Diamonds are one of the world's most precious natural resources. These unique stones are almost as old as the Earth itself, and have become culturally, socially, economically, politically and even scientifically significant. Figures from the World Diamond Council state that each year, around US$13 billion of rough diamonds are mined (65% of which come from Africa). The diamond value chain (from exploration, to mining, processing and retail) employs over 10 million people around the world, and jewellery sales alone (having grown three-fold in 25 years) are now in excess of US$72 billion per annum.
The diamond industry has always existed in a state of pseudo globalization. Over a thousand years ago, diamonds were mined in India, before being cut and polished in Arabia and sold to European aristocracy. These are stones which have been adored for their rarity and beauty, while being almost universally accepted as portable, untraceable and efficient stores of value. The diamond 'industry' (at least as we know it today) began 1800's, when an accidental find of diamonds in South Africa kicked off a mining, exploration and trading boom that led to the existence of one of the most successful and long-lasting cartel's in economic history- that being the small network of world diamond producers.
The relative opacity and complexity of the diamond market has contributed to a general lack of understanding of its dynamics when, in truth, the modern form of globalization has introduced competition, transparency and free-market behaviors to this industry.
To learn more about the world diamond market, I spoke to David Prager, Global Head of Corporate Affairs at De Beers Group, a 120-year-old firm with revenues in excess of US$7 billion, and a market share (by value) of more than 35% of the world's rough diamond market.
AllAboutAlpha: Why are diamonds important?
David Prager: The truth is nobody needs a diamond. You don't need a diamond to heat your home, run your car or power your cell phone. As a business, it's clear to us that there is only one source of value for diamonds- and that is the consumer's desire for the product. 99% of diamond demand is from the jewellery industry, less than 1% goes to industrial uses. For that 99%, diamonds represent a cultural phenomenon. They signify all the values that people recognize as being attributable to the stone—love, commitment, marriage, relationship, the birth of a child, accomplishment and so on. More than just being a luxury item, they are pieces that represent milestone moments. That's why they're important.
People also reflect on whether diamonds are a hard asset class. They are the hardest of all assets, being the hardest asset known to man! Diamonds are rare, there haven't been any major finds for over 20 years, and there are no major mines on the horizon. Demand, particularly in China and India, is growing rapidly, and in the very near future we will see demand outpace plateauing supply. That means that people have a product that not only represents important life moments, but which will be worth more in the future than it is today- and will always increase in value.
AllAboutAlpha: Who are the key participants (and countries) in the diamond market?
Prager: In the mining side of the market, de Beers is the largest miner by value. In many sectors you talk about volume (such as carats), but in diamonds it's the value of the product that is crucial as every diamond is different. De Beers has around 35% of the market by value, and mines in 4 countries- Botswana by far being the largest producer, but also South Africa, Namibia and Canada. We are also currently exploring sites in Angola and India. The mining countries that are big are Botswana, Russia, South Africa and Canada.
In terms of the mid-stream manufacturing sector where rough diamonds are cut, polished and sent to jewellery, the large part of that value chain sits in India. China, Tel Aviv, Antwerp (Belgium) and the United States are also significant and each specialize in a different type of diamond.
Botswana is a very large producer of diamonds, and as part of our 10-year agreement to mine and sell those diamonds through De Beers, we have agreed to move our diamond sales operations, in their entirety from all our mines around the world to Botswana (by the end of 2013). All of our clients (site-holders) will therefore be coming to our diamond sales in Botswana 10 times a year. Overnight, Botswana will go from being a large producer of diamonds to also being a key purchasing and trading centre.
AllAboutAlpha: What are the key demand drivers in the diamond market?
Prager: If we look at gem-diamonds (99% of the market)- the bridal category (wedding and engagement rings) are the leading segment in the United States and China, accounting for around one third to a half of all sales. In India and Japan you see a more balanced demand across all jewellery categories, not just diamonds.
