De Beers report

7/24/2019 De Beers report

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T A B L E O FC O N T E N T SFOREWORD 1

EXECUTIVE SUMMARY 6

01 | DIAMOND INDUSTRY OUTLOOK 13

02 | THE DIAMOND INDUSTRY VALUE CHAIN Global consumer demand 20 Diamond jewellery retail 24

Cutting and polishing 32

Rough diamond sales and distribution 38

Rough diamond production 42

Diamond exploration 46

03 | IN FOCUS Changing consumer preferences and the growth 52

of brands in the United States and China

The miracle of production 66

Safeguarding the industry through technology 74

GLOSSARY 81


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As the diamond industry evolves to respond to recent

consumer trends and macro-economic realities,there are new and sometimes surprising answersto perennial questions. What is the outlook fordiamonds? What are the trends to watch? What dothose involved in the industry from explorationto retail need to do to ensure continued andsustainable success?

De Beers, as the worlds leading diamond company,is uniquely placed to shed light on these questions.For decades, we have undertaken extensive primaryresearch in the main diamond markets and across the

whole value chain. Since the turn of the millennium,our consumer research programme has surveyedsome 800,000 consumers worldwide. The globaltrade research commissioned by us reaches out tothousands of industry participants every year.

We aspire to play a leading role in helping all those

with an interest in the industry understand how andwhy it is evolving. For the rst time, we have broughttogether our wealth of proprietary data and insightinto a single report that provides our perspective onthe global diamond industry in 2013/14 and beyond.

This Insight Report is the rst in an annual series,designed to add depth and detail to other industryinformation sources and to your understanding ofthis multi-faceted industry.

The world of diamonds remains fascinating,challenging and precious. We hope you enjoy

nding out more.

PHILIPPE MELLIERCEO, DE BEERS GROUP

F O R E W O R D


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DISCLAIMERThis report has been prepared by the De Beers Group (De Beers) andcomprises the written materials concerning De Beers and the widerdiamond industry. All references to De Beers in this report refer to the

De Beers Group, unless otherwise stated.

This report has been compiled by De Beers and/or its afliates from sources

believed to be reliable, but no representation or warranty, express or implied,

is made as to its accuracy, completeness or correctness. All opinions and

estimates contained in this report are judgements as of the date of this

report, are subject to change without notice and are provided in good faith

but without legal responsibility.

This report should not be construed as business advice and the insights are

not to be used as the basis for investment or business decisions of any kind

without your own research and validation.

This report is for information purposes only. The information contained in

this report may be based on internal data, or data sourced from, or providedby, third parties or publicly available sources. As such, it may include the

disclosures and/or views of those third parties, which may not necessarily

correspond to the views held by De Beers.

De Beers does not offer any representation or warranty as to the accuracy

or completeness of this report and no reliance should be placed on the

information disclosed for any purpose. Nothing in this report should be

interpreted to mean that De Beers or the diamond industry (as the case may

be) will necessarily perform in accordance with the analysis or data contained

in this report. All written or oral forward-looking statements attributable

to De Beers or persons acting on its behalf are qualied in their entirety by

these cautionary statements.

To the full extent permitted by law, neither De Beers nor any of its afliates,

nor any other person, accepts any liability whatsoever for any direct or

consequential loss arising from any use of this report or the information

contained herein.

This report includes forward-looking statements. All statements other than

statements of historical facts included in this report, including, without

limitation, those regarding De Beers future expectations and/or future

expectations in respect of the diamond industry, are forward-looking

statements. By their nature, such forward-looking statements involve known

and unknown risks, uncertainties and other factors which may cause the

actual results, performance or achievements of diamond markets, or industry

results, to be materially different from any future results, performance or

achievements expressed or implied by such forward-looking statements.

Such forward-looking statements are based on numerous assumptions

made by De Beers in respect of the present and future business strategies

and the wider environment of the diamond industry. Important factors that

could cause actual results, performance or achievements to differ materially

from those in the forward-looking statements include, among others,

levels of actual production during any period, levels of global demand and

commodity market prices, mineral resource exploration and developmentcapabilities, recovery rates and other operational capabilities, the availability

of mining and processing equipment, the ability to produce and transport

products protably, the impact of foreign currency exchange rates on

market prices and operating costs, the availability of sufcient credit, the

effects of ination, political uncertainty and economic conditions in relevant

areas of the world, the actions of competitors, activities by governmental

authorities such as changes in taxation or safety, health, environmental or

other types of regulation in the countries relevant to the diamond industry,

conicts over land and resource ownership rights and other such risk factors.

