The just-released De Beers 2016 Insight Report forecasts nine dominant features and trends that are likely to influence the international diamond business, not just moving ahead into 2017, but for several years beyond. How they interact with one another, and how the industry responds, is likely to dictate results and prices through to the next decade.
Trend 1: Increased sales, but also price volatility
It may come a surprise to diamond industry watchers, but as De Beers reports, consumer demand for diamond jewelry has not only remained strong, but it has been higher over the past three years than during any other three-year period in recorded history.
Nonetheless, global economic growth is volatile and likely to remain that way for some time yet, “The diamond industry is likely to experience increased volatility under any macroeconomic scenario, relative to recent years,” the report states.
Trend 2: Growth mainly to be generated by emerging markets
According to De Beers, consumer demand growth will continue to be generated mainly from Asia, and particularly China and India, but at lower levels than was previously assumed. The U.S market will expand as well, but most European countries are expected to continue to see subdued consumer demand growth, given the weakness in their macro trends.
Trend 3: Millennials to become the market’s dominant force
Millennials are set to become the dominant participants in the diamond jewelry consumer market. In 2015, the report stated, the Millennial generation spent almost $26 billion on diamond jewelry in the United States, China, Japan and India combined, representing 45 percent of the total retail value of new diamond jewelry acquired in the world’s four largest markets.
Concern about the ethical issues will drive consumers, who will demand to know about the provenance of the diamonds they buy. The industry will have to respond appropriately.
Trend 4: Competition to drive innovation among jewelry retailers
E-commerce driven by new smartphone applications is altering the retail landscape, the report notes. Online sales represented only 6 percent of luxury sales in 2014, but what the report describes as “research online, purchase offline” was estimated to account for 60 percent of sales for international luxury brands.
The expectation is that this industry will fully integrate its online/offline experience by 2020, and mobile e-commerce is expected to drive sales growth exponentially in the coming years.
Here again it is Millennials that are attracting the most attention.
Trend 5: Increasing pressure on the midstream
As the De Beers points out, while consumer demand for diamond jewelry remained relatively robust in 2015, the rough diamond trading environment was difficult, leading to what the report referred to as “severe inventory indigestion” in the industry pipeline, and in particular in the midstream.
Exacerbating the predicament, banks became skittish about providing the midstream with the financing it requires.
Financing challenges are expected to persist, the Diamond Insight Report suggests, driven by tighter lending standards and a lower availability of capital. Diamantaires will need to operate under increasingly rigorous professional standards, such as compliance with International Financial Reporting Standards.
The adoption of new forms of financing will also play a role. If bank lending remains restricted, businesses will look for alternative and competitively priced sources of funding, opening the way for new players. New securitization vehicles are in the offing, with inventory or receivables acting as the underlying assets.
Trend 6: As mines go deeper, rough production costs rise
As the decade progress, the De Beers report predicts that a larger share of rough diamond production is expected to come from ever deeper mines, which are complex and costly to operate. This means that additional investment will be required by producers to drive productivity.
The report further forecasts that unit capital cost at the mines will continue to rise. As a result, the rough diamond producers will have to focus on cost reduction and productivity improvements. Innovation and collaborative relationships with governments and other stakeholders will become increasingly important.
Trend 7: Rough production will remain predictable during coming decade
Although rough diamond production will likely increase slightly in the short term, the report states, it will decline slowly after 2020, with large and economically viable new discoveries unlikely. Consequently, rough diamond production is expected to remain predictable and relatively stable over the next 10 years.
New exploration and finds can be expected to take place in regions of the world that involve increased political and physical difficulties.
But improving technology is optimizing cutting and polishing in the manufacturing stage of the pipeline, meaning that the industry is increasingly able to produce more polished diamond from lower volumes of rough diamonds.
Trend 8: Rough producing countries will seek more added value
De Beers, in its Diamond Insight Report, states that it expects beneficiation to continue to be a key driver in a continuing geographic shift of the midstream, from the established diamond cutting centers to countries and regions where diamonds are mined.
“Diamonds producing countries, in particular in southern Africa, will continue to look to maximize the value of the diamond assets. An expected rise in local beneficiation will likely put increasing pressure on midstream margins,” the report states.
Trend 9: Increasing capacity to produce synthetics at lower cost
The possible impact of gem-quality synthetic diamonds on the natural diamond market has generated considerable debate in the industry over the past year, but it was a subject that was dealt with only briefly in the Diamond Insight Report. Nonetheless, the report did point out that, while consumer demand is currently negligible, the capacity to produce synthetics for gem applications will continue to expand and, over time, the cost and value of synthetic production will fall.
The increasing number of synthetic diamonds on the market has implications for consumer confidence. “Higher ethical and professional standards are becoming more of an expectation than a ‘nice-to-have’ extra,” the report notes. “The increased attention on the risk of undisclosed synthetics is also likely to continue, so businesses that can demonstrate their brand’s focus on product integrity stand to benefit.”
article provided by:
DFI Alternative Wealth Solutions
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