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ALROSA becomes a certified member of the RJC

ALROSA has become a certified member of the Responsible Jewellery Council (RJC) by achieving certification against its Code of Practices through meeting the highest ethical, human rights, social and environmental standards as established by the...

Yesterday

De Beers rakes in $450mln from latest rough sales – Anglo

Anglo American said De Beers raked in $450 million from its tenth sales cycle of the year compared with $422 million, a year earlier.

Yesterday

The Kimberley Process (KP) Plenary session starts in Brisbane, Australia

Prior to the commencement, the World Diamond Council (WDC) led bilateral meetings with members of the KP family including the Chair, some of the 81 KP member countries and the Civil Society Coalition. It also conducted its third Observer’s Forum...

Yesterday

CIBJO President expressed support for De Beers plan to develop diamond traceability system

CIBJO President Gaetano Cavalieri has voiced the World Jewellery Confederation's support for a De Beers development project that employs blockchain technology, which was announced on December 4 by the group's CEO, Bruce Cleaver.

11 december 2017

IDE to unveil technology breakthrough initiatives at IDWI 2018

The Israel Diamond Exchange (IDE) has announced that it will unveil a series of groundbreaking initiatives that will have an important impact on the diamond industry in Israel and worldwide at the International Diamond Week in Israel (IDWI)...

11 december 2017

Global diamond jewelry sales are expected to decline slightly in 2016 - Bain & Company

06 february 2017

olya_linde_xx.jpgBain & Company, a leading global business consulting firm, offering solutions on issues of strategy and operations, works with over 2,700 major multinational corporations across every economic sector, including the diamond mining industry. Antwerp World Diamond Centre (AWDC) and Bain & Company recently released a sixth annual report, focusing more in detail on the dynamics of consumer demand across the globe in 2016.

Olya Linde, Principal of the company’s Moscow Office, gave this interview to Rough&Polished.

What is your assessment of mid-term and long-term perspectives of the world diamond trade?

The medium-term outlook remains challenging, as new supply is expected to come online and uncertainties cloud the social, political and economic environments in key markets. In the long run, the positive macroeconomic outlook is expected to work in the industry’s favor—as long as diamond producers behave responsibly and industry players sustain marketing efforts to support diamond jewelry demand, especially among millennials.

What region, in your view, has the best trade perspectives?

The diamond industry is a global, however, different regions are historically strong in various part of the diamond value chain. Russia and African countries remain largest rough-diamond producers. India continues to gain share as global cutting and polishing stronghold. USA and China are likely to remain largest markets for diamond jewelry consumption with India expected to be one of the fastest growing.

What exactly is happening in the rough market? How do you evaluate the current situation?

Rough-diamond production remained stable in recent years at approximately 125-130 million carats. In 2015, these production volumes have not translated into the same sales dynamics, and rough-diamond revenues declined 24% compared to the previous year.  Sales decline was driven by mid-segment slowing down purchases and unloading accumulated stocks.  As a response to the market situation, both ALROSA and De Beers lowered their prices in the second half of 2015, which remained the essentially the same levels throughout 2016.  In 2016 rough-diamond producers posted strong sales as cutters and polishers renewed their purchases of rough diamonds.  2017 will be the year to watch as new supply is expected comes on line and year’s performance will be very much dependent on resurgence of consumer demand. 

What is your main concern?

A continued source of both concern and opportunity at the same time is the long-term consumer demand for diamond jewelry. As a new generation of consumers—the millennials—heads toward its prime spending years, the industry needs to find ways to effectively engage with them. Millennials are similar to previous generations of consumers in their attitudes toward diamond jewelry but differ in their decision-making and shopping patterns. In order to fully capture long-term demand from millennials, industry players need to invest in both category marketing and brand-building efforts and redefine the shopping experience. Efforts to sustain customer demand for natural diamonds can also soften any potential impact of a possible economic slowdown in the next few years.

Why the profit from diamonds is unusually low?