Forward-looking statements should, therefore, be construed in light of such

risk factors and undue reliance should not be placed on forward-looking

statements. These forward-looking statements speak only as of the date of

this report. De Beers expressly disclaims any obligation or undertaking to

release publicly any updates or revisions to any forward-looking statement

contained herein to reect any change in De Beers expectations with regard

thereto or any change in the events, conditions or circumstances on which

any such statement is based.

Forward-looking statements


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D O W N S T R E A M

THEJ O U R N E YOF AD I A M O N D

G L O B A L

C O N S U M E RD E M A N D

D I A M O N D

J E W E L L E R YR E T A I L


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M I D S T R E A M

U P S T R E A M

C U T T I N G ,P O L I S H I N G A N D

J E W E L L E R YM A N U F A C T U R I N G

R O U G H D I A M O N DS A L E S A N D

D I S T R I B U T I O N

D I A M O N DE X P L O R A T I O N

R O U G HD I A M O N D

P R O D U C T I O N


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This report aims to provide an annual perspective

on the global diamond industry, drawing on TheDe Beers Group of Companies extensive proprietarydata and insight as well as other industry sources.

The report is divided into three sections: Section 1provides an outlook for the global diamond industry;Section 2 describes the 2013 performance and keytrends to watch in each part of the diamond industry

value chain; and Section 3 highlights three In Focusareas of particular importance to the industry. This

years report focuses on the changing consumerpreferences in the worlds largest and fastest-growingdiamond jewellery markets, the US and China; onhow technology is helping to safeguard the industry;and on the miracle of production, showcasingchallenges and innovation in rough diamond mining.

SECTION 1: DIAMOND INDUSTRY OUTLOOK

In contrast with precious metals and other naturalresources industries, which rely on multiple sourcesof demand, the diamond industry derives practicallyall its value from consumers demand for diamond

jewellery. The outlook for the industry is thusintrinsically linked to consumer demand. Even under

scenarios of volatile or weaker global economicgrowth, demand for diamonds is expected toshow positive real growth in the next decade.

Positive demand growth for diamonds will almost

certainly outstrip growth in carat production, giventhe lack of major new discoveries in the last decadeand the projected slowdown in several existing mines.

Across the value chain, companies that are able toinnovate and differentiate themselves will be bestpositioned to capture the opportunities createdby this supply demand dynamic.

Relentless focus on two main areas will help theindustry to achieve its full growth potential overthe coming years:

The rst is safeguarding and nurturing the diamond

dream that is, the allure that diamonds have forconsumers, based on their association with romanceand a sense of the eternal, and the fact that theyare seen as a lasting source of value. As always,changing consumer preferences, competition fromother luxury categories, and among other risks the potential confusion caused by undisclosedsynthetics all pose challenges for the entire industry.

The second is for companies across the whole valuechain to innovate and differentiate, to take fulladvantage of opportunities created by the expectedgrowth in demand.

E X E C U T I V ES U M M A R Y


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With these priorities in mind, three areas ofinvestment are likely to be particularly important:

1. Investment in branding, marketing and raisedretail standardswill help ensure that consumers,particularly among new generations and newmarkets, do not drift away from the diamond

jewellery category in favour of competingcategories, such as travel, coloured stones,electronic accessories or designer fashion.

2. Investment inproductionto drive innovation andproductivity in diamond supply. Diamonds havealways been a rare and precious resource, and asmining moves deeper into the earth and towardsmore remote locations, the extraction process isnow becoming increasingly complex, remote andmore costly.

3. Investment in technologywill continue to be akey differentiator across the value chain, while

also safeguarding consumers against the riskof undisclosed treatments and synthetics, whichcould undermine the long-term credibility ofthe industry.

Lack of investment in these areas could hampergrowth for the industry as a whole.

The industrys overall supply and demand dynamicsshould generate value-creating business opportunitiesthat will enable such investments. However, scale anddifferentiation will be increasingly important factorsfor future success, across all parts of the value chain.

