This years Bain Report into the Diamond Industry

[Garry H (Cut Nut)]

https://www.bain.com/globalassets/noindex/2019/bain_report_global_diamond_report_2019.pdf

I think they missed the impact of online sales on retail pricing.
A fall in retail purchases in $ terms has been happening in most countries as online vendors (and PS) create more transparent markets and lower retail margins.
The volume or quantity of sales is harder to measure for bean counters.

Our measures also show falls in costs per stone, so the actual volume or qty has probably risen quite a lot

 

[Garry H (Cut Nut)]

Market watchers might like to debate my opinion on the fall in prices:

https://www.jewellermagazine.com/Ar...hetic-diamonds-for-the-natural-industrys-woes
There is a popular theory that synthetic diamonds are killing the natural, mined diamond business. That’s fake news! The natural diamond industry is doing a better job at harming itself than the manufactured diamond industry could ever hope to do.

 

[TODiamonds]

Interesting chart. Why do you think it is that stones <1ct have fallen in price over the last decade (especially over the last year) while those larger than 1ct have maintained value?

 

[Karl_K]

Like your article Garry but I think you missed something many women are ok with mmd.
When asked do you want to put 40k into a diamond or get something that looks identical or better and is the same material other than where it is sourced and costs 10k and put 30k towards a house or student loans are picking the house and loans over the diamond.
In the low cost end of the market it is: new cell phone or big TV or a diamond/jewelery. On the lower price end of the market Apple and Samsung are kicking the industry in the rear end.

 

[Garry H (Cut Nut)]

Interesting chart. Why do you think it is that stones <1ct have fallen in price over the last decade (especially over the last year) while those larger than 1ct have maintained value?

Chinese are buying lower colour and clarity than the rich jeweller companies expected.

 

[Karl_K]

Interesting chart. Why do you think it is that stones <1ct have fallen in price over the last decade (especially over the last year) while those larger than 1ct have maintained value?

Part of the reason is before they lost control of the market DeBeers over shot the market with huge price increases. If the chart went back to 2000 it would tell a bit more of the story.
Then in 2008 with the loan mess in the US put a huge damper on sales.
The most common US ering budget has hardly moved in 20 years from around $5k. Optimistically in my opinion some are saying $5500 to $6000 today. Which is a boom for mmd because this generation of ering buyers is getting much less for their money than previous generations with mined goods.
The Chinese market compared to what was expected is a drop in the bucket.

 

[Texas Leaguer]

I find the Bain report to be pretty reassuring to the natural diamond trade. They are predicting stability and a recovery from the imbalances of the last year. They are taking into account factors such as global anxiety over trade wars as well as the impact of synthetic diamonds. I did not see mention of internet sales tax which has been an increasing obstacle for online sales over the past year.

There are assumptions in their somewhat optimistic forecasts, one of which is that the industry will embark on "structured marketing' to compete with other products and "experiences" vying for the consumers' disposable income. This is a reference to the kind of support that DeBeers used to provide to the industry as a whole, and I think it remains to be seen if today's industry, composed of so many disparate small players, can find the will to coalesce in funding an effective campaign to support the category.

 

[TODiamonds]

I find the Bain report to be pretty reassuring to the natural diamond trade. They are predicting stability and a recovery from the imbalances of the last year. They are taking into account factors such as global anxiety over trade wars as well as the impact of synthetic diamonds. I did not see mention of internet sales tax which has been an increasing obstacle for online sales over the past year.

There are assumptions in their somewhat optimistic forecasts, one of which is that the industry will embark on "structured marketing' to compete with other products and "experiences" vying for the consumers' disposable income. This is a reference to the kind of support that DeBeers used to provide to the industry as a whole, and I think it remains to be seen if today's industry, composed of so many disparate small players, can find the will to coalesce in funding an effective campaign to support the category.

These consultant industry reports from Bain, McKinsey, BCG, etc are to be taken with a grain of salt. They are almost always overly optimistic. Here's why.

We (my investment firm) hire them all the time when we are trying to build an internal case for a big investment and we're getting pushback from our investment committee and the board of directors. When that happens, we just spend a few hundred thousand dollars to engage one of the Big 3 mentioned above, Bain sends in an army of fresh Harvard MBA grads who (typically know nothing about the industry) crunch numbers, gather data and do hundreds of mass surveys involving industry participants and voila - you have an industry report. We take said shiny new industry report to our committee and say "Look! Those geniuses at McKinsey did a shit load of work (which we commissioned them to do) and they say it's a great idea". Ass covered. Approval received.

Remember, Bain works for the client. Who's the client in this case? The AWDC. You think they have an interest in what the report says? You betcha.

