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Diamond market in China in 2011: "golden decade", the beginning

14 february 2011

What will happen to the diamond market in China in the coming year? In short, it will face higher prices for diamonds, growth and diversification of demand as well as broad influx of buyers from Chinese provinces, which may spur major jewelry companies to chase small towns and even urban villages for customers.

Prices for diamond goods in 2011

One of the main factors affecting diamond jewelry prices in China is rough prices set by De Beers. In mid-November 2010, De Beers announced a new price hike, which reached nearly 8%. According to the Shanghai Diamond Exchange, due to annual growth in diamond prices on the world market, the cumulative increase in wholesale prices for certain types of diamond products in China over the past two years amounted to nearly 30%, particularly affecting "high-end" diamonds. During the spring season of 2010, only wholesale prices for polished diamonds rose by 5%, according to the China Daily.

So far, higher diamond prices set by De Beers have not affected the Chinese jewelry market, as it was noted during visits to jewelry stores in Hangzhou, Wenzhou and other cities. According to various jewelry businesspersons, a new wave of price increases is expected in China early in 2011 and this will boost wholesale prices by at least 8% and retail prices by no less than 10%.

"A rise in rough prices usually affects the cost of finished goods in six months or even in one year, so a price hike should be expected in 2011. In addition, its impact on different kinds of diamonds will be different. Currently, some jewelry companies have already raised prices for large diamonds, but small diamonds will change in price insignificantly," says the general manager of Hengrui Jewellery, operating in Hangzhou, Nanjing and other cities.

Consumer demand in 2011

From November 30 to December 1, 2010 Shanghai held the China Diamond Conference organized by the Diamond Administration of China (DAC), Antwerp World Diamond Center (AWDC) and the Shanghai Diamond Exchange (SDE). This event was a milestone for China's jewelry industry, as the speakers declared it was entering a "golden decade" of its development.

Moshe Mosbacher, President of the Diamond Dealers Club (DDC) drew no less flattering parallels between Shanghai and New York. He said both were the financial nerve centers of their respective countries, both housed their country's first diamond bourse and both serves as their nation's official point of entry for diamonds. According to the DDC president, going forward, Shanghai, like New York, will need to focus on domestic demand for diamonds, especially as China's middle class expands. "The bottom line for a diamond center like Shanghai, therefore, is similar to the one that we are reminded of daily in New York - it is all about the local consumer and local consumer confidence," Mosbacher said.

The global financial crisis has not been able to inflict a crushing blow to the Chinese jewelry industry, while its shift towards domestic demand allowed it to become a locomotive in 2009, pulling the jewelry industry recovery in major countries supplying jewelry raw materials and finished products. According to the Shanghai Diamond Exchange, from January to October 2010, China's imports of polished diamonds exceeded the threshold of $2 billion reaching $2.156 billion, which was 75.2% up towards the similar period in 2009.

Experts predict that in 2010 total imports of diamonds in China will exceed $2.5 billion and this was also mentioned at the China Diamond Conference last December.

"Despite the fact that 2008 was the most difficult year, the extent of business at the Shanghai Diamond Exchange including export-import and domestic transactions increased by 28%. In 2009, this figure continued to grow steadily and in quantitative terms exceeded $1.5 billion, setting a new height. This was particularly evident in diamond jewelry imports, which amounted to $699 million (up 30.7%), thus giving China a chance to outstrip Japan and turn to be the world's second largest diamond consumer market," wrote the International Financial Newspaper published by the Renmin Ribao Holding.

According to the interviewed representatives of the jewelry community, consumer demand in China “is only starting to reveal its potential” and will continue to grow not only in 2011 but in subsequent years.

De Beers accepts this point of view as well. According to the company’s forecast, diamond demand in China will grow 20% annually, Mmegi Online reports.

However, Hu Shugang, Chairman of the Board of Lao Feng Xiang, a well-known Chinese jewelry manufacturer, offers more modest estimates. "Today, diamond demand is penetrating Chinese families at a rate of 15% a year," he says. In addition to the traditional demand for jewelry gems, one should take into account investment diamonds as well, which have become a new darling toy among Chinese investors and collectors. Demand for these will increase by an average of 10% a year.

If we talk about China's share in the global consumer diamond market, it is not very well established and accounts for 6 to 8 percent, according to what was told to reporters by Jean-Marc Lieberherr, General Manager, Diamonds Sales and Marketing Rio Tinto. According to him, from the standpoint of international standards, the Chinese diamond market was still quite small, but it was clear that over the past 3 years it demonstrated very high growth rates. "We forecast that by 2020 China will have a 20-25-percent share on the world stage of diamond consumption and become a major market," Liberherr said.

Major trends in China’s diamond market in 2011

The following trends are noteworthy for they will determine the diamond trade in China in 2011:

1) Gradual diversification of demand among Chinese consumers is underway. They are becoming more knowledgeable and exacting while choosing diamonds and will expect more diversity.

"The emerging middle class in China is an ideal entry point for affordable diamond jewelry. Increasingly, Chinese consumers will be seeking to differentiate themselves through fashion and fashion jewelry, and this will be the driver of future growth in retail diamond demand," Rio Tinto’s general manager for sales and marketing said.

2) The Chinese buyer’s portfolio will have an expanding part of high-quality and consequently more expensive diamond jewelry. Colored diamonds will turn increasingly popular.

"If earlier consumers had one diamond and were quite happy with it, now they have better understanding of diamond goods," Sun Fengmin, Permanent Deputy Chairman of the Diamond Association of China, says.

For instance, Rio Tinto is placing much hope on this trend. In September 2010, the diamond giant teamed up with leading Hong-Kong-based jewelry company Chow Tai Fook to offer exquisite and very expensive pink diamonds to the rich Chinese and supply other colored diamonds to those who cannot yet afford the pink ones.

"In partnership with Rio Tinto we shall primarily focus on highly valued pink diamonds," Huang Shaoji, CEO of Chow Tai Fook, said.

3) In 2011, the impact of inflation on the one hand and revaluation of the yuan on the other hand will play an increasingly important role in stimulating demand for investment diamonds and gold, as well as for diamond and gold jewelry.

4) Wedding jewelry demand will so far remain a major driver for the diamond trade in China.

5) Diamond jewelry will be increasingly seen not only in glittering boutiques on main streets in Chinese cities but also in jewelry stores located in medium and small towns and even urban villages. Large retail companies see a huge consumption potential in provinces and will strive to expand their network to reach as many buyers across the country as possible.

The first to announce its expansion plans in the cities of the second and third levels in the western and central regions of China was Chow Tai Fook (March 2010). As is usual in China, the first successful robin will be followed by others.

6) In 2011, there will be possible new alliances between large foreign and Chinese companies, which, like the partnership of Rio Tinto and Chow Tai Fook, will join forces to win a victory in the competition for Chinese consumers.

Given the increasing competition, such alliances will be beneficial to both parties, especially if a foreign partner will be able to offer state-of-the-art technology, design and, most importantly, an access to jewelry raw materials on easy terms, and if a Chinese partner will be able to offer a developed market network and knowledge of the local market. Hong Kong will remain to be an entry point to the Chinese market, and hence cooperation with Hong Kong companies having strong positions in China’s market will be most important for foreign partners.

On the whole, 2011 promises to be an exciting and to some extent even venturesome stage in the development of the diamond market in China, because players there will place their stakes on the "golden decade" lying ahead.

Dasha Platonova, Editor of the Rough&Polished Asian Bureau in Shanghai