The industry is likely to continue to consolidate andintegrate (including through vertical integration).It is also expected to continue professionalising,modernising and becoming more transparent in the

years to come to the benet of all those involvedwith this precious resource, from the geologistseeking the next big nd to the bride wearing herdiamond wedding ring.

SECTION 2: THE DIAMOND INDUSTRY VALUE CHAIN

Consumer demandfor diamonds has shown positivenominal US dollar (USD) growth in the last ve years,

with compound annual growth in diamond value justunder ve per cent from 2008 to 2013. In this period,growth was driven mainly by the emerging economiesof China and India, as well as the US, since 2010, while

Japan and the main European markets have shownbelow average growth trends in this period.

The diamond jewellery retailsector is highlyfragmented worldwide with a variety of businessmodels serving a wide range of target consumers.The sector has experienced a range of nancialreturns. In developed markets, many jewellery

retailers are failing to cover their cost of capital,resulting in negative returns and the closure ofchains as well as smaller jewellers.

The recent acquisition of jewellery chain ZaleCorporation by Signet Jewelers, another jewellerychain, illustrates the potential for consolidation inthe jewellery retail sector.

Overall, retailers in emerging economies haveoutperformed their peers in developed economies,partly because of the recent fast growth of themiddle classes and partly because of the rapidpace of store openings to supply growing demandin new geographies.

The online channel is becoming increasinglyimportant around the globe, although consumersare going online for different reasons in differentcountries. In the US, the internet is becomingimportant as a sales channel in its own right: morethan one-tenth of diamond jewellery sales in theUS were made online in 2013. While online is not

yet a signicant sales channel in China, the internet

is used by a quarter of acquirers for researchpurposes before purchase.

Many specialist ne jewellery retailers such asTiffany, Cartier, De Beers Diamond Jewellers andChopard continue to invest in product offers andstore modernisation to support the diamond dream.

Another major trend to watch is increasing activity byglobal luxury fashion houses such as Dior and Chanelin the sale of diamond jewellery. These global brandsalso support the diamond dream, and are raisingconsumer expectations of the store environment,in new design generation and customer service.

Branded diamonds and branded diamond jewellerypresent a growth opportunity for diamond jewelleryretailers in both developed and emerging economies.Consumers worldwide increasingly prefer brandedproducts and services. Brands can also be an attractivenancial proposition for retailers because the brandidentity frequently offers differentiation from genericpropositions. The additional revenue that can begenerated from brands should make it possible forretailers to invest in their store environment and inpromoting their businesses and the category, leading

to a virtuous circle of growth.

Cutting and polishingremains fragmented, withmidstream companies under pressure from acombination of increasing costs in the upstream, theavailability of credit and price-point requirementsfrom their retail customers. The nancing challengesare increasingly critical and could intensify over thecoming years, as banks apply more stringent lendingstandards to the cutting and polishing industry. Onepossible consequence is that some companies mayexit the industry, leading to greater consolidation.

Over time, those rms able to add signicant value tothe diamond cutting and polishing process, and thosewith transparent corporate and nancial structures,are more likely to be successful.


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The shift of cutting and polishing operations towards

low-cost centres in India and the Far East is likely tohave reached its peak. Over recent years, producingcountries such as Botswana, South Africa andNamibia have been striving for increased domesticbeneciation. However, the development of a long-term sustainable cutting and polishing industry willrequire not only government intervention but alsointernationally competitive productivity levels.

Rough diamond sales and distributionchannels arecontinuing to evolve, as producers experiment withsales methods to maximise the value of their roughdiamonds. Over the last ve years, auctions have grownin importance and it is possible that, as technologycontinues to evolve, this trend will continue. However,the major rough diamond producers are expected tocontinue to rely predominantly on long-term contractsto sell their production.

Producing countries have been playing a moreimportant role in the sale and distribution of roughdiamonds. This is driven by national governmentsdesire to increase their share of value from theprimary resource. The continuing trend towardsin-country beneciation of diamonds saw perhaps

its largest milestone yet in 2013, with the move ofDe Beers Global Sightholder Sales to Botswana, andthe organisation of De Beers rst ever internationalSight in Gaborone in November 2013.

