De Beers' Diamond Insights: Macro-Economic Uncertainties Make Volatility "The New Normal"

Market Analysis
23/09/2016 11:15

Last week, De Beers published its second "Diamond Insight Report", analysing the current state and future outlook for the global diamond industry - 'from mine to finger' as they say. The report - which you may download here - sees the fundamentals of the industry at the level of supply and demand as positive and maintains a positive outlook for the future; but it also identifies several clear and present challenges as well as positing steps that need to be taken to address them.

While global demand for diamond jewelry in 2015 fell for the first time in five years to $79 billion, two macro-economic factors outside the industry's control played a major role: the stronger US dollar (making luxury goods more expensive elsewhere) and slower growth in China and other emerging markets - a development that led to a major slump across all commodity industries, leading to the lowest returns since 1999. De Beers does not expect the instability in world economic growth to go away: "Volatility is here to stay as global markets are likely to continue to fluctuate, potentially increasing the diamond industry's inherent volatility", even though they see consumer demand continuing to grow over the next ten years - in the U.S., but also in China and India, driven by higher household income.

"These developments," De Beers writes, "will demand that diamond industry participants strengthen their competitive capabilities even more through better planning and more investment in innovation and marketing." This overarching conclusion is then detailed across all sectors of the value chain: retail (downstream), trading and manufacturing (midstream) and mining (upstream). As highlighted in our previous article, the changing nature of consumer preferences, and those of the Millennials in particular, will require retail innovation as diamond jewelry faces stiffer competition from other luxury and experiential categories. Investment in omnichannel marketing, branding and increased product offering - such as customization, more sophisticated consumer segmentation and creating new, experience-oriented platforms to generate and strengthen the emotional connection with diamonds - are recommended as ways to bolster consumer demand.

"The midstream," De Beers writes, "will continue to come under pressure periodically ... financing challenges are expected to persist, driven by tighter lending standards and less availability, placing additional pressures particularly on midstream players with outdated and unprofitable business models." Here as well, changes will be needed, particularly with regard to transparency - for which digitalization is recommended - as well as scale, meaning that collaborations with retail players "are most likely to thrive." Looking forward, there are three keys to avoiding the difficulties the midstream experienced in 2015: increased financial robustness with a sharper focus on efficiency and transparency to meet the challenge of new compliance pressures and lending restrictions; focusing on technology, such as automated cutting and shaping and online inventory systems, and; safeguarding their reputations as higher ethical and professional standards become a requirement instead of an 'extra'.

Meanwhile, De Beers says of the "upstream" (producers - our next topic) that, "Rough diamond production is expected to remain predictable and relatively stable over the next 10 years with a relatively sparse new project pipeline." In other words, while supply will increase in the short term, no significant new mines are expected. Moreover, the miners will face their own challenges, specifically rising costs: more and more production will come from deeper - read, complex and costly - mines; they also expect rising unit capital costs as well as rising unit costs of energy and labor. Additionally, "Fluctuations in foreign exchange and energy prices will cause higher cost volatility." All of which points to innovation becoming critical. Amidst all this volatility, in addition to investment and innovation, De Beers emphasizes that, "partnerships remain more important than ever ... retailers, manufacturers and producers must work together to preserve and enhance the diamond dream."