Brace For Change

ABN AMRO’s latest Insights Report ‘Nothing is Forever’
Brace For Change

Price competition and growth of lab-grown diamonds would impact industry in years to come, says ABN AMRO’s latest Insights Report titled ‘Nothing is Forever’. Diamond World brings you a synopsis.

ABN AMRO’s latest Insights Report titled ‘Nothing is Forever’, notes that the diamond industry is at a cross-road and there are strong forces that could lead to change in the industry.

The industry seems to have moved from a win-win situation to a zero-sum game. Given the oligopolistic structure on the mining side of the industry, rough prices have remained relatively high compared to polished prices and end-demand has disappointed. This has squeezed the middle man, such as manufacturers, rough diamond traders and polish diamond traders. As a result, the middle segment is pushing back at the producers. What happens next depends on their response. They can limit production. This will work, but, eventually stronger price competition and more transparency appear inevitable.

The report said that the industry could witness structural changes in the near future, in which there could be a move toward a shorter supply chain. Two important factors which would greatly impact the industry in the coming years, it pointed out would be price competition and the wider acceptance of labgrown or synthetic diamonds.

A compression of the middle segment
In any event, given the pressure on the middle segment, consolidation will likely be the result here and only the stronger companies will survive. Some strong retail houses could further increase the pressure on middle segment by continuing to move up the chain. This would also enable them to control their sustainability requirements. In a way, they are partly cutting out the middle segment of the diamond sector. So it is very likely that the diamond supply chain will shorten.

Upcoming changes
The strategy of De Beers and ALROSA to compete on quality and perception in order to achieve/maintain a substantial market share has come under severe pressure recently. This is because the industry as a whole is not in a win-win situation anymore. In the past, rough and polished diamond prices rose in tandem. As a result, the entire industry earned enough to stay in business. However since the peak in 2011, polished prices have dropped substantially. This was the result of disappointing demand mainly from Asia. At the same time, rough diamond prices have not dropped to the same extent. As a result, this has squeezed the margins in the middle segment. Inventory of manufacturers and traders have increased substantially and this has negatively impacted their liquidity. This has not been helped by tighter credit conditions. As a result, liquidity conditions among parties in the middle segment have weakened further. The industry seems to have moved from a win-win situation to a zero-sum game. A large part of the capital of these companies in the middle segment of the industry is stuck in the inventory overhang. In addition, there is limited appetite to buy because unprofitable trading and manufacturing conditions. Rough dealers, manufacturers and polished dealers first need to work through their inventory before they are able to buy rough diamonds again. As more players in the middle segment have been cornered by the high rough prices compared to the polished prices, they have come to the conclusion that bundling forces may actually be supportive. In 2015, the sightholders of De Beers deferred a substantial amount of goods, which has not been experienced before on such a wide scale. In the past sightholders were more concerned that deferring goods would hurt their relationship with De Beers and that they would risk future supply.

The report attributed the current crisis to rough prices remaining relatively high compared to polished prices and end demand being low. Also, the report said that the prices of both rough and polished diamonds need to be further lowered before they may be able to recover. It forecast that with the middle segment faced with a stock pileup, the rough buying would be low, coupled with tough liquidity and tighter credit, and this segment would see consolidation. This segment would see the survival of only stronger companies who develop a clear niche for themselves.

Lab-grown diamonds can turn the industry upside down…
Diamond mine production, as per the report is expected to be 1 per cent lower annually over the next few years, owing to depletion of existing mines and failure to find new deposits. The report also mentions the growth of synthetic diamonds at a high pace, although there are no clear forecasts outlined for the same. This would lower the entry cost of the industry, raise total supply of diamonds and pressurize (downward) the natural diamonds. However, consulting firm Frost & Sullivan expects lab-grown diamonds to increase exponentially and to reach 100 million carat in production in 2034. Even if the actual growth would only be half of the projections, it would already have a material impact.

Diamond mining and grown diamond production
Lab-grown diamonds will have many advantages. However, they currently have one important shortcoming. They miss the crucial feature of being rare and unique. There will be a fierce battle between the perception of being rare and unique on the one hand and being sustainable and more affordable. On the other hand, the marketing strategy plays a crucial role in this. In the coming years, it is unlikely that lab-grown diamond will push natural diamonds from the throne. The challenge for the ‘natural diamond’ industry is to make big steps regarding the ‘pipeline’ integrity to somewhat mitigate the sustainability marketing angle’ of the lab-grown diamonds. However, lab-grown diamonds will likely gain market share. In the pearls market, cultured pearls have overtaken natural pearls, though this was also the effect of pollution, which made natural pearls extremely rare. The same can occur for the diamond market. If natural diamond deposits are exhausted or there is a broader acceptance of lab-grown diamonds, labgrown diamonds will gain market share. This will result in new suppliers entering the market at the expense of the current suppliers.

The report suggests the industry embraces change and be open to making bold adjustments instead of resisting change and going against them.

Follow DiamondWorld on Instagram: @diamondworldnet
Follow DiamondWorld on Twitter: @diamondworldnet
Follow DiamondWorld on Facebook: @diamondworldnet

Diamond World