“A diamond may be forever,” he said. “But its allure comes and goes.”
Mines are closing, and middlemen are being squeezed. But don’t expect bargains at the jewelry counter. The top diamond miners in the world, including the two largest, Alrosa and De Beers, have an inventory problem. So do many of the cutters and polishers who buy the rough stones and sell them to retailers. At every stage of the supply chain there are too many of these precious gemstones, whose marketing has long depended on their rarity.
A glut in many other industries would ordinarily lead to deep price cuts. But consumers are buying stones that have passed through many layers of middlemen: traders, polishers and cutters, who have absorbed much of the raw stones’ price volatility, as well as brands and jewelry houses that create rings, bracelets and necklaces. This has kept retail prices relatively constant, fueled by robust demand from shoppers all over the world.
Still, challenges are mounting for the $17 billion diamond mining industry. The oversupply of rough stones and the increasingly strained finances of middlemen have hit miners’ balance sheets in recent months as they try to manage the surplus and increase the value of existing stones. The Argyle mine, in a remote region of Western Australia, was responsible last year for 10 million to 15 million carats of the entire global diamond output (140 million to 145 million carats). The Argyle mine, in a remote region of Western Australia, was responsible last year for 10 million to 15 million carats of the entire global diamond output (140 million to 145 million carats). Argyle is also the source of some of the rarest, most expensive gems in the world: pink, purple and red diamonds.
According to Paul Zimnisky, an independent diamond industry analyst and consultant, the market is being squeezed from all sides. At one end, as a result of geopolitical tensions, global spending on luxury jewelry has become more volatile. More significant, a growing glut of rough diamonds, coupled with foreign exchange volatility, trade wars and rocky stock markets, has upended the industry. Prices for rough diamonds have declined about 6% this year, while polished stones are about 1% lower.
In addition, financing problems have affected the miners’ core customer base: the traders, cutters and polishers of rough stones, whose hubs are predominantly in India and Belgium. Banks have moved away from this complex and secretive industry, made up of tens of thousands of small and medium-size businesses, after being stung by frauds and bad loans. In February 2018, news broke of one of India’s biggest frauds, allegedly perpetrated by a celebrated trader and jeweler. “There is significant indigestion in the midstream of the market, thanks to both a nasty cocktail of recent geopolitics and now this credit squeeze on polishers and traders,” said Bruce Cleaver, the chief executive of De Beers. “The impact is being felt across the entire market.”
With the profit margins of its clients — traders, cutters and polishers — rapidly slipping away, De Beers said it had reduced rough diamond production by 11% for the first half of 2019. It also cut prices and offered options like deferring purchases. A weaker rupee has also made gems more expensive for Indian manufacturers, which cut or polish about 90% of the world’s stones in the city of Surat. “We need to help customers ride out this storm,” Cleaver said. “That said, we’ve seen trading downturns like this before. There is still plenty of demand for diamonds from consumers, and I feel confident this will pass.”
The closing of a mine like Argyle and an incremental decrease in diamond output could also help shift some pressure away from small and medium-size traders and polishing businesses to larger, better-financed companies that can weather the volatility caused by excess inventory. Miners have also significantly reduced investment in exploration over the past decade. Bain & Company estimates that exploration spending as a percentage of revenue has fallen to 2% from about 8% in 2007-08.
The blossoming popularity of lab-grown diamonds — and production in China and India — is another potential headwind for miners of natural gems. While lab-grown stones make up only about 2% of the diamond jewelry market, production is growing by 15 to 20% a year, according to Bain. Synthetic diamonds can cost 30% to 75% less than natural stones.
Still, consumer appetite for natural diamonds is strong.
According to a Bain Global Diamond Industry report last year, diamond jewelry sales increased 2% in 2017, led by demand in the United States, which accounts for more than half the polished natural diamond market, and China, which makes up 15%.