(Reuters) - The major diamond miners are balancing between the desire to strengthen their positions in the market and the fear of accidentally destroying this market, which is already creaking at the seams because of overproduction, macroeconomic instability and lack of generic advertising.
The global diamond industry, once going through a period of wonton growth due to industrial demand for the hardest mineral on this planet, is now making its living solely by producing jewelry since industrial diamonds are cheaper to synthesize than to mine.
"The future of the industry depends on the willingness of people to continue buying diamond jewelry. Unlike gold, a substantial part of which goes for industrial and investment needs at the same price, 95 percent of diamonds find their market due to jewelry demand," Reuters was told by Olga Linde of Bain, a consulting company issuing regular reports on the diamond industry in team with the Antwerp World Diamond Centre (AWDC).
In 2015, polished demand, which nearly started to recover after several years of stagnation in the key US market, received a blow from the East, where the anti-corruption campaign, a slowdown in the economy and a slump in the stock market in China evoked a significant chilling effect on the interest of end-consumers towards jewelry, putting along the way an entire sector of India’s economy on the brink of collapse.
FOR A BETTER LIFE
The diamond market is highly dependent on the growth of household wealth and consumer confidence in the future, so it historically suffers during economic downturns and recovers quickly after they are left behind, the Bain partner said.
However, the market, which only lives by the myth of a diamond as the quintessence of romantic feelings, is threatened not only by macroeconomic factors.
"Having rejected the generic marketing 15 years ago, the industry is now faced with early negative signals as customers are losing the understanding of diamond symbolism," said Andrey Zharkov, the head of the world’s largest diamond mining company ALROSA at an industry session of the Eastern Economic Forum in Vladivostok in early September.
De Beers, a business division of Anglo American, which monopolized the rough diamond market in the past century thanks to an agreement for the sale of diamonds from the Soviet Union, lost its monopolistic status in the late 1990s and stopped paying for generic advertising of diamonds as an obligatory companion of true love, focusing instead on promoting its own brands.
SUPERFLUOUS LUXURY
Due to weak demand in 2015, the global market was oversaturated with polished diamonds and this affected the suppliers of rough.
Against the backdrop of a sharp slump in demand, De Beers, being the world’s second-largest diamond producer, gained the worst sales revenue of $ 200 million since the first quarter of 2009 during the July sight this year, after which the company lowered its prices by 9 to 10 percent across some categories of goods in August, according to VTB Capital’s market review released in September.
ALROSA, which decreased its prices in the first half of 2015 by 6 percent compared with the beginning of the year, is ready to lower them further by 8 to 10 percent in September to mark the lower price boundary and prevent any further slump, the VTB Capital analysts believe.
Meanwhile, the companies react differently to the industry crisis. If De Beers has reduced its output target by 9 percent since the start of this year making this in two moves, ALROSA is so far talking only about reviewing its sales plan, being unable to quickly retrench its workforce employed at its mines and living in the company towns in the remote northern areas of Russia.
The Russian state-owned mining monopoly maintained the pace of diamond production despite the crisis in the industry in 2009, when the world’s diamond output was slashed by around one third, while ALROSA sold diamonds to the state, whereas De Beers reduced production by half and yielded its lead in global diamond mining to ALROSA.
WHERE TO GROW
Despite the current rough glut, ALROSA intends to increase production to 41 million carats by 2019 from 36.2 million carats in 2014.
According to the Diamond Insight Report recently released by De Beers, in case all the announced projects in the world aimed at building new and expanding old diamond mines will be implemented, this will bring the level of diamond production back to what it was in the mid-2000s. The company has not given any specific numbers to that effect.
According to the Kimberley Process, which takes into account only legally mined stones, the origin of which is confirmed by certificates of the same name, the world’s diamond output reached 176 million carats in 2005-2006 or by 51 million carats more than last year.
However, despite the prospect of increased supply in the coming years, rough will be less affordable in the long term, since there have been no discoveries of easily accessible large diamond fields in the world over the last 15 years, miners say.
"Diamond mining companies, and ALROSA in particular, will turn to hard-to-develop and lean diamond deposits, because there are no new diamond fields found," Ilya Ryaschin, Vice President of ALROSA said during the economic forum in Vladivostok. For the Russian company such deposits are Zarya and Verkhne-Munskoye, where development is so far non-remunerative without government support.
But the shortage of diamond deposits will support prices only if global demand for diamonds will grow.
"To maintain sustainable growth in the diamond market it is necessary to boost the demand for diamond jewelry in the key markets of the United States, China and India, and at least to maintain the demand in Europe and Japan, which in recent years just a bit sagged, but these countries remain an important part of the global market," Olga Linde said.
She believes that do this polished diamonds need marketing support and first of all in terms of generic marketing to bolster demand in the mass segment.
To stay afloat, the industry needs to come up with effective mechanisms of influence on the formation of consumer demand for diamond jewelry, experts say. It is particularly important to reach out to the younger generation, who are in no hurry to marry and therefore not too interested in engagement and wedding jewelry, which now accounts for about half of all diamond jewelry.
