Can the emerging markets make up for the shortfall in sales to the United States? Not at the moment, but they are rapidly building up their love for luxury goods, as Antwerp Facets believes.
According to Antwerp Facets, when it comes to emerging markets in the diamond business, the focus is usually on China and India. However, there are other emerging markets whose demand for diamonds is also growing, albeit on a smaller scale. Three of the most interesting are Russia, Brazil and South Korea, and each has an entirely different perspective on the diamond and jewellery industries.
All three are undergoing strong economic expansion. In Russia and Brazil growth is based on their huge natural wealth. South Korea is known for its huge export sector, particularly electronics, cars, ships, machinery, petrochemicals and robotics.
Another factor they all have in common is that they have become unshackled from authoritarian political rule and centralised economic systems in recent decades. While the Soviet Union fell apart in 1992, Brazil had earlier thrown off years of military rule and has moved to liberalise its economy. And with a population of close to 200 million it is now the eighth-largest economy in the world. As for South Korea, its economy has shown impressive results since the country was freed from military dictatorship in 1987.
South Korea is an example of a market that could be open to much larger luxury sales, according to global research firm McKinsey. The country, although only accounting for 4 percent of global luxury sales, is nonetheless "luxury friendly," the report states. And although its sales are low compared to other markets, its growth and diversification could prove attractive for luxury-goods makers. Financially, the country is in relatively good shape, having come through the global economic crisis reasonably well. Its gross domestic product is forecast to grow by 5.8 percent this year, the Korean Ministry of Strategy and Finance said.
Demand for high-end items is growing in comparison to the sluggish market for such goods in Japan, Europe, and the United States. The McKinsey report says South Koreans’ love for luxury is based on two elements: a love of luxury and peer pressure. Just 5 percent of South Koreans report feeling guilty about how much they spend on high-end products, compared to a figure as 15 percent in other developed countries. Meanwhile, a relatively small proportion of survey respondents in South Korea said that they thought that buying luxury goods was a waste of money.
As for peer pressure, South Korean luxury consumers are reported to be keen to be seen to be on top of trends. Where 45 percent of Japanese and 38 percent of Chinese people responded that showing off luxury goods was in bad taste, among South Koreans the proportion was just 22 percent. And as the global economy continues to recover, McKinsey predicts consumers in the country who changed their buying patterns because of the financial crisis will quickly return to buying luxury items. Around 80-90 percent of shoppers said that they planned to return to buying luxury products again. Sales of watches and jewellery are particularly strong, with South Koreans open to the idea of trading up to more expensive brands.
Although well-off women in the 40-60 age group are the main market for luxury brands, South Koreans in their 20s and 30s have emerged as the primary demographic for the luxury market due to having fewer financial responsibilities, and being more open to new ideas. In addition, research shows they are keen to define themselves through the way they dress. Department stores are still the main channel for purchases of luxury products in South Korea, particularly since the country's three major store chains, Lotte, Shinsegae, and Hyundai, together account for 75 percent of all luxury sales and are continuously increasing the number of foreign luxury goods for sale.
South Korea also happens to be home to the world’s newest diamond exchange. Located not in Seoul but in Gyeongju, on the east coast of the country, the South Korean Diamond Exchange was accepted as the 29th member of the World Federation of Diamond Bourses at the World Diamond Congress in Moscow in July. It is currently building a facility that will include a trading floor for rough and polished diamonds, and have training facilities for cutting works and a gemmology school.
The opening of the South Korean Diamond Exchange comes in response to the growing need to provide a secure place for trading diamonds in the growing local market. Individuals dealing in diamonds in South Korea are subject to the requirements of the Diamond Act of South Korea, which regulates the conduct of persons permitted to deal in rough diamonds, polished diamonds and jewellery containing diamonds and precious stones.
Meanwhile in Brazil, IBGM, the Brazilian Gems and Jewellery Trade Association, says there are 4,000 jewellery manufacturing companies and 8,000 retailers, with 95 percent of them being small businesses. Domestic sales, from mining and stone cutting and polishing to retail was worth $3 billion last year, with retail jewellery sales of $350 million. Around 300,000 people are employed in the various sectors of the industry. Brazil is ranked as the 17th largest gold jewellery manufacturing country and 13th in terms of consumption.
