The diamond industry appears to be facing signs of a recession, according to a new study issued by Bain & Co. The firm’s annual global diamond industry report outlines diamond sales for 2018 and the first half of 2019, and paints a picture of how global instability has rattled consumers.
According to the study, global diamond sales are set to clock a 2 percent decrease in 2019, although “the strength of the holiday shopping season will determine the final outcome.” Rough diamond sales fared even worse — dropping a total of 25 percent.
Bain said the U.S. and China are the biggest contributors to these flagging numbers, while political and financial uncertainty in the U.K., France and India did not help.
In the U.S., sales are expected to fall 2 percent and in China more than double at 5 percent. “In the U.S., the downturn is attributed to three things: shrinking consumer confidence, a decline in Chinese tourists that consequently lowered luxury purchasing and a 15 percent tariff on Chinese jewelry that went into effect in September.”
While diamond sales in China grew 4 percent in 2018, this year’s anticipated 5 percent decrease (measured in U.S. dollars) “is attributed to Yuan depreciation, declining consumer confidence stemming from trade tension between the U.S. and China and significantly lower sales in Hong Kong amid protests in the area,” the report reads.
A global increase in online jewelry purchases is affecting the polished stone market as, “online sales and more efficient supply chain operations require less inventory on-hand, creating a need to rethink the business model for midstream players,” Bain said.
A steep decline in rough diamond sales has caused larger problems for the diamond industry. Bain said, “In the second half of 2018, demand for rough diamonds began to stall, causing inventories to rise and prices to decrease.” This came a year after the diamond industry spearheaded a 26 million-carat increase in diamond mining production that “created a surplus that affected the entire value chain.”
Mining companies quickly responded by “adjusting production plans for 2019, cutting their minimum purchase requirements in half and lowering rough diamond prices by about 5 percent.” Bain said smaller producers clipped prices by up to 10 percent, with some skipping out on stone auctions in the third and fourth quarters of this year.
The company estimates that global diamond mining production will drop another 4 percent in 2019, and “the supply of natural diamonds [will] decline substantially starting in 2021, with an annual decrease of 8 percent.”
The picture is no better for polished diamond sales, which are “expected to drop 10 to 15 percent by the end of 2019 because of slowing demand for diamond jewelry globally, lower diamond content in jewelry designs, inventory optimization by major retailers and declining available financing for midstream players.”
Bain was hesitant to provide a midterm outlook for early 2020 stating the market “remains uncertain given continued geopolitical instability, strong signs of an impending recession and limited marketing support, especially for non-branded and lower-end jewelry.”
As natural diamond production begins to wind down, lab-grown stone output increased between 15 and 20 percent over the last year, mostly due to production facilities in China. “Chinese companies use high-pressure, high-temperature technologies to produce rough diamonds, competing on lowest production cost,” the report said. In the U.S., by contrast, “Companies are pursuing a vertically integrated business model by selling premium branded jewelry.”
Bain did offer the consolation that “based on historic experience, the market typically returns to pre-crisis levels within one to two years. Aside from the current downturn, the diamond market has faced only four recessions in the past 50 years. In the same time frame, rough diamond production has grown three times, and rough and polished prices have increased 450 percent and 250 percent, respectively.”
In order for the industry to bounce back, Bain said it needs to invest in the aspirations of growing middle classes worldwide. “Recovery requires continued growth of GDP, the middle class and purchasing power, particularly in China and India. To convert increased wealth into growth, the industry must also provide structured marketing support. In the conservative scenario, our projection accounts for a possible shift in consumer preferences away from natural diamonds due to lack of marketing support,” the firm said.