The diamond value chain is not uniform with regard to profitability. Most rough-diamond producers enjoyed double-digit EBIT margins in 2015. Retail margins have been quite strong as well, with high single-digit margins for smaller retailers and double-digits for larger ones. The cutting and polishing segment, however, historically posted lowest profitability in the diamond value chain. Midstream players have been subject to volatile rough and polished diamond prices and, more recently, to sluggish consumer demand.

How do you explain the overall decline in consumer demand for diamond jewelry?

In fact, in 2015 global diamond jewelry retail sales increased about 3% at constant exchange rates, in line with positive trends in the global personal luxury goods market. Demand dynamics varied between major markets. Strong demand by middle-class buyers spurred growth in the mainstream jewelry retail segment and was the main contributor to an increase in US diamond jewelry sales. China’s diamond jewelry sales in 2015 dropped slightly at constant exchange rates because of significant market contraction in Hong Kong and Macao. Diamond jewelry growth in mainland China remained positive, with major retailers—both brick-and-mortar and online—posting same-store sales growth. Europe, India and Japan delivered revenue gains, measured in local currencies, in 2015. The weaker euro and yen lured tourists to Europe and Japan, and growth in the middle class and disposable incomes supported market gains in India. However, currency depreciation in 2015 contributed to a decline in global revenue of about 2% in US dollar terms.

Overall, global diamond jewelry sales are expected to decline slightly in 2016. In 2016, the Chinese market will likely slow down, with weakening fundamentals in mainland China compounded by continuing declines in Hong Kong and Macao. In the US, economic slowdown in energy-producing states, the uncertainty of an election year and as a result a temporary reduction in overall consumer spending drives diamond jewelry sales growth into negative territory in 2016.

How to ensure the profitability of the business?

There is not a single success recipe across the diamond value chain. Rough-diamond producers have focused on keeping down operating cost and ensuring efficient asset utilization.  Diamond jewelry retail – as any other retail – is a scale business. Keeping traffic high is key to profitability in this sector and seamless customer experience across physical and digital touchpoints is the right thing to focus on to increase same-store sales. Another part of the equation for diamond jewelry retailers is efficient capital utilization, which makes inventory management a priority, especially given the high costs of goods sold. Midstream remains most challenging segment of the diamond pipeline. In the past few years, volatile diamond prices and slowing of diamond jewelry sales have continued to squeeze the profitability of midstream players. These companies must continue to redefine their business models to emphasize demand-driven inventory and production planning as well as continuous operational improvements.

The majority of bankruptcies in the diamond industry in recent years were anticipated. What is the explanation?

If the question is referring to bankruptcies in the midstream (cutting and polishing segment specifically), we have not seen as many bankruptcies and acquisitions as one might expect, given the pressure on that segment.  Mostly, the companies in this segment have been successful in adapting to the changing situation and staying in business.   Even as the overall amount of traditional financing to the segment is going down, there is evidence that large traders are beginning to provide financing to the midstream players in order to support their business. As the retail inventories in the diamond pipeline are cleared and polished prices begin to go up, the pressure on the midstream is becoming less, with lower prices for rough providing margin relief to cutters and polishers.

Do you expect the market’s share of the lab diamonds will grow? 

Lab-grown diamond technology has been around for several decades; however, the share of disclosed synthetic diamonds in the overall jewelry-grade market is still at low single digits.  One of the key facts about the synthetic diamonds has been the lack of systematic marketing efforts for this category of goods.  In 2016, several producers formed a grown diamond association with the goal of promoting synthetic diamonds to the consumer.  At the same time, major diamond producers formed DPA (Diamond Producer Association) that is re-launching generic marketing efforts with “Real is Rare” campaign.  It is still early to see how the marketing efforts will play out, but the key question is whether synthetic diamonds will create additional complimentary demand to natural diamonds (for example, in fashion jewelry) or whether they will be able to gain market share in the traditional diamond jewelry segments.

Alex Shishlo, Editor in Chief of the European Bureau, Rough&Polished

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