Bain & Company, a leading global business consulting firm, offering solutions on issues of strategy and operations, works with over 2,700 major multinational corporations across every economic sector, including the diamond mining industry. Antwerp World Diamond Centre (AWDC) and Bain & Company recently released a third annual report, focusing more in detail on the dynamics of consumer demand across the globe.
Olya Linde, Principal of the company’s Moscow Office, gave this interview to Rough&Polished.
How will the structure of rough diamond sales evolve, in your opinion?
As part of our third installment of the report “The Global Diamond Report 2013: Journey through the Value Chain” we looked in detail into the selling process and mechanisms. Among the three sales channels, currently used to sell rough diamonds, each play an important role for the diamond producers. Long-term contracts, the primary channel for the major producers to sell rough diamonds, today accounts for about 65% of overall diamond sales. This channel has an enduring appeal to both producers and their customers for the predictability and relative stability of supply. Another channel, auctions, has been growing in importance, especially in the growth market, and now accounts for about 30% of all rough diamond sales. This channel is used predominantly by smaller players. The third channel, short term sales, accounts only for about 5% of the overall market and is used by select companies. Given the importance and distinct roles of all of these channels to the producers, we do not expect significant changes in the sales structure going forward.
Will the gap between supply and demand persist in the near future?
Long-term outlook for consumer demand for diamond jewelry is very positive, driven by expected long-term growth of disposable income and a number of middle class households. The demand is expected to grow at about 5% per annum. At the same time, the producers announced the plans to grow production in the next 5 years, driven by new projects and increased levels of production in existing mines. If all the production plans do materialize and won’t be hampered by technological or financial difficulties, the demand and supply of rough diamonds are expected to be in close balance until about 2017-2018. From then forward to 2023, existing mines become depleted and new projects are not expected to add significant new volume. Supply is expected to taper off, while demand will likely continue to grow, creating an increasing gap between supply and demand.
Can we expect the debut of any new players in the diamond market?
Rough diamond market has been traditionally dominated by a handful of major players. De Beers, ALROSA and Rio Tinto account for about 60% of the rough diamond production. In recent years we’ve seen the emergence of a few new players, such as Petra Diamonds and Gem Diamonds, who bought older assets disposed by De Beers. We also see an interest from Private Equity firms in the market who are evaluating the possibility to enter the space. While it is possible that a new player will come to the market, it is most likely will be a small-scale play.
Do you agree with the opinion that De Beers will sooner or later become the largest and most powerful seller of synthetic stones, which are highly competitive to natural ones in terms of quality.
De Beers produces synthetic diamonds through its division Element Six Group, which is majority owned by De Beers Group but is independently managed. It produces synthetic diamond supermaterials for the use in the Industrial segment which has grown 10-15% per year in the past 10 years driven by solid demand from building and high-tech applications. Recent new advances in CVD technology are opening new markets for synthetic diamonds in Optics, Quantum computing, Biotechnology, among others. The market size, growth potential and available profitability in those segments create very attractive possibilities for the producers of synthetic diamonds. Arguably, the industrial market offers bigger size potential, similar profit potential and fewer barriers to entry than the Gem quality diamond market. So, we don’t see many reasons at this time for synthetic producers to try to break into the gem quality market.
What are the prospects for development of market for technical and synthetic diamonds, taking into consideration evolution of high-tech industry?
More than 95% of the market for industrial diamonds is synthetic. Construction is by far the largest segment of that market. But high-tech segment is expected to grow the fastest, pushing the overall industry to growth approximately 5 to 10% over the next 7 to 10 years driven by the rapidly growing demand in biotechnology, quantum computing, lasers and optics. The progress in the field of synthetic industrial diamond solutions is moving very quickly and it is quite plausible that the new solutions that capitalize on the extreme performance characteristics of the synthetic diamonds can be leveraged across a variety of industries.
Could Russia become one of the global trade centers?
New global trade centers (such as Dubai, Hong Kong and Mumbai) emerged in proximity to the major cutting and polishing areas. Russia’s cutting and polishing industry is relatively small and is focused mostly on high value stones.
Can we expect weakening Belgium and the United Kingdom as the global diamonds centers?
Belgium has traditionally been one of the largest and most important diamond hubs. Antwerp is still one of the largest diamond centers today with the annual turnover of over $50 billion. Although there is growing competition from Dubai and Mumbai, the traditional hubs are re-inventing themselves by specializing in high-value stones, offering well-developed infrastructure and providing a favorable regulatory environment for the diamond professionals. Combined value of imported and exported goods in Antwerp grew more than 30% in 2011 and declined by 8% in 2012, which is in line with other major diamond hubs.
Return to the model driven by demand was the most significant change occurred as a result of the crisis. What steps do you think are required to enhance consumer demand?
Generic marketing campaigns by De Beers have been a huge success, helping to build solid demand in developed markets and providing a strong growth momentum to the emerging economies. These have been replaced by branded advertising. Top players spend hundreds of millions of dollars annually to promote diamond jewelry.
It is probably too early to tell whether branded advertising can successfully substitute the generic efforts or we’ll see the decline in demand for diamond jewelry for engagement and weddings occasions. So far, there is no reliable data evidence to support that claim. It will be interesting to watch what happens though: will branded advertising adequately substitute the generic efforts or the big diamond producers need to combine efforts for the global generic “Got Diamonds?” campaign.
