Industry News

AWDC & Bain Publish Latest Report: The Global Diamond Industry 2018

Following a period of volatility, the global diamond industry regained its luster with 2 percent growth in 2017, writes Bain & Company in the eighth annual global diamond report issued in collaboration with the Antwerp World Diamond Centre. Bain & Co. finds that the diamond industry – just like the luxury market – remains resilient against global socio-economic turmoil.

 

In line with positive luxury market trends, global diamond jewelry sales grew last year, fueled by strong macroeconomic fundamentals in the U.S., resurging demand from Chinese millennials, and increasing sales in the self-purchasing category in China. This healthy demand led to an unprecedented jump of nearly 20 percent in diamond production volume last year and supported a 2 percent increase in cutting and polishing revenue, putting the segment on positive ground. These are the findings from the eighth annual report on the global diamond industry prepared by the Antwerp World Diamond Centre (AWDC) and Bain & Company.

 

“The diamond industry closely mirrors the luxury industry in its resilience to socio-economic turmoil around the world,” said Olya Linde, partner at Bain & Company and lead author of the report. “In 2017, we saw notable growth across all segments of the diamond industry value chain even in the face of increased market turbulence, continuing a climb that started in 2016. This is a trend we expect will continue through 2030, despite several challenges that will reshape the way the industry markets itself amid changing consumer preferences and the increasing influence of lab-grown diamonds.”

 

2017 By the Numbers

 

The increase in retail diamond jewelry sales – up 2 percent in US dollar terms – can be attributed to a strong economy and favorable macroeconomics, namely growing consumer credit, shrinking unemployment and higher wages, in the U.S. In China, consumer demand grew for the first time since 2013, picking up momentum from Millennial buyers. As in years past, India had the highest potential for diamond jewelry retail growth, yet its revenues remained flat. Performance in Europe was tempered by lower consumer confidence and by weak economic fundamentals in Japan.

 

All of the top mining companies increased production in 2017, with volume reaching 151 million carats, 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. “In 2017, rough diamond production returned to a level not seen in a decade, while the value of those goods lagged somewhat behind,” said AWDC CEO Ari Epstein. “The situation in 2018, however, is more encouraging. The high level of output has continued but is now combined with a higher average price per carat due to robust demand for higher quality and larger goods. This has led to substantial value gains despite a slightly lower level of production. Provided polished prices keep pace, we have the scenario for sustainable gains across the value chain.”

 

While the cutting and polishing segment grew overall due to healthy demand, profit gains in 2017 were mostly limited to producers of small stones. Average profitability remained positive with stable margins at 1-3 percent; the most efficient players delivered margins of around 10 percent. India, which accounts for 90 percent of global polished diamond manufacturing by value and dominates in all size segments, including the value-add segment of larger stones, continued to grow its leadership position in this segment as a result of lower labor costs, a favorable regulatory environment and relatively better access to financing. However, India’s growth came primarily at the expense of China and other countries.

 

2018 and beyond

 

Demand for diamond jewelry is expected to continue or even accelerate in 2018, steered by high demand from affluent consumers. During the first half of 2018, performance across the diamond industry value chain remained strong with accelerated growth expected among mining companies and jewelry retailers. The final outcome for the year hinges on December’s holiday sales. Assuming demand for diamond jewelry continues to rise through the end of 2018, overall profitability of the cutting and polishing segment is expected to improve.

 

India continues to show promising signs of growth, even amid inflation and a weaker rupee in the first half of 2018. As the country’s middle class expands and personal disposable income grows, demand should follow. The report suggests Europe and Japan will rebound this year, thanks to higher tourism volume, Euro appreciation in Europe and decreased unemployment in Japan. “This outlook versus our forecast from the previous year incorporates revised macroeconomic conditions and possible demand substitution from lab-grown diamonds. It also reflects fundamental supply and demand factors rather than short-term fluctuations,” said Linde. “The short-term supply-demand balance depends on the actions of major producers and efficiencies along the diamond pipeline.”

 

Bain and AWDC anticipate a continued positive long-term outlook for the diamond market through 2030. Rough diamond supply is projected to be negative 1 percent to 1 percent annually in volume terms. Demand for mined rough diamonds is expected to grow up to 2 percent annually in real value terms during the same timeframe, backed by strong fundamentals in the U.S. and the continued growth of the middle class in China and India. “The projections emerging from this report demonstrate at least two things,” Epstein adds. “Firstly, they show just how intertwined the diamond industry is with the global economy, and we in the industry look to longer-term macroeconomic projections to assess the outlook for the industry as a whole. What do they tell us? To expect growing prosperity in the U.S., China and India, and increasing technological efficiency in diamond-manufacturing countries. Secondly, they illustrate the resilience of the diamond industry.  It is clear that consumers around the world still aspire to own a diamond. Provided we keep that desire alive, and deliver the goods in the right, sustainable way, we have reason to be optimistic.”

 

Further downstream, Bain and AWDC expect that China and the U.S. will likely maintain their leading roles in the diamond jewelry market. Real GDP growth of 2-3 percent per year through 2030 will fuel U.S. demand, and expansion of China’s middle class will reinforce the country’s positive long-term demand trend. Further, favorable adjustments to tax and customs policies should support continued Chinese growth, and the online channel is expected to bring additional diamond jewelry sales to regions in China with limited physical retail footprint. However, if the trade war between the U.S. and China continues, economic growth prospects in both countries could be negatively affected, or consumer confidence could dwindle.

 

According to the report, three key industry trends will be influential in shaping the future of the diamond industry:

 

Increasing influence of digital technologies. Emerging and maturing digital technologies are affecting all parts of the value chain, enabling diamond producers, midstream players and retailers to increase efficiencies within their operations. Marketing efforts that use digital technology can also deliver superior customer experiences.

 

Growing presence of lab-grown diamonds. Lab-grown diamonds are clearly here to stay. De Beers’ launch of Lightbox, a retailer of lab-grown diamonds, and the U.S. Federal Trade Commission ruling on diamond terminology were major news in 2018. The effects on natural diamond demand and price will depend on consumer perceptions and preferences.  If the natural diamond industry can differentiate its stones from lab-grown diamonds (perhaps positioning lab-grown diamonds as fashion jewelry rather than luxury items), the effect on natural diamond demand by 2030 will be limited to 5-10 percent in value terms.

 

Shifting preferences of younger generations of consumers. Younger generations of consumers are causing industry players to rethink their sales and marketing strategies. The self-purchase product category continues to grow as Millennial and Generation Z’s female spending power increases. Younger generations are also more inclined to consider the opinions of social influencers, customer reviews and “likes” when making purchasing decisions. Social media shopping is expected to increase significantly as the spending power of Gen Z rises. Many retailers are already strategizing how the shifts in preferences will change their approaches to marketing and operations.

 

“We’re in an age where consumer preferences are changing. Millennials and Generation Z are still buying diamonds, but the way they go about shopping for anything, including diamonds, is different than their predecessors,” said Linde. “Continued future demand for diamonds will depend largely on the industry’s ability to market its jewelry successfully – specifically the process of buying and owning a diamond – versus other types of luxury goods and experiences as well as the growing influence of lab-grown diamonds. If the industry plays its cards right, we believe it could actually benefit from the potential of lab-grown diamonds to potentially increase demand for diamonds in general.”

Download full report

Source: www.thediamondloupe.com