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Ari Epstein: The diamond trade is stable again

26 february 2018

ari_epstein_excl.jpgAri Epstein, CEO of the Antwerp World Diamond Centre (AWDC), dwelled on the results of the past year and the current situation in the diamond market in his interview to Rough&Polished.

How do you assess the results of 2017?

If the diamond trade in 2016 was characterized by market recovery, 2017 brought a return to stability and predictability that should continue for the foreseeable future, particularly in the rough diamond trade. This is a welcome development for the industry as a whole. Pressing concerns remain, particularly with regard to the polished sector, but while the overall value of diamonds traded declined slightly to $46 billion from $48 billion in 2016, we note a tremendous increase in the amount of diamonds traded.

As the largest diamond trading hub, whatever trends are taking place globally are reflected in our trade figures. The dip in value was thus due to an industry-wide increase in demand for smaller rough diamonds last year, which implies a lower average price-per-carat, with the consequence that overall value declined even as our volumes were outstanding. In any event, I no longer think we need to talk about a ‘recovery’. The diamond trade is stable again.

What is your forecast for the development of the global diamond industry in 2018?

If January is any indication, 2018 is shaping up to be a stellar year. In Antwerp, polished exports surged 29% in value, with the volume of polished exports rising 21% compared to January 2017. The volume of polished imports also rose 21% year-on-year, leading to an 8% increase in value to nearly $955 million. Meanwhile, rough exports also surged 14% in value in the first month of 2018 to $1.1 billion, with a 16% increase in volume. The volume of rough imports increased as well.

Granted, this is only one month, so as always, we will temper our optimism. Analysts expect a price increase for rough as well as polished diamonds in 2018, which is interesting for the industry. It is difficult to say at this point where consumer demand will go in terms of the types of goods desired, but the sheer level of consumer demand looks promising right now, particularly in China. The slowdown in Chinese demand was concerning after the exponential increases before 2014, but now it appears to be picking up again.

Globally, consumer diamond demand should grow in 2018 driven by a stable U.S. consumer environment, strong financial markets and a generally positive macroeconomic trend. In terms of production, global diamond production is estimated to decrease about 4% to 146M carats in 2018, as no new major production is expected to come online this year and industry leader ALROSA’s production is forecast to decline slightly. But the three new mines delivering goods to Antwerp - Renard, Gahcho Kué and Liqhobong in Lesotho - are seeing better results after their first year of full production. The recent political changes in Angola and Zimbabwe have also led to optimism around the industry, as miners see promising opportunities for investment.

What causes you the greatest concern?

Banking issues like the recent one coming out of India tarnish the reputation of the diamond industry as a whole and make doing business more difficult for everyone. Despite the fact that Antwerp is not involved in the current situation in India, industry fraud and corruption have a ripple-effect, which spreads to the compliant and transparent companies. We have been working tirelessly together with the government, the banks and financial innovators to solve financing issues locally. Antwerp has made significant strides to address key issues in this regard, including the adoption of the ‘Carat Tax’, which has solidified Antwerp’s position as the world’s leading diamond trade center, and is bringing companies back to Antwerp, precisely because of the stability and predictability of doing business here.

Do you think that a future rough diamond shortfall is possible?

Certainly not in the near future. While no new discoveries of diamond deposits have occurred in recent years, several new projects have entered production this past year, essentially keeping pace with those winding down, while other promising projects are underway. Taking into account all announced and additional potential sources, the global supply of rough diamonds is actually expected to grow an average 0% to 1% per year from 2017 through 2030.

The Luaxe deposit in Angola is probably the largest and most promising new diamond project in the world, with an estimated 350 million carats and a potential lifespan of 30 years. They are fortunate to have a company like ALROSA working to develop that deposit, and expectations are it will enter production after 2020.

ALROSA’s CEO Sergey Ivanov told us the company has a billion carats in reserves, which would carry them for another 25-30 years of production even if they made no new discoveries. And they are confident there are major fields in Yakutia yet to be discovered. Canada as well has several promising deposits in addition to the new mines that just reached nameplate capacity last year, and De Beers is always an active explorer. At some point a shortage will become a possibility, but it is a little early for us to be concerned about that just now. There are so many variables and unknowns.

Do you think the increase of the share of laboratory stones in the diamond trade is possible?

