“Survival in the Absence of Growth” was the subject of a panel discussion at the recent Mumbai “Mines to Market Conference.” It certainly summarized succinctly the diamond industry’s 2016 performance. The full 2016 Pipeline article is published in Diamond Intelligence Briefs.

 

For five years in a row, the industry’s global polished diamond sales, measured in Polished Wholesale Prices (PWP), have followed a downward trend. Commencing in 2011, when sales peaked at $22.6 billion, this figure gradually declined to $18.7 billion in 2016 – registering a 17% accumulative decline. Last year, the decline was merely 3% over the $19.2 billion of 2015. Our economic models predict that in 2017, global polished sales will remain steady, while the industry’s rough replenishment will continue, comfortably absorbing the higher rough supplies already announced by the main producers.

 

A Glance at Each Pipeline Level

In 2016, diamond jewelry retail sales declined slightly by some 1.3% coming to $74.3 billion. This figure must be approached with caution, though: During the last five years, starting from 2011, the average diamond content in each jewelry piece declined. This trend still continues. In this respect, 2011 was an exceptionally good year – but generally speaking, the average diamond content (in PWP) historically represented some 25-28% of the jewelry piece’s retail value. This rose sharply in 2010-2013 to well over 30%. Since then, however, it has been sliding back to some 27%. Thus, hypothetically, if in two years the same diamond retail value was sold globally, this does not necessarily mean that diamond contents would have been the same. They aren’t. At an average, there simply was “less diamond” in the overall jewelry piece – and gold, other precious materials or stones, design, etc. constitutes a larger part of the jewelry piece’s value.

 

Diamond mining output almost returned to normal towards the final months of 2016, after it had fallen steeply in 2015. Both Alrosa and De Beers reduced output in 2016, as they were carrying excess rough stock which was not sold. Global diamond production totaled $13.4 billion in 2016, down from the $15.5 billion unearthed in 2015 – and still a far cry from the $16.5 billion produced in 2014. Over the last few years, producers were forced to stock surplus production (and Alrosa stepped up sales to the Gokhran state depository to avoid severe mining cutbacks), creating divergence in what was mined and what was sold to the market. Thus producer rough sales to the market, which peaked in 2014 at $18.0 billion and fell dramatically to $13.3 billion in the difficult year of 2015, slightly increased last year to $14.8 billion. In our forecasts, we expect that producers will sell well over $15 billion in 2017 – and they have already set higher mining targets.

 

2016 Profitability: The Best Since 2011

Total midstream inventory levels rose by some $1.7 billion, from $10.6 billion to $12.3 billion in 2016. Historically, when viewing the ratio between midstream inventories and sales, the level of inventories have traditionally been higher. This shows that market price volatility is gradually reducing the appetite to maintain excess stocks – thus invalidating and putting to rest the “historic” belief that if one doesn’t make money in the business, one will make money on his inventories. Not anymore!

 

The midstream’s 2016 inventory growth was achieved while the industry slightly decreased its bank indebtedness, from $14.2 billion in 2015 down to $14.0 billion at the end of last year. While the overall financial health of the industry seems fine, there are some troubled (mega) companies that could receive adverse financial news at any moment – something that has been said about several companies for a long time.

 

Fake News and Alternative Facts

Tacy Ltd. has published its annual pipeline since 1988 – this current version is our 28^th in a row. For most of these years, there were minor divergences between our figures and those presented by De Beers, other mining companies, and economic research organizations, regarding estimations of mining output and rough sales to the market. Beginning in 2012, we saw that the data published by De Beers (through its authoritative Insight Reports) showed material differences with our data – both in terms of mine production and rough supplies to the market, therefore also of the resultant polished sales. The figures from De Beers seem unreasonably inflated and are inconsistent with the financial reporting of producers.

Why is this a concern? The global diamond production figures by De Beers are annually some $4.7 billion-$5 billion higher than the annual reports of the Kimberley Process (KP) and the consensus views by those other organizations which don’t simply cut and paste the De Beers figures as the gospel truth. It’s not just the values, it’s also the volumes. The bigger concern on the rough-production-values front is the mismatch of carat numbers. De Beers’ numbers show carat production at nearly 15 million carats higher than KP numbers. While value differences can be debated to a slight degree, carat differences imply that the KP is simply deficient. For the sake of the industry, we hope that De Beers takes a strong look at their numbers.

