Diamond demand seen outpacing supply by 2020

Indian and Chinese appetite fuelling growth, finds a Bain & Company study

That is set to hold up prices even through periods of volatility and could be supported by additional demand for diamonds as investment, the management consulting firm said.
The concept of diamonds as a potential investment commodity has long been debated, but — unlike for gold and silver — difficulties with valuation, the lack of a spot market and a lack of liquidity means efforts to create diamond funds have struggled. Bain, however, said industry efforts to increase transparency could help attract investors to individual, high-end polished gems, with the lack of supply also making top quality diamonds increasingly rare.

“(It could be) not necessarily investment funds, that invest on behalf of investors into diamonds - that model seems to have been less than successful - but individuals buying into investment diamonds in places like China, India and the Middle East,” said Gerhard Prinsloo, a Moscow-based Bain partner and the lead author of the report.

“The industry really needs to grapple this by the horns and develop mechanisms to better price diamonds and get better transparency around the pricing of polished diamonds.” Prinsloo said the industry would need to develop benchmarks to allow investors to get market prices for investment gems.

“The model of having 12 to 16,000 different price points will probably need to undergo to change if you want to stimulate demand for investment,” he said. In its wide-ranging report, Bain said rough diamond supply is expected to grow at a compound annual growth rate of 2.8 per cent globally in the decade to 2020 in carat terms, and 3 per cent in volume terms. That takes into account new projects coming onstream in the short term but also the impact of relatively flat growth towards the end of the decade as no major new deposit discoveries have been made since Murowa in Zimbabwe in 1997.

Consumer appetite for diamonds, though, will boom, Bain said, driven by increased prosperity in China and India. Demand is set to grow at an annual rate of 6.4 per cent to nearly 250 million carats and 6.6 per cent in value terms by 2020.

The supply-demand picture is cheering to producers, but some are already fretting that the difficulties in securing new supply — only about 1 per cent of kimberlite pipes discovered to date have been economically viable — could make the price of diamonds too high, forcing consumers to look at alternatives.

Bain’s Prinsloo said that could be a factor at the lower end, but not at the lucrative top. About 5 per cent of diamonds produced are more than 2 carats, but that accounts for more than 50 per cent of sales value.

“The impact for those types of consumers would be minimal. Having 2, 3 or 5 carat diamonds, this is for the rich or the super rich, who will be less price sensitive,” Prinsloo said, though at the lower end consumers could shift into other gems or even out of jewellery and into technology must-haves.

Industrial diamonds and synthetic diamonds are also unlikely to replace the traditional “rock.” “Like fake luxury goods, Louis Vuitton bags etc, there will be people who are willing to give fake products but the majority of people would not like to,” he told Reuters.