In terms of the diamonds themselves, Americans tend to look for larger stones, falling between 0.5-1 carats, but of slightly lower quality. In China and Japan, around a third of sales are between 0.18 and 0.5 carat but of a higher quality. India is a smalls market, with much smaller stones albeit at a better quality.
AllAboutAlpha: What is the state of the market for synthetic diamonds, and how does that impact natural stone sales?
Prager: If you are talking of the use of synthetic diamonds in industrial (super-material) applications, the market is very exciting. De Beers own a company called Element 6 (Carbon being the 6th element in the periodic table). In the industrial space, you may find Element 6 diamonds on the tip of a drill or road-pick helping productivity, as they wear out far less than a normal drill bit. You may also find these diamonds in the high-tech space in semiconductors (as they dissipate heat very effectively) or as ultra-thin diamond windows for lasers. There are many tremendously exciting applications, and we're only seeing the beginning of them.
In the gem space, there are a few companies marketing synthetics. The first thing to note is that the production of synthetic diamonds is very difficult to do at a good quality and manufacturers must disclose their stones are man-made and not natural. All the market research we have done shows that consumers use diamonds to mark special moments in their lives because they are timeless, have been in the ground 3 billion years and are unique. For all of those reasons, when you ask a consumer, particularly a woman, if they would be happy to have a synthetic diamond engagement ring? The answer is no...
AllAboutAlpha: What are the risks to the world diamond market?
Prager: Rather than large-finds and so forth, the big risk comes from global economic volatility that can impact demand. Geopolitical risk is also important. De Beers has been extraordinarily fortunate to work in countries that have good records and history of governance, and use their profits from diamonds well. In Botswana and Namibia for example, we are in full 50:50 joint venture partnerships to mine diamonds. It creates an equitable partnership where both parties are able to meet their expectations. It's important to note that geopolitical risk and volatility don't worry us from an operational perspective per se, but more in terms of how they will impact the global banking system and consumer demand.
AllAboutAlpha: What is the role of ethics and responsibility in the diamond market?
Prager: It's hugely important. As I said earlier, the only source of value in our business is the consumer's desire for the product. That desire is built on emotions ascribed to diamonds, and if they believe they believe the way that diamond has been brought to their finger (the mine to finger journey) does anything other than live up to the values they ascribe to it, we would have a major problem. Your entire commercial model is then at risk. We do a lot of work, and invest a lot of money, people and time to evaluate our supply chain. We also audit and monitor the supply chain after we sell diamonds. Our clients are only allowed to purchase from us if they meet our best practice principles, which are independently audited and cover everything from abiding by the kimberley process to their environmental, labor and other policies.
Not only is bringing diamonds to market ethically the right thing to do, but it also sits at the very core of our commercial strategy.
AllAboutAlpha: What are the key future opportunities for investors and participants in the diamond market?
Prager: Just from a gem opportunity standpoint, China and India hold remarkable potential. We estimate that between 2010 and 2015, there will be 150million new Chinese entering the middle-class. That's a middle-class which increasingly buys diamonds as a gift of love and as a memento of stature.
De Beers also has some exciting technology in mining and sorting, but the biggest opportunity by far is on the luxury side in China and India.
What does this mean for investors and risk managers?
As Mr. Prager identifies, diamonds are fairly unique as a mined commodity, having (in the main) no real intrinsic value or use other than that which is culturally and socially applied.
The diamond market however is one filled with interesting investment opportunities. Demand for the product is outstripping demand, and we are also now seeing many new entrants, technological advances and demand changes that create profit opportunities for investors.
For risk managers, increased transparency within the market can only be a good thing- bringing better price discovery, liquidity and more considered understanding of the firms that participate. Analysis is also revealing that rather than being immune to market movements, diamonds themselves are- like anything- impacted by currency, inflation, interest rates and other drivers of market sentiment.
...and as Anglo American's acquisition of 45% of De Beers of US$5.1 billion in 2012 shows, this glass with attitude has certainly not lost its sparkle.