Complex Made Simple

Bain & Co. predict rebound for GCC diamond industry

Decline in Chinese demand led to drop in prices of polished and rough stones

Bain & Company’s Fifth Annual Diamond Industry Report sheds light on the global performance of the diamond industry in 2014 and 2015, and provides an outlook for 2016 onwards.

In 2014 and the first half of 2015, retail sales of diamond jewellery grew at a range of four to eight per cent, driven by a strong performance in the US.

China demand declines

However, the Chinese market dropping due to its slow GDP growth outweighed the positive performance and negatively impacted the entire value chain, Bain’s data stated, explaining the resulting drop.

According to the findings, a decline in the demand for diamond jewellery in China actually began in 2014 – it was recorded since May of that year – and persisted, impacting the demand for polished and rough diamonds in 2015, ultimately leading to a drop of 12 per cent in the prices of polished diamonds and 23 per cent in the prices of rough diamonds.

The first nine months of 2015 recorded further drops of eight per cent and 15 per cent in the prices of polished and rough diamonds, respectively.

Robust outlook

 However, Bain & Co. analysts’ outlook remains “robust”, as they predict prices to rebound with macroeconomic factors remaining “positive.”

Olya Linde, lead author of the Diamond Industry Report and Bain partner, recalled a similar drop during the first decade of the millennium. “Following the economic turmoil of 2001 and 2009, prices took 18 to 24 months to recover,” she said.

“This time, we anticipate the market has the potential to recover much quicker – within just one to two years – assuming rough-diamond producers and polished-diamond manufacturers closely monitor and manage their supply levels. This will go a long way toward helping accumulated stocks work their way through the system efficiently,” Linde added.

In 2015, rough diamond revenues grew eight per cent, despite a decline in the volume of carats mined, Bain Company reported. At that time, rough-diamond production also fell by four per cent globally, led by Australia and Africa, to reach slightly less than 125 million carats.

Cut and polish

Meanwhile, cutting and polishing revenues continued on their positive performance, mainly due to China and India. The two countries now represent 80 per cent of the market.

The US and Belgium, two countries that focus on high-end stones, also recorded a decline in polished revenue, given that large stones are being shipped to India.

“The report confirms just how challenging the past year has been for the global diamond industry, but we must not lose sight of the fact that steps are already being taken to bring the system back into balance,” Ari Epstein, CEO of the Antwerp World Diamond Centre, said in a statement.

Listing the challenges faced by the industry, Epstein said that, despite slow economic growth in Asia and the industry’s “ambitious” response to growth witnessed in recent years, “we have also seen continued robust US market performance. The US has always been the main driver of diamond consumption and is still going strong… the current slowdown in those countries in no way implies long-term stagnation”.

Close-up on GCC

 While the drop was noticeable in some global markets, this was not the case for the GCC, given the cultural and behavioural elements that make up the region.

“Hard luxury represents as much as 30 percent of the GCC luxury goods market. It is a €2.3Bn market of which fine jewellery accounts for a third,” said Cyrille Fabre, partner and head of Bain Retail and Consumer Products Practice in the Middle East.

“The GCC jewelry retail market has performed better than other luxury goods categories in 2015, due to a lower sensitivity to non-GCC tourists,” Fabre added.

But overall, Bain & Company’s experts find that the mid-market segment continues to be the weakest link in the industry.

“At the moment, the mid-market segment is just too weak to cushion against short-term fluctuations in the diamond jewellery retail market,” Linde said.

“Though it has little bargaining power over rough producers and limited access to financing, mid-market players still bear the brunt of price volatility, but this is not a life sentence. We expect their continued development will allow the industry to implement more sustainable business models over time,” she added.