Bain & Co. In In-depth Diamond Industry Analysis: Demand to Nearly Double by End of Decade

(IDEX Online News) – A 6 percent rise in the volume of diamond demand, outpacing the 2.8 percent annual supply growth, will create a “structural shortage” for the industry and signal potential price increases, particularly in the larger carat diamond segments, according to a report by Bain & Co.

Much of the supply chain data for the report, “2011 Global Diamond Industry Report,” relies on analysis by IDEX Online.

A doubling in the ranks of the Chinese and Indian middle classes by 2020 will drive much of the demand. The combined market share of this segment is projected to reach 30 percent by the end of the decade, up nearly half from its current levels and nearly equal to the share of the United States.

That does not mean, however, that the industry should reduce its focus on the U.S. “The appetite for high-quality diamonds in China and India is growing,” said Gerhard Prinsloo, Bain & Company partner and lead author for the report. “But industry players would be ill-advised to take their eye off of the United States and its preeminent position as the world’s number one diamond market.”

According to the report, by 2020, annual production will swell to nearly 175 million carats and surpass peak 2007 pre-crisis production levels. Thirteen new mines will help this level of production from previous discoveries whose output may add up to 23 million carats, although no new discoveries are expected in the near future.

The report mentions the growing scarcity of high quality +2-carat polished diamonds, which points to disproportional increases in revenues in this segment. These sizes typically represent only 5 percent of diamond production by volume, but 50 percent of the sales value for producers. Given this even more pronounced structural shortage for larger diamonds, says Bain, retail chains will need to seriously reconsider their diamond sourcing strategy in the coming years

Bain also predicts that specialized retailing chains will continue to take market share from family-owned diamond retailers.

The analysis shows what many manufacturers already know, that rough producers and retailers are the most profitable segments in the diamond value chain, with operating margins of respectively 22 to 24 percent and 5 to 10 percent; much-lower margins in the middle of the value chain are being squeezed from both ends.

In addition, the report finds that industry efforts to improve transparency could finally enable the diamond market to overcome some of its lingering problems – including difficulties with valuation, the lack of a traded market and lack of liquidity – and establish diamonds as a full-fledged investment asset.

Keys to creating investment demand, says Bain, include creating an exchange for polished diamonds, defining the criteria for investment grade diamonds (e.g. carat sizes) and reducing the number of price points, now numbering in the 12,000 to 16,000 range.

“This report unveils much of the mystery surrounding the diamond industry,” said Ari Epstein, CEO of the AWDC, which sponsored the report. “It paints a positive outlook and underscores the value of our continuing commitment to improved transparency.”