11/12/2019 08:17
The Antwerp World Diamond Centre (AWDC) and Bain & Company have released their ninth annual report on the global diamond industry: Strong Origins: Current Perspectives on the Diamond Industry. As with previous editions, The Global Diamond Industry 2019 report provides expert in-depth analysis of all facets of the diamond pipeline – from rough production through manufacturing to diamond jewelry retail across all of the world markets – while delving into recent developments, the machinations driving them and future expectations for the industry and individual components therein.
The leading conclusion of the Global Diamond Industry 2019 report is that the industry as a whole is still mired in a recession that has its roots in the 2015 downturn and was exacerbated by overproduction of rough diamonds in 2017. Short-term challenges caused mining and midstream revenues to fall as much as 25% in 2019 as near record-high rough diamond production in the beginning of 2019 was not matched by increasing demand for polished diamonds, leading to higher inventory levels that generated a ripple effect through the supply chain.
Bain & Co. expects 2020 to be a better year for the industry as the midstream gradually clears its current inventory backlog, but they do not forecast a full recovery in 2020 due to a continuing supply-demand imbalance, as the producers are not indicating a major reduction in supply while the retail market is not showing signs of significant short-term growth. The consultancy expects a reestablishment of balance and growth in 2021.
As for the situation currently, the report notes that while 2018 saw a stable industry with 2-3% growth across the value chain, the absence of growth in diamond jewelry sales led to slowing demand for rough diamonds in the second half of 2018 and the first half of 2019. Coupled with continued near-record production of rough diamonds and inventory optimization efforts among jewelry retailers, inventories in the midstream (manufacturers) started to rise and prices fell, causing additional pain to the manufacturers holding that inventory.
While Bain points out that the rough diamond producers exert the highest level of bargaining power over the industry, the ultimate driver of the market is consumer demand, and in 2019, global diamond for jewelry retail sales are expected to fall 3% in USD equivalent. The decline is driven by changes in the two largest markets, the US and China, where jewelry sales are expected to decline by 3% and 8%, respectively, mainly due to a drop in consumer confidence and geopolitical uncertainties. In the US, a slowdown in Chinese tourism, among other developments, also negatively affected sales.
Bain notes that softer demand for polished diamonds led to a 3% drop in polished prices and 10% to 15% lower revenues for midstream players – namely, manufacturers, largely based in India. The slowdown resulted in some of the lowest profit margins experienced in years, with middle-market companies in India seeing their operating margins fall from 0% – 2% in 2018 to as low as negative 3% in 2019. Indian manufacturers have reduced their rough diamond purchases about 30% to offload inventory and improve their cash flow. In 2019, access to affordable financing also became more challenging for midstream players.
“Despite several short-term challenges, we expect a positive outcome for the diamond market in the long-term,” said Olya Linde, a partner with Bain & Company and lead author of the report, in their press release. “First, though, the industry has to weather some uncertainty in 2019 and 2020, due to continued geopolitical instability, strong signs of an impending recession and limited marketing support, especially for nonbranded and lower-end jewelry.”
“While sentiment in the rough diamond market remains cautious, having been impacted by the oversupply of polished diamonds and the challenging situation in India’s financial sector, the major producers have made efforts to stabilize the diamond pipeline, reducing supply and lowering prices,” adds AWDC CEO Ari Epstein. “All signs now point toward the gradual reestablishment of a balance in the market in the coming year. Explaining in intricate detail the developments that have led to the ‘crisis year’ of 2019, Bain & Co. provide a welcome sense of perspective about how the industry will emerge from this crisis, most likely stronger than before.”
Bain & Co.’s conclusions bear this out: Based on historical experience, they write, the market typically returns to pre-crisis levels within one to two years. Aside from the current downturn, the diamond market has faced only four recessions in the past 50 years. In the same time frame, rough diamond production has grown three times, and rough and polished prices have increased 450% and 250%, respectively. To make sure the market recovers again, Bain & Co. points to positive trends in the industry, such as an increase in marketing spending, an effort to address 21st-centruy consumer expectations and a heightened focus on sustainability and social welfare. Consumers as well as businesses are seeking transparency throughout the pipeline to ensure diamonds are sourced responsibly and produced sustainably, and the industry is taking measures to deliver.
In short, the report concludes that the long-term outlook for the diamond market remains moderately positive, despite significant short-term challenges. But to convert the anticipated increases in global GDP, a growing middle class and their concomitant purchasing power – particularly in China, India and Gen Z – the industry must also provide structured marketing support, both industry-wide and company-specific, to revive demand.
This year’s edition covers industry performance in 2018 and the first half of 2019 and explains key trends that are shaping the industry. It also delivers a review of the industry’s performance over the past 50 years, analyzing historical downturns with a view to gaining insight into their implications for the current situation. Bain & Co. has also updated their long-term outlook for the diamond industry through 2030, with a supply-demand forecast that considers, inter alia, production plans, potential additional sources of supply, expected changes in global and regional macroeconomic parameters and potential impacts from lab-grown diamonds.