Rough diamond productionwas an estimated 146

million carats in 2013, well below the 2005 peak ofover 176 million carats mined1.Overall diamondsupply is expected to increase moderately in the nextfew years, driven by new projects coming on-stream.By 2020, when many existing mines will begin tosee declining outputs, overall supply will be likelyto plateau and, unless major new discoveries aremade in the coming years, supply can be expectedto decline gradually from 2020.

Diamond production is becoming increasinglychallenging as mining moves towards deeper, lessprotable and more remote sources of diamonds.This trend is explored further in the In Focuschapter, The miracle of production.

Explorationspend is expected to remain high asthe chase to nd the next major source of diamondsintensies. Today, most of the diamond explorationspend takes place in historically underexplored

African countries such as Angola, the DemocraticRepublic of Congo (DRC) and Zimbabwe, as wellas the vast swathes of Arctic Siberia and Canada.Large-scale protable discoveries will most likelyremain elusive, however. Viable diamond deposits

of any scale are rare and difcult to nd, and noamount of investment in exploration guaranteesthe discovery of deposits on which sustainablemining operations can be built.


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In reality, exploration spend for diamonds has notkept pace with that for other natural resources; it isnow at practically half the record levels seen in 2007,

when the industry was spending almost US$1 billionper year on diamond exploration. This situation is notexpected to change in the near future, as the globalmining industry overall continues to face pressure

on capital expenditure.

SECTION 3: IN FOCUS

Changing consumer preferences and the growth ofbrands looks in detail at how the consumer landscapeis changing in the US and China. Notwithstanding themarkets vertiginous growth over the last ve years,China still offers a tremendous growth opportunityfor the industry. Penetration of diamond jewellery isstill relatively low and consumers desire for diamondsis high. The situation in the US, a more maturemarket for diamonds, is different. Fine jewellery hasgrown more slowly than other luxury categories inrecent years. However, there are promising growthareas in the US too, not least in bridal jewellery andbranded diamonds and diamond jewellery, whichhave performed particularly well in recent years.

Safeguarding the industry through technologydescribes the vital role played by technology acrossthe entire diamond value chain. Geologists relyon technological innovation to help them discovernew, viable sources of diamonds in locations thatare often hard to access and difcult to work in,such as the Arctic Circle. Mining companies also

look to technological innovation to keep operatingcosts as low as possible. Rough diamond producersare dependent on automated high-speed technologyto sort diamonds. Laboratories and cutting centresrely on detection equipment to identify undisclosedsynthetics and treatments, which pose a challengeto consumers condence in diamonds.

The miracle of production explores the increasingcomplexity and cost of mining diamonds. This sectionexplains what it takes to bring a diamond to themarket in the 21st century, and offers an insight intothe day-to-day realities and costs of diamond miningat the extremes of the earth.


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1. Diamond demand will continue to grow inreal value terms, driven by the effect of the USeconomic recovery and the continued growthof emerging markets, especially China.

2. Positive demand growth for diamonds willalmost certainly outstrip growth in productionvolume in the medium term. Across the valuechain, organisations that are able to innovateand differentiate themselves will be bestpositioned to capture the opportunities created

by this supply demand dynamic.

3. There will be strong competition from otherluxury categories, and investment will be requiredto safeguard and nurture the diamond dream.

4. Brands will become increasingly important consumers are seeking them out, and theygive retailers an opportunity to differentiatethemselves from generic propositions.

5. Online is rapidly increasing in importanceas a channel for both research and sales ofdiamond jewellery to consumers, and willcontinue to do so though the pattern differsby geographic market.

6. The midstream will continue to come undercompetitive pressure and, as a result, willprofessionalise and consolidate; businesses withscale and/or differentiated strategies will thrive.

7. Beneciation will continue to be importantfor countries and regions where diamondsare mined.

8. Diamond production will decline slowly after2020 with low likelihood of large, economicallyviable new nds.

9. As supply from existing mines decreases, miningwill become increasingly complex and remote,and increasingly costly as a result. Investmentin operational innovation will be required todrive productivity.

10.Technology will remain critically important tosupport the whole value chain, including insafeguarding the diamond dream from the riskof weakening consumer condence as a resultof undisclosed synthetics and treatments tonatural diamonds.