Brazil is better known as a gemstone, rather as a diamond, producer and exporter, and accounts for around 30 percent of global gemstone production. The country was the centre of the international diamond mining trade for around 150 years from 1725. Most of the gems were sent to the diamond processing plants of Amsterdam and Antwerp. However, that largely came to an end when Portugal declared a royal monopoly on all diamond mining in Brazil and levied heavy taxes on mining concessions.
In 2009, the main destination countries for Brazil's exports of rough gemstones were Hong Kong, China, India, the United States, Germany, Thailand Italy and Japan, said Oscar Bouza, of the IBGM's international division. Meanwhile, the main importers of cut and polished gemstones were the United States, Hong Kong, Germany, United Kingdom, Japan, Switzerland, Italy and India.
Brazil is the world’s top producer of amethyst, citrine and white topaz, and also produces Paraiba tourmaline, fine aquamarine, alexandrite and chrysoberyl cat’s eye, as well as blue tourmaline and rubelite. In addition, it is the only producer of true Imperial Topaz.
As for Brazilian gold jewellery manufacturing, there has been a decline in output in the past decade, according to IBGM figures. In 2000, Brazil produced 28.2 tons of jewellery, but that fell 44 percent by 2003 to 15.9 tons. In 2009, the amount had risen slightly to 17.7 tons.
As for the country's diamond industry, it has been somewhat handicapped by the fact that most of the deposits are in the Amazon rainforest where obtaining permission for mining operations is difficult due to the destruction that has taken place and global environmental concerns. Diamond mining is also hampered by the sometimes violent opposition of the rainforest's tribal natives.
However, boasting the world’s 10th largest GDP, and having been selected as the host of the FIFA World Cup in 2014 and the Summer Olympics in 2016, Brazil's global profile is set to rise, thus promoting it as an investment opportunity.
Like with Brazil, it is difficult to get a clear picture of the situation in the Russian jewellery market, since a wide range of statistics is not available while high taxes have led to the development of a relatively large unregistered jewellery trade.
Russian jewellery sales in 2008 are estimated at between $6 billion to $8.65 billion, while in 2009 they fell to 50-60 percent of that amount, according to veteran jewellery manufacturer Pavel Sokolov. As for the first half of this year, sales are forecast to have been about 85 percent of the total for 2008, but receiving precise data is difficult and derived from indirect calculations, said Sokolov, who runs his own company and is the ambassador to Russia of the International Colored Gemstone Association.
"In 2009, because of the financial situation, many companies that mass produced gold diamond jewellery using small calibrated stones moved over to mass production of jewellery made of silver and using cubic zirconia and other synthetic stones," he explained.
"At present, small calibrated rubies, sapphires, emeralds, and diamonds are becoming popular again. Diamond jewellery is always popular in Russia, and the growth rate of diamond jewellery production is higher than the growth rate for general jewellery production," he added.
As for other types of jewellery that are popular in Russia, Sokolov said Russian women have always liked diamonds and emeralds, but are not keen on rubies. "This is a result of there being too much jewellery with red synthetics stones on sale during the period of the Soviet Union. Less expensive semi-precious stones are very popular, such as blue topaz, red garnet, smoky quartz and other varieties of quartz group such as lemon quartz and green amethyst. Only 25 percent of customers know about tourmaline, tanzanite, aquamarine and such stones, and just one percent is looking for large stones, of more than 0.5 carats in tanzanite, rubies, and sapphires.
As for the size of the Russian jewellery manufacturing industry, Sokolov said there are around 4,500 jewellery manufacturing companies, but that they face several large challenges. "Firstly, customs duties for imported gemstones are too high and should be abolished. Secondly, the government should allow the sale of precious stones to private individuals without the special permission of the Assay Office. Finally, complete information on the jewellery market should be made available to enable members of the diamond and precious stones industries to gain an all-round appraisal of the situation," he said.