How would Bain look to the client if they produced a report telling them their industry is in secular decline after they just got paid 300k? Pretty sure they wouldn't be hired again for future "consulting" projects.

 

[Karl_K]

I find the Bain report unconvincing and lacking in several areas.
1: does not address environmental concerns with mines and the pipeline.
2: does not address stability issues in many countries.
3: Mentions new mines but does not address environmental regulations that could keep them from being exploited. If they are mined they will face increased environmental spending, Clean up funds, taxes, and using technology to minimize environmental damage during mining operations.
4: does not mention increased beneficiation costs and taxes.

It glosses over the competition from other goods.
It barely mentions goods and experiences that compete for the same money. Where it is a major factor and challenge facing the industry.
It does not talk about in the US the high student loan and high housing costs that are eating up a significant part of their younger customers budgets.

 

[TODiamonds]

Anecdotally (ie: I have done zero work and have no scientific evidence to confirm this) I can tell you that people my age (36) and my fiance's age (30) are increasingly shifting to MMD stones and other types of stones made from sustainable / environmentally friendly processes, as well as cheaper alternatives like Moissanite because they'd rather spend the enormous savings on their honeymoon or a down payment on a new home as @Karl_K has outlined.

I would also say our social circle is much more affluent than the national average, which likely means this trend is probably even more prevalent across the general population than what I see within my limited circle.

The threat is real... and those of you who refuse to acknowledge it and continue to live under a rock (pun intended) may find yourselves out of business faster than you think.

 

[Garry H (Cut Nut)]

Agreed. What they do miss is that the mass market cheap off white uncertified goods sold in Mauls will be supplanted by MMD. That will reduce the value of goods relegating them back to industrial which are now almost not worth processing.

 

[OoohShiny]

Having aspirations greater than my income I'm interested in the MMD comments in the report.

Some interesting observations and a high level of growth being recorded! (My emphasis in bold.)

Production growth 15–20% per annum with increasing focus on 1 ct, white, excellent, cut stones

In 2018 and 2019, production of lab-grown diamonds increased 15% to 20%, with majority of the growth coming from China. As the lab-grown market evolves, several business models are emerging. Chinese companies primarily use high-pressure, high-temperature (HPHT) technologies to produce rough diamonds, competing on lowest production cost. In the US, companies are pursuing a vertically integrated business model by selling premium branded jewelry. If we assume that early growth in the lab-grown market happened because both wholesale and retail prices were decreasing differentially, allowing players to earn better margins than with natural stones, then wholesale prices have stabilized. We expect additional pressure on retail prices to accelerate lab-grown diamond jewelry sales.

Related to the above quote, Figure 31 was very interesting in terms of retail vs wholesale prices - I wonder if the margins suggested there are consistent across carat/clarity/colour ranges? Either way, it does suggest consumers could potentially seek lower pricing on MMDs:




Figure 44 seems to not have any real commentary attached directly to it but there is mention earlier in the document that I presume refers to it:

Based on lessons learned from natural and synthetic sapphires, we expect lab-grown diamond substitution to stay within 5% to 15% in value terms through 2030. Lab-grown and natural sapphires have remained separate markets for more than 20 years, and synthetic sapphires account for 15% of the total gem-quality market in volume. Lab-grown diamond prices have been falling, which may lead to a sustainable business in costume jewelry. As mines deplete, lab-grown diamonds could offset a portion of the reduction in supply of natural diamonds.

It says MMDs could take 15% of market value, but discusses sapphires in terms of 15% of market volume.

If the suggestion is that wholesale MMD prices are currently 20% of Mined wholesale prices, and that retail margins will be cut to be nearer that level (and wholesale prices to also drop, reducing the impact on margins), does that imply that MMD sales volumes will replace or create up to 5x the Mined sales volumes within the 15% market share? (20%x5=100%) Meaning the overall market for diamonds (both Mined and MMD) will grow?

Does that make any sense?? I'm struggling to say what I'm thinking lol, and I feel like I'm just throwing words at a page...

 

[Texas Leaguer]

One of the assumptions that is debatable pertains to the artificial logic of charting mmd 'discount" at retail and wholesale. Especially the notion that prices of lab diamonds have 'stabilized'.

Since lab diamonds are essentially a technology product rather than a limited natural resource, it will likely track better to Moore's law than to Rapaport!

We have not seen the bottom of synthetic diamond pricing. Not by a long shot.

 

[prs]

In addition to all the uncertified junk diamonds sold in malls, I think the market for very small diamond melee might also be particularly vulnerable. People might not be willing to trade in their rubies or sapphires for man made, but saving significant bucks on the setting might be a whole other story.

 

[Garry H (Cut Nut)]

OhShiny
1. when De Beers new Portland factory starts up next year prices will decouple from natural. There is no validity for CVD as double the weight = double or less cost vs natural 2xCt= 4x$'s
2. Grading will disappear because it will be an added cost with no benefit if the brand is good (e.g. Swarovski)
And CVD equipment is getting very very cheap. Seeems Alibaba has setups for $2,000 to $30,000.

 

[Texas Leaguer]

OK Garry, I think I see a retirement hobby coming into view. I just hope my diamonds turn out better than my beer.

 

[Garry H (Cut Nut)]

OK Garry, I think I see a retirement hobby coming into view. I just hope my diamonds turn out better than my beer.

I was praying someone would take that line Bryan!

 

[Karl_K]

And CVD equipment is getting very very cheap. Seeems Alibaba has setups for $2,000 to $30,000.

CVD machines capabile of doing micron level coatings are one story.. some have even done a diy setup that can do it.
A CVD machine that can run for hours and do multi mm thick material is a whole different story both in cost and complexity.

 

[diagem]

Having aspirations greater than my income I'm interested in the MMD comments in the report.

Some interesting observations and a high level of growth being recorded! (My emphasis in bold.)






Related to the above quote, Figure 31 was very interesting in terms of retail vs wholesale prices - I wonder if the margins suggested there are consistent across carat/clarity/colour ranges? Either way, it does suggest consumers could potentially seek lower pricing on MMDs:




Figure 44 seems to not have any real commentary attached directly to it but there is mention earlier in the document that I presume refers to it:






It says MMDs could take 15% of market value, but discusses sapphires in terms of 15% of market volume.

If the suggestion is that wholesale MMD prices are currently 20% of Mined wholesale prices, and that retail margins will be cut to be nearer that level (and wholesale prices to also drop, reducing the impact on margins), does that imply that MMD sales volumes will replace or create up to 5x the Mined sales volumes within the 15% market share? (20%x5=100%) Meaning the overall market for diamonds (both Mined and MMD) will grow?

Does that make any sense?? I'm struggling to say what I'm thinking lol, and I feel like I'm just throwing words at a page...

My question is, what are MMD values compared to?
If the answer is to naturals, then the whole comparison is moot.
MMD’s have no reason whatsoever that I can think off to be compared in value to naturals. They have enough of their own merits to be valued on.

 

[Garry H (Cut Nut)]

My question is, what are MMD values compared to?
If the answer is to naturals, then the whole comparison is moot.
MMD’s have no reason whatsoever that I can think off to be compared in value to naturals. They have enough of their own merits to be valued on.

Total agreement Yoram,
whats more paying for grading is a waste of money. The stone is up to standard or not.

 

[OoohShiny]

whats more paying for grading is a waste of money. The stone is up to standard or not.

I can totally understand this and I think it is true when looking at Lightbox or a similar product, where a given minimum standard is stated/guaranteed.

I think that it is useful for consumers, though (or at least me as a potential consumer ) because it enables (remote) comparison between individually-cut stones - colourless is colourless, of course, but for some people, they definitely want a D and wouldn't be happy with an F!

I think it will be interesting in terms of light performance assessment as well - if we are potentially looking at MMD rough as being the material of the artisan, cutting exciting and interesting stones and stones with stellar light performance (in ASETscope assessment or in other more intangible terms) that would/could not be cut from Mined rough due to difficulties sourcing suitable rough (because rare/expensive), then grading reports will help empirically show the quality of the cuts (assuming AGS-/ASET-style light assessment etc.)

Perhaps grading reports will end up only being used on 'top of the tree' MMDs?

 

[Garry H (Cut Nut)]

I think it will be interesting in terms of light performance assessment as well - if we are potentially looking at MMD rough as being the material of the artisan, cutting exciting and interesting stones and stones with stellar light performance (in ASETscope assessment or in other more intangible terms) that would/could not be cut from Mined rough due to difficulties sourcing suitable rough (because rare/expensive), then grading reports will help empirically show the quality of the cuts (assuming AGS-/ASET-style light assessment etc.)

Perhaps grading reports will end up only being used on 'top of the tree' MMDs?

OctoNus Publications : Letter to the Editor - Synthetic Appeal

from October 2008. Been agreeing with you for more than a decade OS

 

[OoohShiny]

OctoNus Publications : Letter to the Editor - Synthetic Appeal

from October 2008. Been agreeing with you for more than a decade OS

Trust me to be 10 years behind the curve... LOL