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MKT&IND REPORTS |
 From the peaks to the depths and back again: such has been the course traced by the global diamond market since 2008. In 2013, however, the diamond market showed clear signs that its rollercoaster trajectory of recent years has moderated, and that it is now on a path of steady, sustainable growth across every step of the value chain, according to Bain's Global Diamond Report.
In 2013, rough-diamond sales increased by 2 %, even though four out of five major producers increased their revenues by 5–16 %. According to Kimberley Process statistics, smaller producers reduced their output, which pulled down the aggregate sales total for the year.
The cutting and polishing segment of the diamond value chain reported a 4 % rise in revenues, to about $22 billion. India’s share of those revenues increased at an even more robust rate, to more than 60 %, confirming the country’s status as the center of the cutting and polishing industry.
China, for its part, solidified its position as the hub of diamond jewelry manufacturing, capturing most of the industry’s revenue growth in 2013. China, already the global leader in overall jewelry production, now claims a growing share of global diamond-jewelry manufacturing, while the shares of Europe and the US have continued to dwindle, as manufacturers there focus almost exclusively on pieces for the top end of the market.
Retail sales of diamond jewelry rose an estimated 3 %, and Euromonitor, an emerging source for perspectives on diamond jewelry sales, confirmed an even more aggressive growth trend in the first half of 2014. Continued strong demand from China and a resurgence of demand in the US powered the rise of the retail segment. In both countries retail sales grew, in percentage terms, at a high-single-digit rate. And despite worries that the positive momentum would dissipate in the second half of 2014, reports from the September Hong Kong Jewellery & Gem Fair suggest that the crucial 2014 holiday selling season will be a positive one.
Prices of both rough and polished diamonds have corrected since peaking in 2011, showing a moderate growth trajectory in 2013 and the first half of 2014 that is in line with long-term historic trends. Prices of different categories of polished diamonds grew at divergent rates, with prices for small stones growing faster than those for large stones. For example, prices of polished diamonds of 0.3 carats rose at a highsingle-digit rate, while stones of 1 carat and larger posted declines in the 3–4 % range in 2013. Such disparity in price growth by category also continued in the first half of 2014, with prices for polished diamonds of less than 1 carat posting moderate growth in the 4–6 % range and prices for larger stones continuing their slightly negative trajectory.
The US, China, and India remain the world’s three largest markets for diamond jewelry and power the global industry’s growth. The US confirmed its position as the world’s leading diamond retail market, powered by economic growth of approximately 2 % in 2013—a big improvement from the 1.6% decline posted during and immediately after the global financial crisis. The consensus forecast among economists is that the US is on pace for a period of steady long-term GDP growth in the 2–3% range, which suggests that US demand for diamond jewelry will continue to rise. Recently released short-term forecasts of US GDP are even more optimistic, with expectations of economic growth slightly above 3% in 2015.
Demand in Europe, meanwhile, partially recovered. Conditions there require careful monitoring, however, because the European economy’s continued stagnation suggests that the GDP growth slowdown is not cyclical but has instead settled into a “new normal” of low or flat growth. Japan, the third pillar of the diamond jewelry market in the developed world, maintained moderate demand growth despite increasing tax pressures that affected luxury-goods sales in 2013.
ROUGH-DIAMOND PRODUCTION
In 2013, according to Kimberley Process statistics, rough-diamond output, as measured by carats, grew a modest 2% to 130 million carats. Output in 2012, for comparison, increased more, by 4%.
Russia claimed the largest share of the production increase—3 million carats. Production rose because ALROSA’s Aikhal underground mine reached its target capacity, ore grade at the Jubilee pipe improved, and ALROSA acquired the Nizhne-Lenskoye diamond-mining company. Australia’s production increased 2.5 million carats as a result of Rio Tinto’s commissioning of an underground mine at Argyle. Botswana’s output grew by 2.5 million carats because of increased production by Debswana.
At the other end of the production spectrum, the Democratic Republic of the Congo and Zimbabwe cut their production by a combined 7.4 million carats. Congo reported that production decreased by 5.8 million carats, but industry insiders suspect that output might be understated. Zimbabwe’s production fell by 1.6 million carats.
Alluvial deposits have been depleted, and producers have been slow to transition to more costly underground mining.
Even though overall growth was moderate, all five major rough-diamond-producing companies increased their output in 2013, three of them by double-digit percentages. ALROSA, which produced 37 million carats, a 7% increase from 2012, was once again the volume leader.
De Beers, whose sales increased 5%, retained its position as the revenue leader, followed closely by ALROSA. The top five players together collected about 85% of industry revenues, with Petra Diamonds posting the largest revenue increase in percentage terms, 16 %. Rio Tinto’s revenues increased 15%, as underground operations in the Argyle mine came online. ALROSA’s revenues rose 9%, consistent with its increase in production volume.
In the first half of 2014, the dynamics of production among the major producers changed. ALROSA’s output decreased by 7 % compared with the first half of 2013 because of planned maintenance at the Aikhal and Udachnaya processing plants and despite the growth of output from recently launched Severalmaz production.
The pace of growth at Rio Tinto and Petra Diamonds slowed from the double digits to 2 % and 4 %, respectively. Dominion Diamond ramped up its output by 7 %. De Beers sustained its pace of growth at 12 %, thanks to higher output at Venetia following the recovery from a flood in the pit and higher output from processing plants at Jwaneng.
Three other events in 2014 are worth noting. LUKOIL started diamond production in its Vladimir Grib mine, selling the first diamonds at auction in Belgium. ALROSA commissioned its Udachny underground mine, and Charles E. “Chuck” Fipke, a legendary diamond explorer, agreed to sell his remaining 10% stake in the Ekati mine to Dominion Diamond.
