Bain & Company is considered one of the most prestigious management consulting firms in the world, with 47 offices in 30 countries and over 5,500 professionals on staff globally. Recently, the company released a report titled “The global diamond industry: Lifting the veil of mystery” giving an in-depth analysis of diamond production. Gerhard Prinsloo, a key author of the report, has further unveiled the current situation in the diamond market in his interview to Rough&Polished.
Could you briefly describe what kind of services are offered by Bain’s office here in Moscow?
Bain's business is helping to make companies more valuable. We work with top management to beat their competitors and generate superior performance results.
Our focus is on helping clients on where to go strategy. Issues addressed beyond corporate strategy include, in particular, streamlining of operations along a number of dimensions: corporate control, supply chain and product line optimization, distribution full potential, role of the center versus the business units, individual business unit strategies.
In our approach we focus on data, not opinion: we start by defining the right question, then we dig deep into the numbers as the basis for creating solutions.
We realize that helping an organization change requires more than just a recommendation, so we try to put ourselves in our clients' shoes and focus on practical actions that will help our clients secure further profitable growth of their businesses.
Across the globe we have experience in almost every industry. The range of our capabilities encompasses a full set of strategy consulting competencies. Partners in the CIS offices focus on and have broad experience in financial services, telecommunications, energy, retail and consumer goods.
Bain's CIS practice has a diverse client base representative of the region's business environment. For these clients we have carried out projects ranging from market potential assessment to post-merger integration.
Although Bain’s report says that long-term contracts still constitute the largest sales channel of rough diamonds, auctions are lately emerging as an ever more vigorous and expanding sales alternative. Do you think it may win a significant market share from long term contracts in the long run?
Long term relationships are at the core of the industry. It has been for decades. Despite the lack of the so-called traded market for rough diamonds the major producers have managed to maintain prices within a relatively narrow band due to arbitrage opportunities that rough dealers see. So in that sense the market is efficient. However, these price bands are not set on daily basis, but when rough buyers deal with producers on mostly monthly basis. An auction-based system is therefore faster, and could yield higher prices quicker in an upturn. The reverse of course is also true. It is up to each of the individual producers to find the optimal balance between the long term contract system that reduce price volatility and a more responsive short term pricing mechanism. Therefore one sees marked differences between the producers in how they view that balance.
Bain’s diamond report stressed the positive role of the Kimberley Process in the diamond industry, whereas Global Witness blamed the organization for lack of interest towards human rights. In parallel, there is the ongoing discussion of ethical problems related to the jewelry industry (responsible jewellery practices, No Dirty Gold campaign, etc.). What is your take of these problems: are they boon or bane for these industries?
Bain does not comment on work of multilateral bodies such as the UN.
Since diamonds are now attributed to endangered minerals, for how long, in your opinion, will they hold their attraction, given that the pent-up demand could take fancy for something else?
Diamonds are Forever! Consumers have many choices to satisfy the demand for diamonds. They can pay more to acquire that elusive stone, the most precious sizes or they can buy something smaller or buy jewelry with many small diamonds as technology now allows cutters and polishers to achieve up to 1000 perfectly-cut diamonds from a carat. At the high end there will be limited switching. As in any other business the diamond industry will need to be careful not to “price itself out of the market”. However, we see that this risk is fairly limited as there are hundreds of thousands of jewelry outlets feeding consumer reactions back to the whole diamond value chain from jewelry manufacturers up to producers.
Your report says that no globally set prices for rough diamonds exist making them nontransparent and set by major producers via sights and tenders. Do you think there is any way to make them transparent, if almost every rough diamond appears to be a unique product?
Transparency is more easily achieved for polished diamonds. The skill to buy a diverse range of rough diamonds at the right price is a key skill that rough traders have. This is large part of their value-add in the industry and unlikely that much progress can be made to make rough pricing visible to end-consumers or the financial markets. Standardization as you correctly pointed out could reduce some of the mystique of diamonds thereby undercutting its subjective value to consumers. Nobody in the industry could afford to damage the fundamental value proposition of diamonds.
Insufficient supply of rough diamonds may affect the business of diamond manufacturers (for instance, in Surat). In your opinion, in what direction may evolve diamond production in India and elsewhere in such a market?
In a rising price environment for rough diamonds it is unlikely that polished diamonds will enjoy similar price rises. This has been historical fact in the industry. Retailers, jewelry manufacturers, the cutting and polishing industry all have to become more cost competitive, more innovative and productive. It is also foreseeable that one will see increasing consolidation in the middle part of the value chain in years to come. Countries like India and China will also see increased competition from policy in e.g. Botswana and South Africa to cut and polish more and more diamonds in source countries. It will not be surprising if these policies also shift to include the jewelry manufacturing industry as well.
When, in your view, the demand for diamond goods in India and China will match that in the U.S. and Europe?
Based on our estimates around 2020 depending on global economic growth, the level of urbanization and growth of middle class in China and India.
Recently, ALROSA disclosed that it has proven diamond reserves for the next 37 years. Taking into account that the world’s major diamond mines are past their mid-age, may it be that this company will sooner or later turn into a sole diamond miner?
Reserve estimation is an inexact science as level of proven reserves always pertain to a given price range. ALROSA undoubtedly has large reserves, but so do other players like De Beers. De Beers incidentally don’t publish exact details of their reserves, but one can assume that they are equally strong. It is also likely that exploration expenditure in the industry will continue. In our report we said that “no new mines will be discovered AND developed in the next 10 years”, but that does not exclude a new discovery tomorrow.
Alexander Shaburkin, Rough&Polished
