Sparkle fades for diamond industry as demand wanes

Clearly, something is weighing on desire for the stones but what that might be is harder to pin down

Lucara Diamonds - Karowe Diamond Mine. Lucara Diamonds *** Local Caption ***  bz01ma-Lucara-Diamond-03.jpg
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Cape Town // Millennials are killing the diamond industry. At least, they are taking their money and spending it elsewhere, much to the dismay of jewellers and diamond miners.

“When my girlfriend and I get married next year, it will be barefoot on a beach in Bali,” says Kenneth McCloud, a final year student at the University of Cape Town. “We’ll exchange rings, but no diamonds. All our money is going on the trip and honeymoon. If there’s any left-over we’ll put it towards a house or something useful.”

Diamond sales are struggling precisely at a time when a new generation of young people are expected to be getting married – with young men especially digging into their wallets to pay for engagement rings.

When they do spend money on diamonds, it is just as likely to be a synthetic stone, grown in a laboratory rather than retrieved from a mine. Martin Rapaport, editor of the diamond industry's voice, Rapaport Diamond Report said as much in a recent widely circulated editorial.

“As millennials finally come of marriageable age, we are in danger of losing an entire generation of diamond consumers due to our failure to differentiate our natural diamonds from synthetic diamonds based on value retention and other factors,” he wrote.

It is a strange position for an industry that was one of the first to understand branding and marketing. Clever slogans such as "a diamond is forever", and a loose formula that posited a man needed to spend three months’ salary on a sparkler, built the fortunes of companies such as industry leader De Beers.

The 'Dynasty' diamond, cut from the 179-carat Romanov rough diamond discovered by Alrosa PJSC, is displayed in Moscow, Russia, on Tuesday, Aug. 1, 2017. In 2015, Alrosa discovered a giant, 179-carat rough diamond in a mine in the northeast region of Sakha, naming it Romanov after the family that ruled for more than 300 years before the Russian Revolution. Photographer: Andrey Rudakov/Bloomberg

De Beers was founded more than a century ago in the diamond fields of South Africa. These were so prolific that diamonds, once the preserve of kings and queens, became common. This threatened their value so De Beers embarked on a huge marketing campaign, helping it dominate the industry it essentially founded.

De Beers, now 85 per cent owned by London listed Anglo American, is still the world’s largest source of rough diamonds by value.

Today though, the diamond world is very different. In late July De Beers issued the results of its latest sale, which showed a 53 per cent decline over its sale in July 2018. The company’s sixth "sight" - the term it uses to pitch its products to selected dealers - of the year earned only $250 million (Dh918.1m), down from the $533m for the same month last year

"With ongoing macroeconomic uncertainty, retailers managing inventory levels, and polished diamond inventories in the midstream continuing to be higher than normal, De Beers Group provided customers with additional flexibility to defer some of their rough diamond allocations to later in the year," chief executive Bruce Cleaver said. "As a result, we saw a reduction in sales during the sixth cycle of 2019."

Unusually, De Beers allowed "sight holders" - the dealers invited to a viewing – to defer purchases or buy less than offered. De Beers' practice has always been to present a take-it-or-leave-it package of diamonds. Most take it because to decline the offer risks being removed from the sight list.

De Beers says it has reduced second-half production targets and lowered its production forecast to a maximum 31 million carats for this year, compared with an earlier outlook of 31 million to 33 million carats. The company also plans to boost its marketing spend significantly this year.

Year-to-date sales of $2.6bn are tracking nearly 25 per cent lower than at the same time a year earlier when De Beers had realised $3.4bn.

This month, meanwhile, Anglo American, the British multinational parent of De Beers, released the diamond miner's half year results for 2019. This showed its underlying earnings before interest, taxes, depreciation and amortisation decreased by 27 per cent to $518m.

De Beers attributed the sharp drop to “challenging midstream trading environment and slowing consumer demand growth, which has resulted in a decrease in the rough diamond price index and realised price, as well as lower margins in the trading business”.

Clearly, something is weighing on demand for diamonds. Some in the industry believe there is more at play than just millennials bypassing the product.

“There is growing evidence of people getting married later in life or not at all, so this does inevitably impact diamond engagement ring demand,” says Paul Zimnisky, an independent diamond industry analyst in New York. However, he adds: “Global population growth and economic growth in developing and emerging economies in particular has led to incremental new demand for diamonds that is more than offsetting this.”

If anything, millennials are now the biggest purchasers of jewellery as a demographic, Mr Zimnisky believes. Declining sales are more likely the result of consumers in general growing disillusioned with cheap, poor-quality stones that are increasingly available.

Mr Zimnisky says that as older legacy mines close, they are being replaced by lower-quality producers. High-quality deposits are few and far between but advancing mining technology is making it cheaper to work with less productive and lesser quality deposits.

“The diamond industry had an influx of smaller diamonds in 2016 to 2018 driven by production from new mines and improved recovery technologies. The industry is currently working through this excess inventory, which I think will be normalised by this time next year,” Mr Zimnisky adds.

Right now, for instance, the global diamond mining industry is waiting for Rio Tinto to close its Argyle mine in Australia in 2020. The mine produces about 10 per cent of the world’s annual demand of around 140-million carats. Most of Argyle’s production are small, lower-quality diamonds.

Another indication of the decline in sales is the slump of jewellery sales from China into the US that have fallen around 17 per cent over the past three years, says Edahn Golan, a diamond industry analyst. China is hands-down the largest exporter of jewellery to the US, and some have speculated that the current trade war may be behind the decline.

Mr Golan, however, disagrees. “The decline is not about Trump or politics. It's about a change in demand, cost of labour, quality and design. And therein lies the solution.”

Instead, jewellers need to put more into crafting pieces that consumers – including millennials – will value.

“If the industry wants to avert a decline in business, it must invest in design, marketing, branding and quality of manufacturing,” Mr Golan says. “With that in place prices can be increased and margins protected.”

Only time will tell if that will add sparkle to the diaomond industry's fortunes.