Diamond de-industrialization

Elena Levina

Analysts are unanimous in asserting that public welfare in recent years has been growing across the world, saying that if this is so, demand for jewelry is growing as well. Meanwhile, diamond consumption and diamond prices are inexorably going south in the last few years. However, the market of luxury goods, including jewelry, does not show any significant fall, staying at the same level year after year.

If jewelry demand is really growing, what are people buying instead of diamonds?

For a long time, we have been passionately surveying the market of synthetic diamonds and its aggressive marketing. Against this background, we lost sight of another interesting market – the market of colored gemstones, which, seemingly staying in the shadows, demonstrates rapid growth. And the emergence of another strong player on the jewelry market makes the overall situation even more complicated and confusing.

Make it in color

Colored gemstones have been known to the world for hundreds, if not thousands of years. Rubies, sapphires and emeralds adorned the crowns of many ancient rulers and had exactly the same chance to become broadly popular, but diamonds and the A Diamond is Forever campaign “fired” first. For a long time, this kind of mining industry had no large-scale development prospects: major deposits of colored gems were in African countries, which presented huge political risks in the 20th century (not to mention the trivial risk for life), while the broad marketing campaign launched by De Beers left little chance for investments in their production to pay back through sales.

However, political risks have “petered out,” while mining technologies made a step forward and the art of marketing diamonds as an eternal value was very “timely” suspended. This has contributed to the emergence of several players in the 2000th, who are now very successful in mining and selling colored gemstones. The largest of them, Gemfields recently posted the results of 2016, including prices for their goods.

Changes in prices for gemstones in 2010-2016 :

analyt_30012017(Source – Gemfields’ annual report for 2016).

According to the graph above, prices for colored gemstones have increased by a multiple of 3.5 only in recent years. When did we see last time diamond prices going up threefold – well, at least by 30 per cent?

Gemfields calls its business model “Mine and Market.” The company mines gemstones and dedicatingly invests in marketing, thereby forming demand for its goods on a relatively “empty” market. The marketing campaign is going on across the entire board: Hollywood stars graced with its bright jewels willingly pose on the red carpet, while well-known bloggers make video records for social networks. Colored gemstones are being positioned in all market segments at once – both as everyday jewelry and as an engagement gift (for which purpose a separate marketing campaign has been launched, Say Yes in Color). Judging by the price graph presented above, this kind of marketing is more than successful.

The business press takes comments from affluents buying jewelry with rubies and sapphires and cites females finally happy to splurge big colored jewels and feel safe without any bodygurads around.

Colored gemstones are tangibly cheaper than diamonds. And if their low price makes happy even the wealthy, imagine what response it has in the hearts of the vast majority of rank and file consumers. The prices for the same Riviera Pave ring made in 18k white gold and put up for sale on the website of the well-known online retailer, Blue Nile differ by a factor of two depending on whether it is encrusted with diamonds or colored stones. There is a diamond ring, which costs $ 980, while an absolutely similar one with rubies is sold for $ 695, with sapphires – for $ 550, and amethysts – for $ 475.

In one of the previous reviews, we have already mentioned that consumers consider design and price to be the most important criteria, when choosing a jewelry piece. They are not very interested if it is a natural stone or what its country of origin is. For half the price, consumers of colored stone jewelry are offered a huge selection of colors and shades that can emphasize their individuality. This option may also be very appealing to millennials who aspire to special things, different from the rest, in everything.

More is not always better

A wide range of products displayed on the market is probably a good thing for the consumer. However, it does not bode well for producers: the total amount of money, that consumers are willing to spend on jewelry, remains the same, just to be divided between a larger number of market players.

The problem does not involve a mere loss of income. The emergence of alternative products, different from each other, can naturally lead to market fragmentation, not only by price but also by “ideological” tokens. Think of the smart phone market, where you can find adherents of Apple, choosing it for its status brand and design. There are fans of Samsung, who appreciate more powerful hardware stuffing and highly customizable software. And there is a market for “all the other smartphones,” which are sold in great quantities, mainly cheap, and their manufacturers’ names are hardly a buzz word for most people.

Something of the kind may happen to the jewelry market. Diamonds, of course, will stay – but only as a premium product for very wealthy people or for true fans who are ready to spend any money for their heartthrob object. Most people are likely to continue associating a diamond with engagement and consider it the most expensive stone, but in reality they will buy jewelry more relevant to their income and not requiring half a year to save money for a ring.

The market of cheap jewelry is divided into two parts. One is for those who prefer bright individual jewelry with colored stones. The second – selling synthetic diamonds – is for those who like diamonds, as well as for those who are concerned about environmental issues and human rights violations. For those who do not have enough money for such jewelry, there will always be moissanites, cubic zirconia or Svarovski crystals.

That said, it should be noted that the damage in this situation will be sustained by diamond mining companies only. It does not matter for diamond manufacturers, if they are cutting synthetic or colored stones or natural diamonds – their production technology does not change. For jewelers, it is not at all important, what exactly will be inserted into the ring, if this ‘something’ will attract demand. Moreover, modern jewelry retailers prefer to avoid following a single-product strategy in any case and their assortments have jewelry of different types and characteristics anyway.

However, in this case diamond producers may find themselves in a very delicate situation. If natural diamonds will become a premium product for affluent customers, then there will be no need any longer to have 130 million carats of diamonds that are mined in the world now to meet this demand.

It is a big question, if the world will need at least 5 million carats, or maybe even that amount will be in excess?

The premium segment has traditionally been using high quality diamonds from one carat and more in size. The share of such diamonds in any miner’s production footprint does not exceed 10%. And there are no tell-tale signs on the ore body of a diamond deposit pointing to where you will find a flawless two-carater and where there is nothing but a handful of minor bort. In any case, you will have to mine and recover everything there may be found in the retrieved ore and then sell non-premium quality diamonds at a price close to that of synthetics – well, maybe adding a small markup for their natural origin.

So much for the several million carats for the premium segment. As for the remaining one hundred million carats of diamonds – small and dark or containing inclusions, which currently typify the mass-market, – they will simply turn redundant. Accordingly, there will be no need in industrial operations mining them, including open-pit and underground mines. In fact, to meet demand from the premium segment it will be enough to have several diamond placers, the more so that alluvial diamonds are often of good quality. To develop such deposits, it will be enough to have a few hundred people scattered around the world – rather than hundreds of thousands, as it is now.

In the past one hundred years, diamond mining was developing industrial technologies being one of the most science driven branches of economy. It learned to find deposits lying deep beneath the earth and extract diamonds from a depth of 3,000 feet at the lowest cost. It studied the properties of diamonds to beneficiate ore without the use of heavy chemicals. The biggest worry for workers in this industry was that technological development would sometime replace their labor by machines – like remote-controlled trucks, for instance. However, today the technology of producing enhanced and synthetic stones and the aggressive promotion of alternative goods put the entire diamond industry under a threat of what looks like every inch the true de-industrialization.

Source Rough&Polished