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Industry’s Trends
By: Diamond World News Service
Jun 29 2015 6:11PM
Reference: 11640  

It is an undeniable fact that the industry is undergoing a sea change. It is imperative now more than ever to get a pulse of these changes and trends to build strategies of survival for the future.

McKinsey & Co. has identified seven fundamental trends facing the diamond industry that will shape its future. These trends affect players from across the value chain and will likely remain constant, regardless of other less certain factors, such as the global macroeconomic outlook. This article describes each trend in turn:

1. Plateauing levels of production for the next ten years
Based on an analysis of the world’s 54 largest diamond mines, global diamond production will reach an estimated 135.5M (million) carats in 2015, which compares with an estimated 131.1M carats produced in 2014. In terms of value produced in U.S. dollars, 2015 production is estimated at $14.0B (billion), compared to an estimated $13.8B in 2014. Given the lack of recent, economically viable discoveries, rough production is likely to remain relatively constant over the next ten years. Post 2025, when a number of mines are scheduled to go out of production, production will start to decline.

The last major diamond deposit discovery was Bunder in India, discovered by Rio Tinto in 2004. This case is illustrative of the time it takes to develop a mine because Bunder’s deposits have still not been developed. Similarly, Gahcho Kué in Canada, which was discovered in 1995, indicates that 2015 to 2016 is the earliest it could enter into production.1 Thus, we are assuming that any future discoveries will take just as long to develop; even a new, major discovery would be unlikely to come on-stream in the next decade and, thus, would only impact global production from the mid-2020s on.

2. Pressure from producing countries to extract more value
Across the world, resourcedriven countries are keen to extract more value from their natural resources, either through increased taxes and royalties or through a strengthened push to increase their share of added value. McKinsey & Co. expect this pressure to continue – in particular, in major diamondproducing countries in southern Africa (including Botswana, Namibia and South Africa), given their relatively low levels of economic diversification.

3. Increase in mining costs
New diamond deposits are found deeper underground and in less accessible areas, and it is, therefore, more complex and expensive to extract them. Thus, we expect mining costs to continue to rise across both capex and opex. Over the last ten years, the capital intensity of new projects has risen threefold across most minerals, and critical input factors, such as labour and energy costs have also grown rapidly. We expect cost increases in the future to outpace inflation, leading to rising costs per carat.

4. Shift in demand to emerging markets
Strong economic growth in developing markets continues to create a wealthy “new middle class”, which will be an important driver of demand for diamonds. All of the five equity analysts the company interviewed for this research identified the middle classes in Asia as key drivers of future demand. They specified India and especially China as particularly important to demand growth. McKinsey’s own estimates3 indicate that by 2020 “mainstream” Chinese consumers –households with annual disposable income between USD 16,000 and 34,000 – will make up 51 per cent of urban households (from six per cent in 2010), and affluent households six per cent (from two per cent in 2010).

5. Changing consumer preferences
Research undertaken for the Jewelry 2020 – On the Heels of Apparel report indicates that consumers increasingly prefer branded jewellery. This is also true for high-end diamond jewellery. Brands reduce consumers’ risk of making the “wrong” purchasing choice and help them express their personality by way of association. Only 20 per cent of today’s jewellery market is driven by brands. All the senior jewellery executives interviewed for the report agreed that brands will claim a higher share of the market by 2020, although their views differed on how exactly that would happen. Most of them expect the branded segment to account for 30 to 40 per cent of the total market in 2020.

Four factors underlie this trend. First, the research suggested “new-money” consumers (who are less likely than the “old-money” wealthy to have inherited jewellery) will likely seek branded jewellery to show their wealth. Second, emerging market consumers trust brands more. In our research, 80 per cent of interviewees quoted established brands inspiring trust and providing a lifestyle benefit as a purchasing factor. Third, interviewers highlighted the focus of many young customers on brands as a means of self-expression and self-realisation. Finally, luxury brands playing in neighbouring categories, such as Louis Vuitton, Hermès and Dior, are introducing jewellery collections or expanding their assortment, especially in the higher-end segment.4 For diamond mining companies, the impact of this is mixed. On one hand, it increases the likelihood that value will be captured by those who control the brand, as opposed to those who control the product (consumers will want “a Tiffany ring” rather than “a diamond ring”). But on the other hand, large-scale consumer brands have the means and ability to invest in building consumer demand for the product, which is the key to maintaining the position of diamond jewellery relative to other luxury goods categories.

6. Increases in transparency and vertical integration
Digitalisation of the supply chain will enable a larger client base to access the diamond market. A notable example is the development of online open auctions, which allow new players, not just the traditional select set of diamond buyers, to access rough diamonds. New technologies will also enable diamond jewellery manufacturers to be increasingly selective regarding the production they acquire. For instance, it will likely become easier for them to ask for specific assortments or to compare available production across different mining companies.

7. Improvement of technical capabilities in synthetic gems
Synthetic gem companies and the technology they use are becoming increasingly sophisticated. If synthetic stones leak into the diamond value chain without being properly labelled as synthetic, they may pose a risk to the industry by undermining consumer confidence in the authenticity of what they are buying. However, detection technology used to identify synthetics has, so far, kept up with the technology used to produce them.

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