This was supposed to be the diamond decade. Back in 2010, De Beers executives were touting that the coming 10 years would bring unprecedented demand and growth to the industry. Almost halfway through, it feels anything but, especially for diamond dealers and manufacturers struggling to raise liquidity levels and garner respectable profit margins.
As the years passed, we’ve heard less about the diamond decade and, somewhat appropriately, more about the diamond dream at industry events and gatherings. So what happened to ‘the diamond decade’ and what were those promises supposed to bring?
Fundamentally, the industry was looking at consumer demand and bracing itself for continued rapid growth in China and India and a recovery in the U.S. That, coupled with stagnant supply, meant that the decade promised to be very good for diamonds. While all that remains true, the global economy and the diamond trade face very different realities four to five years later.
In 2014, the U.S. has indeed shown signs of recovery but cracks are still showing. Consumer sentiment has been mixed and the start of the retail shopping season was hardly encouraging. U.S. sales at brick-and-mortar retailers over Thanksgiving weekend fell 11.3 percent year on year to $50.9 billion, according to preliminary data published by the National Retail Federation (NRF). However, the NRF has maintained its guidance for a 4 percent increase in sales this Christmas season.
The U.S. jewelry market has gone through dramatic changes in the past few years. It suffered greatly during the recession, losing the likes of Friedman’s, Whitehall and others, only to emerge leaner. That consolidation also left room for dominance by larger retailers, and the recent merger between Signet Jewelers and Zale Corporation presents new challenges for smaller independent jewelers.
Meanwhile, economic growth in China has slowed, albeit to around an admirable 7 percent, while caution this year has filtered into the diamond trade. The majors in Hong Kong and China have ridden the wave of regional growth that was driven by unprecedented, and often unpredictable, gold jewelry demand, but they face their own challenges amid economic and political uncertainties. Their recent interim earnings results and October sales reports reflected that caution.
However, even as the long-term consumer demand story remains intact, the diamond trade has endured a tough time so far this decade. Market conditions have been volatile, affecting both sentiment and diamond prices.
Since the beginning of 2010, the RapNet Diamond Index (RAPI™) for 1-carat lab-graded diamonds has increased just 6 percent with few sporadic periods of profitability for the trade. The index is down 5.6 percent since the start of 2011, when the decade technically began.
Manufacturers’ profit margins consequently tightened as rough prices have remained relatively high amid the uncertainty in polished. While miners pointed to the widening supply-demand gap as a measure of the industry’s prospects, the increasing gap between rough and polished prices has prevented manufacturers from capitalizing on that growth prospect.
In contrast, diamond miners have garnered impressive profits in the past five years – with some years naturally stronger than others. In fact, diamond mining companies appear on track for record sales in 2014, largely on the back of firm rough prices.
They’re in the enviable position of operating in a quite consolidated sector with a large and competitive client base. Consider that there are fewer than 10 notable diamond mining companies in the market and thousands of manufacturers vying for their rough.
Diamond manufacturers also seem to have a shrinking client base for their polished given the consolidation in the jewelry retail sector, and the fact that many of the major jewelers have encroached on their space. Not only do they have to supply polished to such powerful buyers as Signet, Chow Tai Fook and Tiffany & Co., but they also have to compete with them for rough supply. Jewelers are doing more of their own in-house diamond cutting than ever as they seek to protect their own margins, which in turn enables them to pay the high rough prices that pure manufacturing businesses cannot afford.
Neither are they getting help from the banks, which have instead reduced their credit to the industry. As a result, close to half a decade of tight margins has taken its toll on liquidity, which is undoubtedly the biggest challenge facing dealers and manufacturers in 2014.
Therefore, the story of the diamond decade has been marred by difficulties facing the manufacturing sector and sentiment is understandably low. Perhaps the remainder of the decade will be defined by similar consolidation among cutters as we’ve seen among retailers. That would certainly help improve prospects for those companies that remain.
In order to salvage the promise of a decent decade for diamond manufacturers, the immediate focus has to be on improving their profit margins and liquidity. That won’t be easy given that polished demand is weak and market conditions remain challenging. Indeed, polished prices fell again in November (see Rapaport Monthly Report – December 2014).
Therefore, it is little wonder that De Beers has changed its talking points to the diamond dream in recent years. In that context, the company is (correctly) focused on keeping consumers’ appetite for diamonds alive by emphasizing what the diamond represents – the dream, or ambition, of eternal romance and commitment. That should be enough to ensure growth in consumer demand for the rest of the decade. However, whether it will be enough to enable profitability across the pipeline remains but a dream for manufacturers at this important halfway point.
