WSJ MarketWatch Article
By MARKETWATCH
Published: December 8, 2011

Global Diamond Demand Predicted to Nearly Double by End of Decade, According to New Wide-Ranging Bain & Company Report. Prices Poised to Increase as Demand from China and India Fuel Buying.

Investment Potential Could Further Boost Demand and Prices.

Diamond demand, in carats, will grow more than six per cent per year through 2020, far outpacing the 2.8 percent annual supply growth, creating a "structural shortage" for the industry and signaling potential price increases, particularly in the larger-carat diamond segments; this according to the "2011 Global Diamond Industry Report", released today by Bain & Company, commissioned by the Antwerp World Diamond Centre (AWDC). Even the most conservative growth scenario in the report forecasts a strong positive outlook for the $60 billion diamond jewelry industry. A doubling in the ranks of the Chinese and Indian middle classes by 2020 will drive much of the demand surge, with their combined market share projected to reach 30 percent by the end of the decade, up nearly half from its current levels and nearly equal to the share of the United States.

"The appetite for high-quality diamonds in China and India is growing," said Gerhard Prinsloo, Bain & Company partner and lead author for the report. "But industry players would be ill-advised to take their eye off of the United States and its preeminent position as the world's #1 diamond market."

The report finds that industry efforts to improve transparency could finally enable the diamond market to overcome past hurdles--including difficulties with valuation, the lack of a traded market, and lack of liquidity--and establish diamonds as a full-fledged investment asset. Keys to creating investment demand include: creating an exchange for polished diamonds, defining the criteria for investment grade diamonds (e.g. carat sizes) and reducing the number of price points, now numbering in the 12,000 to 16,000 range. High net worth individuals and banks in China, India, and the Middle East, in particular, have shown interest in investment in large high quality diamonds.

Other findings include:

-- By 2020, Bain predicts that annual production will swell to nearly 175 million carats and surpass peak 2007 pre-crisis production levels. Thirteen new mines from previous discoveries may add up to 23 million carats by the end of the decade, although no new discoveries are expected in the foreseeable future

-- A growing scarcity of high quality larger-carat polished diamonds, i.e. those above two carats, points to disproportional increases in revenues in this segment. This segment typically represents five percent of diamond production terms of volume, but 50 percent of the sales value for producers

-- Given an even more pronounced structural shortage for larger diamonds, retail chains will need to seriously reconsider their diamond sourcing strategy in the coming years

-- Family-owned diamond retailers, many of them fourth and fifth generation businesses, will continue to be hard hit, as specialized retailing chains continue to take market share. While the market share of specialized jewelry chains grew from 20 percent in 2000 to 27 percent in 2010, market share of independent jewelry stores fell from 38 percent to 24 percent

-- The Internet plays a very modest role as a distribution channel for polished diamonds, but is used as negotiation mechanism against retailers. Some retailers have already embarked on various strategies to ensure future security of supply of high quality diamonds

-- Rough producers and retailers are the most profitable segments in the diamond value chain, with operating margins of respectively 22 to 24 percent and five to 10 percent; much lower margins in the middle of the value chain are being squeezed from both ends

"This report unveils much of the mystery surrounding the diamond industry," said Ari Epstein, CEO of the AWDC. "It paints a positive outlook and underscores the value of our continuing commitment to improved transparency."

[WSJ MarketWatch]