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Diamond demand to increase 6pc per year until 2020: Bain & Co.

December 9, 2011

Courtesy of De Beers

Diamond demand will far outpace the annual 2.8 percent supply growth, which is likely to create a structural shortage in the industry. This indicates a possibility of price increases, especially in the luxury market where there are larger-carat diamond segments, according to findings from a study from Bain & Co.

The 2001 Global Diamond Industry Report indicates that the demand is mostly brought on by Chinese and Indian consumers, whose combined income is steadily increasing. Diamond demand is expected to grow 6 percent every year until 2020.

“Diamond shortage will put upward pressure on prices, especially for larger diamonds,” said Gerhard Prinsloo, New York-based partner at Bain & Co. and lead author for the study. “Retailers need to increase efforts and focus on diamond sourcing strategies.

“At the lower end of market, too, high prices might induce switching to other alternatives: down trading to smaller diamonds, other stones and other luxury goods,” he said. “However, diamond engagement rings are culturally deeply embedded and the industry will be well-served to ensure diamonds remain affordable.”

Cutting it down
The diamond industry is a $60 billion industry.

Annual diamond production will grow to nearly 175 million carats by 2020, surpassing top pre-recession levels. Additionally, 13 new mines alone could produce 23 million carats by that time.

There is also a growing scarcity of high-quality polished diamonds above two carats. This points to disproportional increases in revenues in this segment, which typically represents 5 percent of diamond production in terms of volume, according to Bain.

It is to be assumed that many luxury brands use high-carat diamonds.

Because of this predicted structural shortage for larger diamonds, retailers may need to reconsider their diamond-sourcing strategy in the coming years. Also, family-owned retails will continue to be hard-hit, per the study.

Seeing clarity
The surge in demand by Chinese and Indian middle classes is expected to be up nearly half from its current levels and approximately equal to the share of the United States, according to the study.

Indeed, consumers in BRIC markets do have more discretionary income to spend on luxury goods. In fact, the study indicates that the two countries’ combined market share is projected to reach 30 percent by the end of the decade.

Industry efforts to improve transparency could enable the diamond market to overcome difficulties with valuation, lack of a trade market and lack of liquidity to establish diamonds as a full-fledged investment asset.

Keys to creating investment include creating an exchange for polished diamonds, defining the criteria for investment-grade diamonds such as carat sizes and reducing price points ranges, according to Bane.

Investors in China, India and the Middle East have already shown interest in large-carat diamonds, the study said.

“The growing middle class in China and India with higher disposable income has discretionary income to be able to afford luxury items,” Mr. Prinsloo said. “It is a natural outcome of strong economic growth.”

Final Take
Rachel Lamb, associate reporter on Luxury Daily, New York

Rachel Lamb is an associate reporter on Luxury Daily. Her beats are apparel and accessories, arts and entertainment, education, food and beverage, fragrance and personal care, government, healthcare, home furnishings, jewelry, legal/privacy and nonprofits. Reach her at rachel@napean.com.