The growing prosperity in China and India leads to a sharp increase in the demand for diamonds of more than 6% a year over the next decade. This will almost double the size of the market. The strong rise in demand will far outpace supply increases and as a result the price of diamonds is expected to rise significantly. This is evident from the report “The Global Diamond Industry” by Bain & Company.
Besides an analysis of the market and future trends, the report provides an interesting introduction to the diamond market, an overview of the key historical developments and insight in the end-to-end value chain.
High market concentration
Due to the high demand, the annual production in 2020 will have increased to almost 175 carats and have surpassed the peak production of 2007. Thirteen newly discovered mines may yield up to 23 million carats extra by the end of this decade. However, there are no new discoveries expected in the near future.
Concern is a high market concentration. A Good 62% of the worldwide production is produced by a limited number of mines. This results in high EBITDA margins (between 20%-35%).
Diamond as an investment channel
The concept of diamonds as a potential investment commodity has long been debated, but - unlike for gold and silver - difficulties with valuation stopped diamonds from being used as an investment vehicle, such as other precious metals. According to Bain, industry efforts to increase transparency could help attract investors: “The industry really needs to address this issue and develop mechanisms to better price diamonds and get better transparency around the pricing of polished diamonds”, says Gerhard Prinsloo, a Moscow-based Bain partner. Prinsloo adds that the industry would need to develop benchmarks to allow investors to get market prices for investment gems. “The model of having 12 to 16,000 different price points will probably need to undergo to change if you want to stimulate demand for investment”, he said.
Other findings include:
- A growing scarcity of high quality larger-carat polished diamonds, i.e. those above two carats, points to disproportional increases in revenues in this segment. This segment typically represents 5% of diamond production terms of volume, but 50% of the sales value for producers.
- Given an even more pronounced structural shortage for larger diamonds, retail chains will need to seriously reconsider their diamond sourcing strategy in the coming years.
- The Internet plays a very modest role as a distribution channel for polished diamonds, but is used as negotiation mechanism against retailers. Some retailers have already embarked on various strategies to ensure future security of supply of high quality diamonds.