THE FUTURE AT A GLANCE


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01D I A M O N D I N D U S T R YO U T L O O KIn contrast with precious metals and other natural resources industries,which rely on multiple sources of demand, the diamond industryderives practically all its value from consumers demand for diamondjewellery. The outlook for the industry is thus intrinsically linked to thestrength of consumer desire for diamonds.

Positive demand growth for diamonds will almost

certainly outstrip growth in carat production in thenext 10 years, given the lack of major new discoveriesin the last decade and the projected productionslowdown in several existing mines. Even underscenarios of volatile or weaker global economicgrowth, demand for diamonds is expected to showpositive real growth in the next decade. Across the

value chain, companies that are able to innovateand differentiate themselves will be best positionedto capture the opportunities created by this supplydemand dynamic.

A positive supply demand outlook is shared by anumber of external experts. For example, in itsrecent publication on the global diamond industry,McKinsey & Company sets out four potential futurescenarios for the diamond industry2(see Fig. 1).In every scenario, demand growth outstripsproduction growth. De Beers has undertaken somemodelling of potential rough diamond supply anddemand based on McKinseys Diamonds are Foreverscenario, and the relative supply and demand curvesare shown in Fig. 2. Other industry analysts haveexpressed similarly positive views (see Fig. 3).


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F IG. 1: F O U R F U T U R E S C E N A R I O S F O R T H E D I A M O N D I N D U S T R Y

1 IAMONDRE F REVER

Consumer demand grows strongly, fuelled by recovery in the US economy and continued above-

average growt in emerging mar ets, especia y C na an In ia. Bran s ecome more important anincreasingly invest in promoting the allure of diamonds. Even with demand in Europe and Japanoftening, the dynamics of supply and demand in this scenario mean that previously uneconomical

mining projects become economically viable, so production is maximised.

2 EM NDH K

Diamond demand grows more slowly as key consumer markets such as the US, China and Indiaexperience weak growth. Companies lose the incentive to invest heavily in brands, and diamonds loseome appeal through a lack of investment in promoting the diamond category and consumers moving

away from conspicuous consumption. Production remains stagnant but recycling of diamond jewellery

increases as consumers encounter financial distress.

3 EA T ANDAMINE

he diamond industry develops in a volatile manner, driven by high levels of global macro-economicuncertainty. Strong rises in eman are fo owe by sharp decreases, leading to scattered supply

expansion. Lead-time between the demand and supply cycles implies a wide variation in prices.Mining companies strive to diversify their mining assets to manage volatility and adapt to the growingresource nationalism trend. Consumers increasingly move away from diamonds, and brands slow down

their investments.

4 A T RENEWL BAL

R WTH

he industry enjoys strong growth driven by emerging markets, especially China and India. However,US growth is only moderate. The consumer base for diamonds widens as the emerging middle classrows and consumers show a distinct preference for rands. Diamond producers will continue to investn developing new supply projects.

McKinsey recently published a report, 'Perspectives on the Diamond Industry'. Building on four key uncertainties, the macro-economic out oo , future conso i ation in t e va ue c ain, consumer attitu es to iamonds, and the supply of rough

diamonds, the report identified four future scenarios for the global diamond industry.

ource: McK nsey ompany, Perspectives on the Diamond Industry, eptem er 20 4

Source: De Beers analysis, McKinsey & Company, Perspectives on the Diamond Industry, September 2014

F I G . 2 : S U P P LY A N D D E M A N D C U R V E B A S E D O N D I A M O N D S A R E F O R E V E R S C E N A R I O

Demand forecast value in nominal terms (smoothed)

Production forecast in value at 2013 prices

2025F2024F2023F2022F2021F2020F2019F2018F2017F2016F2015F2014F

60

80

100

120

140

160

180

Index base 100 in 2014


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F I G . 3 : D I A M O N D S U P P L Y A N D D E M A N D : P E R S P E C T I V E S F R O M T W OI N D U S T R Y A N A L Y S T S

Deman is set to strengthen rapi ly, etermine by therecovery of consumer confidence in two key markets:

T e US, w ic represents t e argest s are of g o ajewellery sales. All in icators point to the fact thatt e US wi remain strong going forwar .

