Inventory backlog to clear by 2020!
The Global Diamond Industry 2019, the work was commissioned by AWDC and prepared by Bain & Company and AWDC. It is based on secondary market research, analysis of financial information available or provided to Bain & Company and AWDC, and a range of interviews with customers, competitors and industry experts! Key points of the Report are summarized as follow.
1: Short-term challenges caused mining and midstream revenues to shrink by 25% and 10%, respectively, in
2019. Near record-high rough diamond production in the beginning of 2019 was followed by lower-than expected demand for polished diamonds, causing a ripple effect through the supply chain.
The softer demand for polished diamonds was driven by two major factors: geopolitical and macroeconomic tension lowered consumer confidence and thus demand and an increase in e-commerce created efficiencies in the supply chain that decreased the need for inventory on hand.
2: Available financing for midstream players decreased by $5 billion since 2013: This 30% decline in financing impacted the ability of manufacturers to support the growth of their operations. Traditional diamond banks curtailed their exposure to the diamond sector.
Indian banks adopted a more conservative approach following the poor performance and challenges of the Indian financial sector at large. Cutters and polishers reduced rough diamond purchases about 30% to off-load inventory and improve their cash flow. In 2019, access to affordable financing became even more challenging for midstream players.
3: In 2019, global diamond jewelry retail sales are expected to decline by up to 2% in US dollars based on the retail performance during the first three quarters of the year. In local currency, we expect the demand for diamond jewelry to remain stable.
The strength of the holiday shopping season will determine the final outcome. The decline is driven by changes in the two largest markets, the US and China, where jewelry sales are expected to decline by 2% and 5%, respectively, in 2019. However, the holiday season may reverse that trend.
In the US, the downturn is attributed to three things: shrinking consumer confidence, a decline in Chinese tourists that consequently lowered luxury purchasing, and a 15% tariff on Chinese jewelry that went into effect in September. Despite a shift toward local consumption, the diamond jewelry market in Greater China is also expected to decline.
4: Softer demand for polished diamonds led to a 3% drop in polished prices and is expected to lead to 10% to
15% lower revenues for midstream players. The slowdown resulted in some of the lowest profit margins experienced in years, as well as high inventory levels, which have been accumulating since 2017.
5: Rough diamond sales are expected to fall by 25% in 2019 though rough diamond production remained stable. Major rough diamond producers responded to midstream pressure by increasing their inventory levels and offering more flexible purchasing terms, cutting rough diamond prices by 5%. Junior miners lowered prices by 7% to 10% in attempts to minimize inventory.
6: 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% and 250%, respectively.
7: We expect the midstream to clear its inventory backlog in the beginning of 2020, bringing a better year for the industry. However, based on our historical analysis, the industry is not likely to fully recover in 2020 because of ongoing supply–demand inequality and limited growth of financing options for midstream players.
Major diamond producers have not announced substantial mining plan cuts, and we do not expect significant retail growth in 2020, as consumers brace for a global recession. The industry will have a stronger chance to rebalance and grow in 2021.
