Star Wars was not the only force making a come-back in 2015. The return of generic advertising brought with it a promise of increased profitability for the diamond trade. Even as numerous stories reflecting pain in the industry vied for our attention in a rather forgettable year, this column chose the re-introduction of generic – or category – marketing as the paramount development for the sector in 2015.
With the benefit of hindsight, one could say many of the trade’s grueling challenges could have been met more effectively had investment in category marketing continued to be made in the past decade. Instead, the trade found itself vulnerable to a slowdown in China, unsure about selling to millennials, and facing more prudent retail inventory management.
Many of these issues came to a head in 2015 and contributed to an over-supply of diamonds – a recurring theme that became a strong contender for the ‘story of the year.’ Midstream manufacturers and dealers focused on reducing polished inventory, which resulted in a decline in prices, and a slump in rough buying and manufacturing.
Those trends had already started brewing in 2014.
Chinese jewelry retailers bought aggressively in the first quarter of that year as they restocked many stores that were unveiled during the preceding boom years. However, as economic growth slowed, and the government’s anti-corruption campaign curbed luxury spending, Chinese jewelers were left with more diamonds than they needed when consumer sentiment soured and expansion programs cut back.
Meanwhile, diamond manufacturers looking to fill anticipated orders overbought rough and sent large volumes of polished diamonds for grading. That created a huge backlog and led to delays at the Gemological Institute of America (GIA), mainly in the 0.30 to 0.50-carat category. By the start of 2015, a sluggish Chinese New Year in February following a disappointing U.S. Christmas season took its toll. Polished inventory shifted from the GIA to manufacturers who struggled to pass it on to retailers and consumers.
The oversupply pushed polished prices down, as reflected in the RapNet Diamond Index (RAPI™). An in-depth review of prices will be published in the upcoming Rapaport Diamond Statistics Annual Report 2015 in the January edition of the Rapaport Magazine.
As manufacturers attempted to cut inventory, 2015 might be remembered as a year in which the midstream started to realign with retailers. After all, while retailers adjusted to holding lower quantities after the 2008-09 downturn, manufacturers and dealers grew their inventory. They were incentivized to build new factories and take advantage of easy bank credit to buy rough – or perhaps, more correctly, buy rough in order to take advantage of easy credit.
The tightening of bank credit to finance rough purchases was this column’s Story of 2014. While there is still some concern about liberal lending practices, primarily in India, the dramatic cut in manufacturing and rough purchases made bank credit less of an issue this year.
Manufacturers maintained polished production at 30 to 50 percent below capacity throughout the year as they had sufficient inventory to fulfill slower demand, and as they resolved to avoid buying unprofitable rough. Their frustrations stemmed from previous years when rough prices rose while polished prices fell. Particularly in 2014, aggressive rough buying spurred an estimated 7 percent jump in prices, according to De Beers rough price index, and engendered record profit for miners. RAPI for 1-carat polished diamonds, meanwhile, dropped 8.7 percent during 2014.
Diamond cutters refused to continue in the same vein this year. De Beers and ALROSA lowered prices by 15 percent and rough demand plummeted, most notably in the second half. Recognizing a challenging environment, the miners temporarily suspended their regular supply rules, allowing clients to “take what they want” in the fourth quarter.
Sightholders didn’t want much rough and opted to wait for 2016 to assess their factory requirements. They took advantage of the new-found rough supply flexibility to further reduce manufacturing and unwanted polished inventory. By year-end, some shortages emerged for select polished diamonds which helped support prices and the RAPI index stabilized.
Time for Introspection
But, caution lingered as the midstream recognized 2015 has been a year of consolidation. Numerous bankruptcies were declared, affecting the mood and liquidity in the manufacturing and trading centers. Many suggested that the challenges were deeper than those faced in 2008 when external economic factors rather than imbalances in the trade hit demand.
This year, markets slowed because of internal, industry-specific challenges which forced the trade into introspection. The reflection mainly focused on how to manage rough supply with some, including the Rapaport Group, calling for a sharper correction in rough prices to facilitate manufacturers’ profitability.
It also influenced some unscrupulous practices as dealers sought to cheat the system to garner a profit. The GIA recalled 424 grading reports for diamonds that were treated to temporarily improve their color by up to three grades. Later in the year, the lab invalidated 1,042 reports in a separate case whereby computer hackers penetrated its system and altered data. Both cases are still largely unresolved with police investigations ongoing.
Challenging times also inspired some technological breakthroughs. A 60-carat high pressure-high temperature (HPHT)–grown diamond set a record for the largest laboratory-grown diamond crystal. While the trade largely views synthetics as a threat, evidenced by the Bharat Diamond Bourse (BDB) banning their trading on its premises, technology is enabling larger and better quality lab-grown diamonds that are becoming harder to detect.
Technology also enabled arguably the most talked about diamond story of the year as Lucara Diamond Corporation recovered a 1,111-carat rough diamond – the second largest in history – at its Karowe mine in Botswana. Had it not installed previously untested Large Diamond Recovery XRT machines at Karowe’s processing plant, the historic stone would not have been detected and broken up in the crushing process.
Lucara’s find was one of a number of diamond-related records that were shattered during 2015, injecting some hype and positive press into the industry. Most notably, Sotheby’s sold a 12.03-carat, fancy vivid blue, IF diamond for $48.5 million, or $4 million per carat, effectively becoming the most expensive diamond in history.
Campaigning for a Brighter Future
However, those record breakers were exceptions rather than the rule and stood in sharp contrast to the lagging interest in commercial diamonds. Above all, diamantaires noted a lack of inspiration among typical consumers to buy diamonds.
It’s little wonder that they’d been calling for mining companies to invest in generic marketing ever since De Beers shelved its iconic campaigns about a decade ago. That the industry took action in 2015 should be applauded even if some feel it’s too-little-too-late, and while the jury is still out about the impact of this year’s campaigns.
For this holiday season, De Beers brought back its iconic ‘Diamond is Forever’ slogan in its Forevermark marketing, while its Seize-the-Day campaign was its first spend on generic advertising since shifting from generic to brand-centric Forevermark campaigning. Signet also punched-in with its ‘Ever-Us’ two-stone ring concept, which included the jeweler’s first-ever iconic merchandising and marketing program.
More importantly, the top seven mining companies created the Diamond Producers Association (DPA) to “enhance consumer demand for and confidence in diamonds.” While its initial budget was just $6 million, and its establishment too late to impact sales this year, the DPA’s influence – and budget – is anticipated to grow in 2016. Among its first orders of business, the DPA hired creative agency Mother New York to help identify the unique promise of diamonds that can connect with the new generation.
Indeed, millennials buy differently, engage with brands and products differently and are influenced by their peers rather than corporations, which had such a strong say in consumption trends in the heady days of booming diamond demand. Somehow, the trade got left behind along the way. And, as demand slowed in 2015, the industry realized something needed to be done.
After all, while it will no doubt face the same industry-specific challenges in 2016 – most notably the need to restore manufacturing profit – diamond sector growth can only be driven by raising demand. And the industry would much prefer inventories to be depleted by growing demand rather than decreasing supply. For that reason, this column chose the reintroduction of generic marketing, and the establishment of the DPA, as its story of 2015 – if only for the promise of a profitable 2016.