China, which will un erpin iamon growth in themedium term, as penetration of diamond jewellerypieces increases. Jewellery growth in China isexpecte to remain ro ust, wit ea ing retai erssuch as Chow Tai Fook reporting 32 per cent higherretai revenue over t e 20 4 C inese New Year.

Production will be increased by a set number of projectscoming online including:

Petra s propose expansion of Finsc an Cu inan,which will lift pro uction from ~3 million carats peryear in 2014 to over million carats per year in 2019.

Grib: 4 million carats per year. Gahcho Ku: 4 million carats per year by the end of 201 . Renard: 1.5-2 million carats by the end of 2017.

Diamond demand is expected to expand at aCompound Annual Growth Rate (CAGR) of 11 percent in nominal value between 2013 and 201 ,

riven by:

Cyclical recovery in US consumer spen on luxurygoo s as economic growth recovers.

Structural demand growth from emerging markets onthe back of higher penetration of iamon jewelleryamong a growing middle class.

Global natural supply is expecte to increase at anaverage rate of 5.2 per cent between 2013 and 201 :

Output in establishe mines falls as ol er mines cometo the end of their life or move to underground mining.Going underground will make it difficult to maintainexisting output levels ue to a itional haulage timean the technical challenges that come withunderground mining.

New mines coming online (including Grib, Gahcho Ku,Bun er, Karponskogo, Star-Orion South an Renar )represent only 17 million additional carats per year.

Source: Goldman Sachs, Get engaged with Russian diamonds: Initiating as Buy, 9 December 2013BC, Diamond Digest, 4 March 0 4

DIAMOND DEMAND DIAMOND S PPL


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Source: De Beers

F I G . 4 : C O N S U M E R D E M A N D A N D D E B E E R S R O U G H D I A M O N D S A L E SO V E R T I M E ( 1 9 8 0 - 2 0 1 3 )

Nominal De Beers rough diamond sales

US recession years

Asia/Japan financial crisis

Consumer demand (Nominal USD PWP)

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NOMINALDE BEERS

ROUGH SALESPWP

However, the positive supply demand outlook can beexpected to be impacted by the cyclical nature of theindustry. It is especially prone to the ripple effectcaused by de-stocking and re-stocking by midstreamoperators to full lower or higher demand. Despitethis, over the past 50 years rough diamond values haveconsistently recovered as economic growth rebounds

(see Fig. 4).

THERE ARE TWO KEY ASPECTS TO THE HEALTH OF THEDIAMOND INDUSTRY IN THE NEAR FUTURE

The rst is safeguarding and nurturing the diamonddream that is, the allure that diamonds have forconsumers, based on their association with romanceand a sense of the eternal, and the fact that they areseen as a lasting source of value. As always, changingconsumer preferences, competition from otherluxury categories, and among other risks thepotential confusion caused by undisclosed syntheticsand treatments all pose challenges for the entirediamond industry.

The second is innovation and differentiationto takefull advantage of opportunities created by the expectedgrowth in diamond demand.


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With these aspects in mind, three areas of investmentare likely to be particularly important for future growth:

1. Investment in branding, marketing and raisedretail standardswill help ensure that consumers,particularly among new generations and newgeographic markets, do not drift away from thediamond jewellery category in favour of competingitems, be they experience categories such as travel,electronic accessories or designer fashion.

2. Investment inproductionto drive innovation andproductivity in diamond supply. Diamonds havealways been a rare and precious resource and, asmining moves deeper into the earth and towardsmore remote locations, the extraction processis now becoming increasingly complex, remoteand more costly.

3. Investment in technologywill continue to be akey differentiator across the value chain, and

will also safeguard consumers against the riskof undisclosed synthetics and treatments, whichcould undermine the long-term credibility ofthe industry.

Lack of investment in these areas will be valuedestructive for the industry as a whole.

Overall, supply and demand prospects shouldgenerate value-creating business opportunitiesthat will enable such investments. However, scaleand differentiation will be increasingly importantfactors for future success, across all parts of the valuechain. The industry will continue to consolidate andintegrate (including through vertical integration),

and to professionalise, modernise and enhance itstransparency. This will be critical if it is to stay relevantand protable. Companies with scale will be betterpositioned to make such changes proactively andtherefore to benet from the continued growth ofthe sector. Niche companies will have to differentiatefurther their value propositions.