GLOBAL ROUGH DIAMOND DEMAND FORECAST
The demand forecast for rough diamonds hinges on consumer demand for diamond jewelry. Bain’s forecast therefore factors in data on the forces that historically have shaped demand for diamond jewelry. These forces include GDP growth, the size and growth of the middle class, and diamonds’ share—especially diamond engagement rings’ share—of the overall jewelry market.
“We expect demand for rough diamonds over the next decade to grow in line with historical trends, influenced by the speed of economic recovery in Europe and the US from the most recent global downturn, China’s and India’s ability to sustain high-single-digit GDP growth and expansion of their middle class, an increase in private consumption, and continued adoption of Western cultural traditions in developing markets”, the report stated.
Marketing campaigns by jewelry retailers, industry associations, and other value-chain players can play a major role in supporting the diamond market’s growth story. As we discussed in previous chapters, players are already teaming up to promote diamonds.
In the base scenario, we have incorporated forecasts for key regions around the world. Drawing on those forecasts, we expect rough-diamond demand to grow by 2024 at an average annual rate of 4–5%.
DEMAND FORECAST FOR KEY REGIONS
China, India, and the US will account for the majority of growth in diamond jewelry consumption in the next ten years.
US - In the short term, diamond consumption in the US is expected to continue its current rebound trend of the past few years, before gradually converging with its historical long-term growth rate in line with GDP and disposable income growth. We anticipate no major shifts in cultural norms regarding engagement and wedding jewelry.
Personal disposable income growth through 2024 is forecasted at about 2.6 %; the population is expected to grow moderately at about 0.7 % per year through 2024.
CHINA - In China, the diamond jewelry market is expected to sustain strong growth, owing to continued expansion of the middle class, a rising urban population, and increases in personal wealth. Diamond demand is projected to more than double by 2024, thanks to continued robust GDP growth, which further supports middle-class growth. The number of middle-class Chinese households is expected to increase by 2.5 times in the next ten years. Middle-class households claim a relatively small percentage of total households (about 26 %), but the latest analysis suggests that that percentage could reach up to 56 % in 2024.
In China, GDP and personal disposable income (PDI) growth will determine middle-class growth. PDI is projected to see a CAGR of 6-7 % through 2024. Meanwhile, urban population growth is expected to grow at a compound annual rate of about 2 % over the same period.
INDIA - India’s story is similar to China’s. Following the stabilization of the currency situation in India, the diamond jewelry market there is expected to revert to high-single-digit growth. Economic growth is expected to pick up again, and India’s middle class is expected to grow 2.8 times by 2024, driving demand for diamond jewelry.
Middle-class households constitute only about 15 % of total households, as they have over the last three years. But our analysis suggests that the number could rise to 35 % in 2024. In India, middle-class growth will follow workforce growth and increased labor-force participation as the nation switches from a natural to an organized economy and more of the population joins the labor force. The Indian luxury-goods market has not yet achieved its full potential, presenting significant upside for growth in diamond demand powered by GDP growth and improvement in consumer welfare. The penetration rate of diamond jewelry is expected to increase as well—relative to gold products—owing to increased interest in the giving of diamond rings as an engagement ritual.
Bain’s base supply scenario calls for moderate growth in the supply of rough diamonds. It assumes that new mines now under development will add 20 million carats to the supply and takes into account a slight depletion of existing diamond resources and absence of significant new discoveries of diamond deposits in recent years. The resulting forecast calls for rough-diamond production to reach 163 million carats in 2019, below the pre-crisis production of 177 million carats in 2005, which dropped to 163 carats by 2008.
NEW MINES COMING ONLINE
The base scenario draws from analysis of companies’ published plans regarding their current and future production levels. In addition to existing mines, 14 new mines are expected to begin production or ramp up to full capacity by 2024.
The largest mine expected to come online is the Gahcho Kue mine in Canada’s Northwest Territories. Developed by Mountain Province Diamonds and De Beers, Gahcho Kue is projected to produce up to 5 million to 6 million carats annually through 2020. ALROSA’s development of the Karpinsky-1 pipe at the Lomonosov diamond field is expected to yield about 3 million carats annually. Rio Tinto’s Bunder mine in central India is projected to yield roughly 3 million carats annually when it comes fully online in 2020 or 2021.
With the exception of Russia’s Grib mine and Canada’s Renard mines, which are projected to produce 4–4.5 million and 1.5 million carats per year, respectively, other new mines under development are relatively small; each is projected to produce 1 million or fewer carats annually. Most of the new mines have encountered technical challenges and have had difficulty attracting financing in the current uncertain macroeconomic environment.
The 14 new mines could collectively generate about 20 million carats in annual production by 2024—a modest amount relative to current global rough-diamond production. Because it takes seven to ten years to develop a mine, even if major new deposits were discovered within the next few years, there would not be enough time to bring them to full production by the end of the forecast period.
Taking all these factors into account, the base scenario calls for the global supply of rough diamonds to grow by a compound annual growth rate in the range 3.5–4.0 % during the 2013–2019 period and then to decline by 1.5 % to 2.0 % from 2019 through 2024. This long-term supply decline will derive from the aging of existing mines combined with a shift of production to underground mining.
Bain projects that from 2014 through 2018, the demand growth rate will exceed that of supply. Starting in 2019, the difference between the growth rates is to widen by up to 6%. Demand is projected to continue its long-term growth trajectory, supported by the outlook for strong market and economic fundamentals, and supply is projected in line with the reduction in global production levels. This trend, if sustained, suggests a long-term positive outlook for the diamond industry.
21.01.2015 19:41
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