The capacity of laboratory diamond producers certainly makes them capable of increasing their share, as they already produce millions of carats of industrial goods. But for synthetics to make a significant impact on the gem-quality diamond market, there has to be sufficient consumer demand for increased production to make sense, and at this point I don’t see it happening.

Nonetheless, I would not be surprised to see the market for gem-quality synthetics increase a few percentage points, and this would make for a tolerable co-existence. I would also not be surprised if they plateaued at that point. Having said that, the diamond trade needs to continue to promote its product and maintain its appeal regardless what the synthetics guys are up to. We believe in the intrinsic value and beauty of our product, and at the end of the day, we think consumers will continue to value real diamonds to mark the truly significant moments in life.

Do you expect a surge in diamond e-сommerce?

E-commerce is already surging. If you look at the Signet Group, probably the largest jewelry retailer in the US, their e-commerce sales have increased nearly 50% in the last year alone, even if it only makes up about 10% of total sales. China’s retail jewelers are investing heavily in online platforms and are seeing their e-commerce grow over 100% annually. And they are just getting started. The potential market in Asia as e-commerce becomes fully embedded in consumer behavior - if it is not already - is huge. Not to mention India, where it is just getting off the ground.

I believe this comes with the caveat that sales of lower-priced goods drive the e-commerce market. When people make a more significant purchase, I believe they will generally prefer to see it, hold it, and have professional guidance. On the other hand, technology that approximates the in-store experience is already available and is developing so rapidly that it is hard to predict what the retail space will look like in 5-10 years.

What do you think about generic and private-brand marketing to promote diamonds?

It goes without saying that we are a strong advocate of category marketing and applaud the initiative of the diamond miners to set up the Diamond Producers Association, which is doing great work. Despite a limited budget to start with, the DPA hit the ground running with a coordinated plan to speak to a new generation of consumers. As their budget has grown, so has their ambition and reach.

It is great to see diamond advertisements at the Oscars, the MTV Awards and the Olympics. And now they are reaching out to the growing markets in India and China. This is crucial, and we support them wholeheartedly. As for the marketing efforts of private brands, we are pleased whenever companies increase the exposure and allure of diamonds in the minds of consumers. Any marketing spend that increases awareness of our product is a net gain.

Is it possible in the medium term to expect an increase of demand for diamonds in Europe?

Europe saw a small decline in 2016 because of lower tourist inflows, and expectations were that the European jewelry retail market would return to growth in 2017. It did, but not to the extent expected. The Brexit, together with the weakening of the currency, has UK consumers being cautious about their purchases. Only time will tell what happens there. Still, diamond demand parallels the course of the luxury goods market, which grew slightly in 2017. Sales of high-end jewelry are strongly linked to affluent tourists, and future sales will depend on attracting them back across the region. The good news is that tourism to Europe increased by 7% to 8% last year, a trend we hope to see continuing. In short, the market research we have seen forecasts a moderate but steady increase of European diamond demand.

What are the AWDC’s nearest plans?

AWDC always has multiple plans brewing on many different fronts. Just naming our typical activities would take a good deal of space. We are already gearing up for the Kimberley Process Intersessional in June, but we have several major events between now and then, including a State visit to Canada in March and a visit together with the City of Antwerp to Russia in April. We will be hosting a Hackathon - a weekend where we invite young innovative thinkers from inside and outside the industry to put their minds together to come up with business models to several specific diamond industry issues - with the idea being to select the best solutions and put them into practice. We will also be hosting the second edition of the Antwerp Summer University and expect to repeat the great success of last year’s inaugural edition. These types of initiatives demonstrate our commitment to engage the broader community with the diamond industry, and to continue Antwerp’s intellectual and innovative leadership in the global diamond trade. We have also struck up a Diamonds & Antwerp partnership with jewelers in Japan, which already includes 21 participants, and which we will be developing further throughout the year.

What do you expect from the new edition of BrilliAnt?

Last year saw the emergence of a new diamond and jewelry event called CARAT+, which burst onto the trade show scene with a glamorous event featuring 130 leading exhibitors from 13 countries. The organizers of CARAT+ and BrilliAnt decided to create a synergy that would result in a show with even greater impact. The AWDC recently agreed to become a leading partner to this event, and we expect the second edition of CARAT+ in May 2018 to be another step forward in their objective to become the world’s premier diamond event.

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