Slowing Global Demand Sends a Ripple Through the Global Diamond Pipeline, Driving Prices Down by Nearly 25 Percent in the Second Half of 2014

Bain & Company’s fifth annual report on the diamond industry
predicts the market has the potential to rebound in 1-2 years, but not
before current turmoil will likely force the mid-market to reevaluate
their business models

MOSCOW–(BUSINESS WIRE)–Retail sales of diamond jewelry grew last year and in the first half of
2015 by 4 to 8 percent with solid performance from the U.S. Meanwhile,
the Chinese market continues to slow, due to stagnant GDP growth – a
risk we predicted previously – which caused a ripple effect across the
entire value chain. In 2015, diamond producers and mid-segment companies
should anticipate a 10-20 percent decrease in revenue with diamond
jewelry sales to remain near flat. These are the findings from the fifth
annual report, The
Global Diamond Industry 2015: Growth perspectives amid short-term
challenges, released today by Bain & Company and the Antwerp
World Diamond Centre (AWDC).

The mild decline in consumer demand for diamond jewelry began in 2014 in
Greater China and led to a notable drop in demand for polished and rough
diamonds in 2015. This, in turn, forced retailers there to trim orders
for polished diamonds, creating an inventory backlog in the cutting and
polishing segment. As a result, prices for polished and rough diamonds
plunged 12 percent and 23 percent, respectively, since May 2014 and 8
percent and 15 percent, respectively, for the first nine months of 2015.
The long-term outlook remains robust as Bain expects macroeconomic
fundamentals to remain positive, with prices likely to rebound similar
to previous downturns.

“Following the economic turmoil of 2001 and 2009, prices took 18 to 24
months to recover,” said Olya Linde, lead author of the global diamond
industry report and a Bain partner. “This time, we anticipate the market
has the potential to recover much quicker – within just 1 to 2 years –
assuming rough-diamond producers and polished-diamond manufacturers
closely monitor and manage their supply levels. This will go a long way
toward helping accumulated stocks work their way through the system
efficiently.”

Additional findings in the report reveal a somewhat turbulent year for
the rough-diamond market in 2014 and 2015. Rough-diamond revenues grew 8
percent last year on the strength of increased sales by the top five
producers and despite a decline in the overall volume of carats mined.
During that same time, rough-diamond production volume fell by 4 percent
globally to slightly less than 125 million carats, with the largest
drops occurring in Australia and Africa.

On the other hand, cutting and polishing revenue continued its
positive trajectory last year with growth in the mid-single digits, due
in large part to India and China. Together, they now represent about 80
percent of the market. In contrast, Africa’s cutting and polishing
market declined dramatically, despite efforts to turn the tide by the
governments of Botswana, Namibia and South Africa – countries that have
not yet become competitive in terms of manufacturing efficiency and
skilled labor. Elsewhere, Belgium, Israel and the U.S., which focus on
high-end stones, recorded declines in polished revenue as volumes of
large stones migrated to India. The country now cuts and polishes more
than 40 percent of the world’s diamonds larger than 1 carat with quality
standards comparable to those of developed markets.

As in past years, the industry continues to face challenges – most
notably that mid-market companies are being forced to reevaluate their
business models amid industry turbulence and continuing pressure on the
market.

“At the moment, the mid-market segment is just too weak to cushion
against short-term fluctuations in the diamond jewelry retail market,”
said Linde. “Though it has little bargaining power over rough producers
and limited access to financing, mid-market players still bear the brunt
of price volatility, but this is not a life sentence. We expect their
continued development will allow the industry to implement more
sustainable business models over time.”

In addition, somewhat flat consumer demand in 2014 and 2015 shines a
light on the industry’s long-standing challenge of sustaining enduring
demand for diamonds. Bain’s
recent research on the luxury industry reveals that consumer
attitudes toward luxury overall are changing, particularly in Europe,
the U.S., and Japan. Further, little is known about the diamond
consumption patterns of the new generation of consumers. Finally, the
industry is still struggling to boost investment demand for diamonds.
All of these considerations are further challenged by the ongoing
penetration of undisclosed synthetics that can undermine consumer
confidence.

Ari Epstein, CEO of the Antwerp World Diamond Centre: “This report
confirms just how challenging the past year has been for the global
diamond industry, but we must not lose sight of the fact that steps are
already being taken to bring the system back into balance. While we have
witnessed slow economic growth in the Far East impacting consumer
demand, we have also seen continued robust U.S. market performance. The
U.S. has always been the main driver of diamond consumption and is still
going strong. And while the industry as a whole responded too
ambitiously to exponential growth in Chinese and Indian demand in recent
years, the current slowdown in those countries in no way implies
long-term stagnation. The entire pipeline is now recalibrating its
output and prices to adjust to somewhat lower growth forecasts.
Furthermore, the measures the major miners have taken in response to the
needs of the midstream, together with initiatives to stimulate demand
for polished diamonds, should bring the pipeline back into balance.
Every indicator points to a recovery starting mid-2016. We remain
confident in the long-term prospects for the diamond industry.”

Looking ahead, Bain’s proprietary forecasting method anticipates
rough-diamond demand will grow at an annual rate of about 3-4 percent
over the next 15 years. Meanwhile, the aging and depletion of existing
mines and relatively little new supply coming online, will eat into
supply by 1-2 percent per year from 2015 to 2030, causing the gap
between supply and demand to widen starting in 2019. Despite an
anticipated slow-down due to weaker economic growth and slowing
expansion of the middle and upper classes, the Chinese market will
likely stay flat in 2016 before an anticipated recovery in 2017 that is
expected to lead to 4-5.5 percent annual growth through 2030. This
projection is down from about 7 percent in previous Bain forecasts.

Editor’s Note: For a copy of the Global Diamond Industry Report 2015
or to schedule an interview with Olya Linde:

• International media: Dan Pinkney at dan.pinkney@bain.com
  or +1 646 562 8102
• Russian media: Masha Shiroyan at masha.shiroyan@bain.com
  or +7 495 721 8686

To schedule an interview with AWDC, please contact Margaux Donckier at margauxdonckier@awdc.eu

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Contacts

Media:
Bain & Company
Dan Pinkney
Tel: +1 646
562 8102
dan.pinkney@bain.com
or
Bain
& Company
Masha Shiroyan
Tel: +7 495 721 8686
masha.shiroyan@bain.com