 

Explaining Data Discrepancies… Or Not

Tacy Ltd. publishes its pipeline figures every year many months before the KP production figures are collected and published. Our estimate for 2016 is $13.14 billion, at rough production values. By value this represents a decline of some 15% below our $15.5 billion figure for 2015. But one shouldn’t forget that the producers’ policies of “artificially” reducing output to produce in line with demand that was announced in the latter part of 2015, and this reduction in prices, show its impact in all severity in 2016. Our figures are generally slightly above the KP, as we base our data on production per mine – though we do realize that there are a few (mostly two) producer countries where export values are intentionally understated by the respective governmental authorities for reasons best known to them.

 

Synthetics Has Become a Zero-Sum Game

What characterizes 2016 more than anything else is the aggressive behavior of the gem-quality synthetics (lab-grown) producers. The polished diamond output of the dominant synthetic (lab-grown) rough producer, which manufactures and sells the polished itself or through subcontracting, enters the consumer market largely undisclosed – especially through set-jewelry, where the chances of “discovery” are near zero. In value, we estimate that some $750 million of gem synthetics (lab grown) were sold in 2016. [Our $750 million represents the natural PWP equivalent, as they effectively eat into the demand for natural polished. The production and sale cost for the same can be significantly lower.] In terms of volumes, especially melees, the amounts of undisclosed synthetics in the markets are staggering.

 

Diamond Midstream’s Ambiguous Position on Synthetics

Diamond manufacturers tend to bend over backwards to curry favor with natural producers. That’s the result of almost a century of the De Beers sightholder system: A manufacturer or rough trader is dependent on the goodwill and willingness of the producer to sell the rough to you rather than to someone else. Diamond manufacturers’ revenues – and margins – depend on the added value created between purchase of raw material and sales of resultant polished.

The rise of synthetics has decreased the hold, the “grip” if you want, of the natural producers over their clients. A manufacturer in Surat (or anywhere else for that matter) wants to optimize his added value and margins. If there is more money to be made by cutting and polishing synthetics, he sees no reason why he shouldn’t do so. Anglo American didn’t state it so bluntly, but the reduced demand that for natural diamonds it signals isn’t just coming from consumers, but rather also from the midstream sector.

 

Synthetics’ Impact on Rough Prices and Diamond Exploration

Anglo American correctly noted the impact of synthetics on natural producers’ rough selling prices. In the supply curve analysis of rough diamond prices conducted by Pharos Beam Consulting and Tacy Ltd, it seems that current rough prices are some 4% below the “normalized prices,” i.e., the price level the rough prices would have reached if there were no synthetics in the market. [The supply curve is a graphical representation of the relationship between the price of a good or service and the quantity supplied for a given period of time.] We expect this gap to grow to 10% by 2020.

 

Price Volatility and Risks – Concern for Entire Pipeline

The Tacy Pipeline provides simple numbers. Behind each figure hides amazing stories – and ever-changing realities. The ciphers speak for themselves – and in this review only some salient issues were discussed. If one had to identify a single overriding concern shared by all players, it would be the enormous price volatility. This is quite a recent phenomenon in an industry in which (artificially maintained) price stability was probably one of its greatest attractions – providing comfort to all stakeholders, especially governments and bankers.

 

Diamond Jewelry is Losing its Share of the Luxury Wallet – Forever?

he diamond jewelry market is losing its share of the consumer’s luxury wallet. The growth of diamond jewelry retail sales lags dramatically behind (nominal) global GDP growth. Diamond jewelry retail sales, since 2007, have fallen steeply behind inflation indices. In our 17-year pipeline chart, using an index (base) of 100 for the year 1999, diamond jewelry retail sales have risen by merely some 130%, while GDP rose by 240%. The diamond content in jewelry had risen to some 180% by 2011, but has fallen back to 150%. The diamond jewelry market is underperforming almost any relevant economic parameter.

 

The full article is available here: