Global Diamond Supply Faces Cliff in 2018

  Global Diamond Supply Faces Cliff in 2018

  Surging Demand in US, China and India Will Overtake Depleted Mines; Major
Shake-Ups in Industry Value Chain Anticipated; Private Equity Turning Eyes to
                             Possible Investments

Business Wire

MOSCOW -- September 4, 2013

The continuing buoyancy for diamond demand in the United States and a growing
appetite for these precious stones in China and India—coupled with depleting
mine inventories around the world and relatively small mines under
development—are projected to cause a significant gap in global diamond supply
and demand, signaling potentially steep increases in rough diamond prices
beginning in 2018, which will have major consequences for industry players up
and down the value chain; this according to the “Global Diamond Industry
Report 2013,” the third annual collaboration on the outlook for the diamond
industry by Bain & Company and the Antwerp World Diamond Centre (AWDC).

Bain’s proprietary forecasting tool projects that rough diamond production
will grow at an average annual rate of 4.8 percent from 2012 through 2018,
reaching a peak level of 169 million carats and a production value of $19.6
billion. Beginning in 2019, average rough diamond production will decline by
1.9 percent annually, leveling off at 153 million carats in 2023, with a
production value of $18.4 billion. Global demand for diamonds is expected to
see robust growth at a compound annual rate of 5.1 percent, reaching $26
billion (using 2012 prices) in 2023—implying higher prices at every stage of
the value chain.

“The absence of significant recent discoveries, coupled with adverse technical
and financing challenges of new mines under development, will strain the
global supply of diamonds in coming years,” said Olya Linde, Bain partner and
diamond industry expert based in Moscow. “The emerging supply-and-demand gap
will greatly disrupt market dynamics for the diamond industry and force all
players to evaluate their business model strategies.”

The in-depth report provides key insights at each stop along value chain,

  *Mining companies feel increased pressure to perform. Rough diamond
    producers reacted to falling prices (revenues decreased 18 percent in
    2012, though significantly recovered from the financial crisis and 2008
    prices pre-crisis), by cutting planned output. Though total rough diamond
    output increased by a modest four percent to 128 million carats in 2012,
    it was still far off its peak level of 176 million carats in 2006. Stable
    prices in the short-term however will increase pressure on mining
    companies to improve operational excellence to maintain margins and
  *Middle market feels the squeeze. Though a balanced supply and demand
    should benefit the middle market (generally polishing and cutting) as
    rough price increases are unlikely to grow as quickly as in the past and
    with access to ample short-term supply, the degree of fragmentation in the
    middle market—with margins for the larger players double or triple the 1-2
    percent levels of some smaller players—should drive continued
    consolidation. Increased performance is also a key for this segment of the
    diamond value chain to achieve higher levels of productivity and
    efficiency, often a result of increased technology deployment
  *Long-term security of supply is a concern for retailers. With diamond
    demand projected to grow unabated for at least the next 10 years,
    companies will be looking for ways to ensure their supply of rough
    diamonds of the required quality and size through a variety of ways and
    channels—from investing in mining assets, to becoming actual sightholders,
    to forming partnerships with existing large middle market players to
    guarantee their sourcing needs

“The entire diamond industry will be affected by the looming supply gap in
four years, with no player left unaffected,” added Bart Cornelissen,
Moscow-based Bain principal and co-author of the report. “This presents both
opportunities and challenges for companies along the value chain.”

Bain is also seeing private equity firms beginning to turn their interest to
the diamond industry, as disruption and consolidation present potential
investment opportunities for financial investors. “Transactions like the BHP
Billiton sale of its Ekati mine to Harry Winston, who in turn sold its retail
business to the Swatch Group (now Dominion Diamond), and talks of Rio Tinto’s
possible sale of its mining assets, certainly sparked interest in this area by
private equity players,” added Linde. As well, a number of players are “high
grading” their portfolios according to Bain, such as De Beers, which sold a
number of unprofitable and smaller mines to smaller players like Petra
Diamonds and Gem Diamonds. Concluded Linde, “Smaller players, like Petra and
Gem, have demonstrated that it’s possible to turn around older mines through a
range of initiatives, processes and technologies—resulting in cost reductions
and improved output, with profitability at or above the industry average. This
can be an attractive investment opportunity for private equity investors as
assets become available for acquisition.”

Editor’s Note: For a copy of the “Global Diamond Industry Report 2013” or to
schedule an interview with Olya Linde or Bart Cornelissen, please contact
Cheryl Krauss at email: or +1 646-562-7863, or Frank
Pinto at email: or +1 917-309-1065. Members of the
Russian media should contact Masha Shiroyan at or +7
495 721 8686.

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English-Language Media:
Bain & Company
Cheryl Krauss, +1 646-562-7863
Russian-Language Media:
Bain & Company
Masha Shiroyan, +7 495 721 8686
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