It is the responsibility of the entire industry, especiallythose organisations of scale, to continue to makethese investments and secure the future of theindustry in the face of changes and challenges tothe sector. The In Focus section of this InsightReport discusses these three investment areas: thechanging consumer; the challenges in rough diamondproduction; and the imperative of using technology tosafeguard the consumer and the industry overall.


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02T H E D I A M O N D I N D U S T R YVA L U E C H A I NThis section of the report examines each stage of the diamond valuechain in turn, providing a snapshot of how the industry has performedrecently and one perspective on what the future may hold.


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G L O B A L C O N S U M E RD E M A N D

2013 SNAPSHOTGlobal diamond jewellery sales were an estimatedUS$79 billion in 2013, growing at over three percent in nominal value in 2013 in USD terms vs 2012,ahead of the compounded annual rate of growthexperienced between 2008 and 2012 (see Fig. 5).China continues to be the main growth engineof diamond jewellery demand, but the US alsoperformed particularly well in 2013.

In terms of polished diamonds contained in diamondjewellery at cutting centre wholesale value (so calledPWP or polished wholesale price), demandincreased by over three per cent from 2012 to 2013,to reach approximately US$25 billion (see Fig. 6).The two biggest markets, the US and China, bothgrew by more than the global average, with sales ofpolished diamonds increasing seven per cent in theUS and 14 per cent in China, measured in USD terms.In contrast, both India and Japan saw sales fall (by sixper cent in Japan and 10 per cent in India, measuredin USD terms).


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Source: De Beers

F I G . 5 : D I A M O N D J E W E L L E R Y V A LU E , G R O W T H B Y G E O G R A P H YUSD billion (nominal)

Note: Gulf includes Saudi Arabia, UAE, Qatar, Kuwait, Oman and Bahrain

40

80

0

60

20

2008 2009

3.4%3%

US

Japan

Gulf

China

India

Rest of World

2013201220112010

2%

1%

18%

6%

1%

4%

2008-2012 CAGR 2012-2013 GROWTH 2008-2013 CAGR

USD

LOCAL

CURRENCY

-2%

12%

12%

4%

Source: De Beers

F I G . 6 : P O L I S H E D D I A M O N D V A L U E , G R O W T H B Y G E O G R A P H YUSD billion (nominal)

Note: Gulf includes Saudi Arabia, UAE, Qatar, Kuwait, Oman and Bahrain

5

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Rest of World

2011

India

20132009 201220102008

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US

Japan

Gulf

China

2%

4%

20%

6%

2%

3%

2008-2012 CAGR 2012-2013 GROWTH 2008-2013 CAGR

USD


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US consumers account for the largest share of globalpolished demand (ie polished diamond content) inUSD terms at approximately 40 per cent, followed byChina/Hong Kong/Macau (approximately 15 percent), India (approximately eight per cent), the GulfRegion3(approximately eight per cent) and Japan(approximately six per cent). Consumers in these top

ve markets accounted for approximately 77 per centof total demand for polished diamonds in USD termsin 2013.

All main geographic markets consume all types ofpolished diamonds. However, with the exception of theUS, which has a more evenly distributed consumptionacross all types of polished diamonds, other marketshave particular focus areas of polished diamonds(see Fig. 7). For example, India consumes mainlystones under 0.08 carats of all clarities, while Chinaconsumes mainly stones between 0.18 carats and 0.99carats of medium and high clarity. In recent years,there has been growing demand for larger and higherclarity diamonds in both the US and China. This willprobably mean increased competition to secure supplyof the best jewels and, potentially, an increasing shiftin value towards those types of diamonds.

Another characteristic of the diamond jewellerysegment is the seasonality of demand. Differentgeographic markets have different shopping seasons,but Q4 tends to be the main sales season globally,followed by Q1. Fig. 8 illustrates the main periods ofdiamond jewellery acquisition by consumers for thethree largest diamond consumer markets. Of note

is the pronounced seasonality of the US in which ahigh proportion of pieces are acquired by consumersbetween Thanksgiving and Christmas. Other marketshave slightly less pronounced seasonal patterns.

