The future of the diamond industry

dave_siskin-12-2015-house-of-cardsThere is no doubt that the diamond industry is going through a fundamental transformation.  Crisis after crisis keeps pummelling the trade; breaking down the long held trust and faith for the product.  DeBeers is faltering; cutting prices and production.  Polished goods are overstocked and overpriced but even deep discounts at retail fail to motivate the consumer enough to restore previous sales levels.  Wholesalers and retailers are concerned that their inventories are losing value and liquidity.  Over-grading, hacking, undisclosed treatments, and other unethical behaviour is eroding both consumer and trade confidence.  Drastic change is inevitable but what will be the result?


Return to status quo is only a delay

Many in the industry hope that the economy will turn around and business will return to what it has always been.  Mining companies will control supply and pricing as they have done in the past, industry wide generic marketing will fuel demand, and everyone will go back to making money.  It is a nice dream but it will turn into a nightmare.  Full recovery will only encourage all levels of the trade to continue feeding the monster of manipulation, deception, and false values.  This house of cards must collapse as it is an unsustainable structure.


A completely free market may not be possible

The coloured stone industry operates in a free market environment.   Much of the mining is done by small artisanal groups or individuals.  Rough is bought and sold in small gem markets near mining sources or cutting centres.  Supply and demand controls price structures in commercial goods.  Auctions set values of top quality gems. But diamonds, for the most part, require large scale mining operations and these are already in the hands of the current players like DeBeers, Rio Tinto, Alrosa, and a small handful of others.  With few artisanal miners and essentially no street level rough markets; a truly free market is doubtful.  Only the big mining companies have the resources to meet the world’s demand for diamonds.


Consolidation and vertical structure

Most likely, there will be a large scale shakeout at all levels of the diamond industry.  As prices tumble, thousands of small diamantaires will face bankruptcy and liquidation.  Holders of large reserves of rough could panic and dump their inventories while there is still some value.  The market may be flooded with goods at close-out prices, driving prices even lower.  Only large companies, like the mining groups, will have the cash to purchase the excess stones. They also have the need to control the flow of these goods back into the supply chain to prevent the total destruction of value.  With the bulk of the middle-men gone, the mining companies will keep all production…mining, cutting, distribution, and even jewellery production…within their own vertical structure.  Retail prices will be much lower and will create a broader base of consumers. Higher volume and lack of additional hands in the pot will make this structure very profitable.  Eventually the companies will swallow each other through buy-outs, mergers, and other acquisitions until only a few will remain.


Salt shows the way

Again we can look to the salt industry for reference.  As the monetary value of salt dropped from precious to common, suppliers consolidated until only a few remain.  When K+S (a chemical conglomerate) bought Morton Salt, they became the world’s largest salt supplier.  They are vertically integrated, mining the mineral and processing it with a product mix that covers food, road de-icing, and swimming pool sanitizers. Their food products include table salts, flavoured salts, and spice mixes.


The diamond future

It is probable that the diamond industry will follow this same pattern with a very few vertically integrated entities controlling and providing rough, polished gems, finished jewellery, abrasives, and industrial diamonds.  In the long run, this will create a robust, sustainable business model and more consumers will be able to own and wear diamond jewellery.  In the short term it will be a blood-bath.  Businesses will close and fortunes will evaporate as the big boys fight for control.

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