Bain & Company: India now cuts and polishes more than 40% of the world's diamonds larger than 1 carat

Bain & Company's fifth annual report on the diamond industry - The Global Diamond Industry 2015: Growth perspectives amid short-term challenges, retail sales of diamond jewelry grew last year and in the first half of 2015 by 4 to 8 percent with solid performance from the U.S. The Chinese market continues to be slow, due to stagnant GDP growth – as previously predicted, causing a ripple effect across the entire value chain.

The report stated that in 2015, diamond producers and mid-segment companies should anticipate a 10-20 percent decrease in revenue with diamond jewelry sales to remain near flat.

The report was released by Bain & Company and the Antwerp World Diamond Centre (AWDC).

According to the report a mild drop in the consumer demand for diamond jewellery started off in 2014 in Greater China and led to a notable drop in demand for polished and rough diamonds in 2015. This caused retailers to trim orders for polished diamonds, an inventory backlog in the cutting and polishing segment and the resulting polished and rough diamond prices dropping 12 percent and 23 percent, respectively, since May 2014 and 8 percent and 15 percent, respectively, for the first nine months of 2015.

But the report notes that the long-term outlook remains robust with macroeconomic fundamentals to remain positive, with prices likely to rebound similar to previous downturns.

"Following the economic turmoil of 2001 and 2009, prices took 18 to 24 months to recover," said Olya Linde, lead author of the global diamond industry report and a Bain partner. "This time, we anticipate the market has the potential to recover much quicker – within just 1 to 2 years – assuming rough-diamond producers and polished-diamond manufacturers closely monitor and manage their supply levels. This will go a long way toward helping accumulated stocks work their way through the system efficiently."

It was a turbulent year for the rough-diamond market in 2014 and 2015. Rough-diamond revenues grew 8 percent last year on the strength of increased sales by the top five producers and despite a decline in the overall volume of carats mined. During that same time, rough-diamond production volume fell by 4 percent globally to slightly less than 125 million carats, with the largest drops occurring in Australia and Africa.

The report notes that cutting and polishing revenue continued its positive trajectory last year with growth in the mid-single digits, owed majorly to India and China. Both countries together today make up about 80 percent of the market, while Africa's cutting and polishing market declined dramatically. Belgium, Israel and the U.S., which focus on high-end stones, recorded declines in polished revenue with volumes of large stones migrated to India. India, according to the report now cuts and polishes more than 40 percent of the world's diamonds larger than 1 carat with quality standards comparable to those of developed markets.

Amidst the challenges the industry faces, the mid-market companies are being forced to reevaluate their business models. "At the moment, the mid-market segment is just too weak to cushion against short-term fluctuations in the diamond jewelry retail market," said Linde. "Though it has little bargaining power over rough producers and limited access to financing, mid-market players still bear the brunt of price volatility, but this is not a life sentence. We expect their continued development will allow the industry to implement more sustainable business models over time."

Ari Epstein, CEO of the Antwerp World Diamond Centre said, "This report confirms just how challenging the past year has been for the global diamond industry, but we must not lose sight of the fact that steps are already being taken to bring the system back into balance.” He also noted that though Far East has reflected a slow economic growth impacting consumer demand, ‘we have also seen continued robust U.S. market performance.

The U.S. has always been the main driver of diamond consumption and is still going strong.’ Also, while there was high dependency on the growth in Chinese and Indian demand in recent years, and now with the slowdown in those countries, it does not mean long-term stagnation. Recalibration of output and prices to adjust to somewhat lower growth forecasts is what is happening. “Furthermore, the measures the major miners have taken in response to the needs of the midstream, together with initiatives to stimulate demand for polished diamonds, should bring the pipeline back into balance. Every indicator points to a recovery starting mid-2016. We remain confident in the long-term prospects for the diamond industry."

The report also noted that consumer attitudes toward luxury overall are changing, particularly in Europe, the U.S., and Japan. Further, not much is known about the diamond consumption patterns of the new generation of consumers and the industry continues to struggle to boost investment demand for diamonds. All of these considerations are further challenged by the ongoing penetration of undisclosed synthetics.

The proprietary forecasting method anticipates rough-diamond demand will grow at an annual rate of about 3-4 percent over the next 15 years. Meanwhile, the aging and depletion of existing mines and relatively little new supply coming online, will eat into supply by 1-2 percent per year from 2015 to 2030, causing the gap between supply and demand to widen starting in 2019. The Chinese market will likely stay flat in 2016 before an anticipated recovery in 2017 that is expected to lead to 4-5.5 percent annual growth through 2030. This projection is down from about 7 percent in previous Bain forecasts.