased production by smaller players. The top five mining company aggregates faced unfavorable exchange rates in 2017, which contributed to lower profit margins of about 5 per cent.

Cutting and polishing revenues increased slightly in 2017 due to healthy demand, marking a turnaround from prior years. Average profitability was stable at 1 per cent to 3 per cent, with the most efficient players delivering margins of around 10 per cent. The report expects cutting and polishing profitability to improve in 2018, supported by rising prices for polished diamonds and increased demand for diamond jewellery. Midstream inventory has increased in anticipation of higher demand, particularly in lower-quality and smallersized assortments.

Global retail sales of diamond jewellery increased in 2017 due to a strong economy in the U.S., the world’s largest diamond jewellery market. A resurgence of luxury spending among Chinese millennials also contributed to the increase. De Beers Group launched Lightbox Jewelry, a lab-grown fashion jewellery retailer with a new linear pricing model and no grading reports for its products, in September 2018. Along the value chain, companies are evaluating how to strategically respond.

Performance across the value chain was strong during the first half of 2018, with accelerated growth expected among mining companies and jewellery retailers.

Rough diamond production
All of the top mining companies increased production in 2017, leading to an unprecedented 19 per cent growth in rough diamond production; volume reached 151 million carats in 2017, breaking an eight-year trend of flat output. However, the increase was largely attributed to the processing of lower-quality supplies and tailings, diminishing the effect on revenues.

Canada, the Democratic Republic of the Congo, Australia, Botswana and Russia accounted for 90 per cent of the output increase in 2017. Canada led the way, with the largest production increases coming from commercial mining efforts in Gahcho Kué and Renard, both of which started production in 2016 and early 2017.

The report believes that 2017 was the pinnacle production level for the natural diamond supply. From here on, output is expected to remain stable at best. Miners’ plans and actual production volumes in the first half of 2018 suggest production may even decline in the near future.

The most significant decreases are expected from Mirny in Russia and Voorspoed in South Africa, resulting from their closure; Jubilee in Australia from lower-grade mining; and Argyle, also in Australia, because of depleted reserves in its block cave. Meaningful increases are expected from Orapa and Jwaneng in Botswana.

Currency adjustments in production countries lowered the EBIT margins (earnings before interest and taxes) for De Beers Group and ALROSA in 2017. ALROSA returned to positive in the first half of 2018 and maintains the highest margin in the segment, attributable to rises in rough diamond prices, currency devaluation and strong cost containment. Petra reported negative EBIT margin in 2017 but rebounded in 2018. Merger and acquisition activity was focused on the mining segment, with key industry players investing in mining resources and operations. De Beers Group purchased Chidliak, a diamond resource in Canada; ALROSA increased its shares in Catoca from 33 per cent to 41 per cent .

Cutting and polishing
Healthy growth in the diamond jewellery retail market supported a 2 per cent increase in cutting and polishing revenue, putting the segment on positive ground in 2017.

While the cutting and polishing segment grew overall, profit gains in 2017 were mostly limited to producers of small stones. Companies that specialize in large, high-quality stones experienced pressure from retailers in 2017. That trend reversed in the first part of 2018. To sustain profitability, cutting and polishing companies are focusing on four strategies: managing inventory levels, shortening production cycles, optimizing yields and expanding operations. Technology is leading improvements in the cutting and polishing segment, from digitally mapping and modeling stones to automating cutting processes.

Because of its low labour costs, favorable regulatory environment and relatively easier access to financing, India continued to gain market share in 2017. India’s growth came primarily at the expense of China and other countries. India accounts for more than 90 per cent of global polished diamond manufacturing by value, and it dominates in all size segments, including the value-add segment of larger stones.

In China, cutting and polishing revenue increased in 2017, backed by strong domestic jewellery demand.

Access to affordable financing continues to be an issue for some midstream players. Following several defaults in India, some banks have tightened credit requirements. However, transparent and financially healthy players in the cutting and polishing segment reported only limited influence on their ability to secure funding.

Diamond jewellery retail
The luxury category has been stable compared with global GDP for the past five years, marking resilience to generational shifts. The luxury segment has adapted to changing consumer preferences and behavior. Keeping in line with luxury market trends, global diamond jewellery sales grew 2 per cent in US dollar terms in 2017.

Demand for diamond jewellery is expected to continue or even accelerate in 2018, steered by high demand from affluent consumers. An increase in retail diamond jewellery sales is attributed to a strong economy and favorable macroeconomics in the US, namely growing consumer credit, shrinking unemployment and higher wages.

Demand in China grew for the first time since 2013, picking up momentum from millennial buyers. Favorable adjustments to tax and customs policies should support continued Chinese growth. The online channel is expected to bring additional diamond jewellery sales to regions in China with limited physical retail footprint.

As in years past, India had the highest potential for diamond jewellery retail growth, yet its revenues remained flat. Despite inflation and a weaker rupee in the first half of 2018, personal disposable income is expected to grow in India and provide basis for increase in demand.

In 2017, performance was tempered in Europe by lower consumer confidence and in Japan by weak economic fundamentals. Both are positioned to rebound in 2018, thanks to higher tourism volume and euro appreciation in Europe and decreased unemployment in Japan.

If the US and China continue to dispute trade terms, economic growth prospects in both countries could be negatively affected, or consumer confidence could dwindle. While nothing detrimental has materialized, the potential outcomes of an ongoing trade war should be considered.

Key industry trends
Three trends have the highest potential to affect the diamond industry in the near term: advancements in digital technologies, the development of lab-grown diamonds and generational shifts in consumer preferences. Among other benefits, digital technologies are aiding transparency and efficiency efforts across all segments of the value chain. For example, in 2017 and early 2018, blockchain projects were launched to help consumers confidently identify the origin of their diamonds. Mining companies are using predictive maintenance, real-time controls and artificial intelligence to mitigate rising operating costs. Cutting and polishing players are pursuing advanced solutions in digital mapping, modeling and manufacturing to shorten production cycles and ultimately move toward fully automated processes to manufacture polished diamonds. Consumer behavior is also changing as technology matures; social media, for example, is enabling and influencing newdirect-to-consumer and online sales models.

Two important events occurred in 2018 regarding the lab-grown diamond market. In July, the US Federal Trade Commission amended its Jewellery Guides, clarifying “a diamond is a diamond” regardless of its origin. In September, De Beers Group launched a lab-grown fashion jewellery retailer called Lightbox Jewelry that introduced a new pricing paradigm. Lightbox uses a linear pricing model, reflecting the linear cost of production, whereby all lab-grown stones cost $800 per carat, regardless of size. Lightbox also does not provide grading reports for its products. As the labgrown industry continues to evolve and lab-grown diamond prices decline, players along the entire natural diamond value chain will need to determine how to respond and how to position their products with consumers.

While much attention has been paid to millennial buyers, their successors in Generation Z have been gaining buying power, forcing the industry to rethink marketing and sales strategies. Self-purchase sales and social media shopping are expected to increase, attracting younger generations of diamond buyers with distinct preferences.

Recent developments in the lab-grown market
Lab-grown diamonds have existed for more than 60 years, with limited effect on the natural gemquality market. But advancements in technology have pushed the lab-grown market into a more competitive position. Most notably, new chemical vapor deposition (CVD) technology deeply cut the cost to produce larger, higher-quality diamonds. Today, it costs $300 to $500 per carat to produce a CVD lab-grown diamond, compared with $4,000 per carat in 2008.

As production costs have dropped, retail prices have followed. The retail price of gem-quality lab-grown diamonds nearly halved in the past two years, while wholesale prices dropped threefold. Prices are expected to decrease even further as production efficiencies increase, new competitors enter the market and the segment commoditizes.

Lab-grown diamond producers have two options: to pursue gem-quality production for retail jewellery sales or to produce diamonds for high-tech applications. The latter option has the greatest potential for long-term growth and profitability, as well as low barriers to entry. Sensors, semiconductors and medical cutting tools, for example, present an emerging market for CVD-produced diamonds.

The current gem-quality, lab-grown polished diamond capacity is estimated at 2 million carats majority of which is melee (diamonds size less than0.18 carats). By 2030, the market could grow to between 10 million and 17 million carats, if the segment can sustain its current growth rate of 15 per cent to 20 per cent annually supported by consumer demand and attractive economics. But the report believe manufacturing capacity will be a major limiting factor in the short to medium term. Ultimately, marketing and consumer perception will determine the effect of lab-grown diamonds on the natural diamond market. Three scenarios exist: Consumers could perceive lab-grown and natural diamonds as interchangeable, as two different products, or somewhere in between. Marketing could uphold the value of natural diamonds, especially if the prices of lab-grown diamonds continue to drop. It’s probable that consumers will view lab-grown diamonds as fashion jewellery but not luxury goods, limiting the effect on natural diamond demand.

Updated supply and demand model
Based on the analysis, the report expects natural rough diamond supply to change at an average annual rate of negative 1 per cent to 1 per cent in volume terms through 2030. The report expects demand to grow 0 per cent to 2 per cent in real value terms during the same time frame.

The current outlook versus the forecast from the previous year incorporates revised macroeconomic forecast, possible demand substitution from lab-grown diamonds, and reflects fundamental supply and demand factors rather than shortterm fluctuations. The short-term supply-demand balance depends on the actions of major producers and efficiencies along the diamond pipeline.

The report expects China and the US to maintain their leading roles in the diamond jewellery market. Real GDP growth of 2 per cent to 3 per cent per year will fuel US demand, and expansion of the middle class will reinforce China’s positive longterm demand trend.

India continues to show promising signs of growth, even amid its current market challenges. As India’s middle class expands and bridal jewellery is adopted, demand should follow. Europe and Japan are expected to remain relatively stable, with modest long-term growth prospects.

The rough diamond supply is reasonably predictable over the next 5 to 10 years. However, financial challenges, production mix updates and overall uncertainty over future market conditions could force or delay production. As mining companies can adjust output to react to changing market conditions, production may fluctuate at existing mines.

The report based the rough diamond supply forecast on an analysis of existing mines and anticipated production at planned new mines. The report’s projections also include potential supply from new sources, such as tailings from older mines, reopening of distressed mines, activation of options in resource development plans and recycling of secondhand diamonds.


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