LOOKING AHEADA detailed view of future consumer trends for thediamond industrys most important markets, the USand China, is provided in the In Focus section of thisreport: see Changing consumer preferences and thegrowth of brands in the United States and China.

Source: De Beers

F I G . 7 : T Y P E O F P O L I S H E D D I A M O N D S O L D I N M A I N D I A M O N D J E W E L L E R YM A R K E T S , B Y S I Z E B A N D

Note: Large = 1+ carat, Medium = 0.18-0.99 carat, Small =


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Source: De Beers

F I G . 8 : S E A S O N A L I T Y O F C O N S U M E R D I A M O N D J E W E L L E R Y ( D J )A C Q U I S I T I O N S B Y M A I N M A R K E T

US

30

20

10

0

5

15

25

35

DecNovOctSepAugJulJunMayAprMarFebJan

ChinaIndiaUS

INDIA

CHINA

EngagementsValentinesDay

MothersDay

Wedding seasonThanks-giving

EngagementsChristmasNew Year

Wedding season

ChineseNew Year

Diwali/Weddingseason

GoldenWeek

ChineseValentinesDay

GoldenWeek

Monthly distribution of DJ acquisitions, per cent


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D I A M O N D J E W E L L E R YR E T A I L

2013 SNAPSHOTDiamond jewellery retail is a highly fragmentedsector with over 200,000 retail doors selling diamond

jewellery worldwide.

The past few years saw a marked contrast betweendeveloped and emerging markets in the performanceof diamond jewellery retailers. In developed markets,retailers have faced pressures from a weak economicenvironment and strong competition from brandedluxury goods and experiential categories, as wellas the low-price models of ecommerce companies.On the other hand, the growing middle classes andincreasing consumer appetite for diamonds haveallowed retailers in developing markets, together withthe less prevalent ecommerce models, to enjoy highermargins and return on invested capital, althoughthese too have started to come under pressure.


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DEVELOPED MARKET RETAILERS ARE UNDER PRESSURE, BUTSOME BUSINESS MODELS PERFORM STRONGLY

In developed markets, multiple business models existwithin diamond jewellery retail, ranging from luxurychains to small, independent, family-owned stores.Many of the large listed retailers across the US, Japanand Europe have failed to meet their cost of capital,resulting in negative returns4(see Fig. 9). Leading USspeciality jewellery chains closed over 2,000 doors inthe last ve years, with several traditional large chainssuch as Whitehall, Friedmans and Finlay no longertrading5(see Fig. 10). No new jewellery retail chainsof scale have emerged to replace the doors lost whenthese stores ceased to trade.

Not all developed market retailers make returns belowtheir weighted average cost of capital (WACC). Amongseveral retailers that have established successfulbusiness models is Tiffany, which maintains one of

the highest margins of its peer group6. Blue Nile isanother example: the company is unusual in achievingnegative working capital by minimising inventory andmaximising payables, as consumers pay for their itemsbefore they have been acquired by Blue Nile7.

FIG. 9: FINANCIAL RATIOS FOR A SELECTION OFLISTED JEWELLERS IN DEVELOPED MARKETS

Source: Bloomberg

Per cent

i Blue Niles 2013 annual report states that the company hasnegative working capital

ROIC2012 Most recent

EBIT2012 Most recent

SignetJewelers

15 1415 14

ZaleCorporation

7 35 1

JC Penney -13 -10-2 -11

Blue Nilei 40 354 3

JewelryTsutsumi

3 133 13

Tiffany 15 2119 18US

TasakiShinju

5 1-2 -3JAPAN

Damiani -5 -4-6 -5EUROPE

FIG. 10: UNITED STATES JEWELLERY CHAINSDOORS OVER TIME

Source: Company filings

i Signet Jewelers acquired Ultra in 2012, with stores nowincorporated in Signet Jewelers (US) total

ii Signet Jewelers acquired Zale Corporation in 2014

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

6,500

6,000

5,500

5,000

4,500

411317

274

155

9588

2013

3,847

1,679

1,471

300 23410459

2006

6,275

2,350

1,307

793

485

Reeds

Fred MeyerGitanjali

Helzberg

Signet Jewlers (US)

Friedmans

Whitehall

Zale Corporationii

Finlay

Ultrai No longer trading

Chains ranked top 10 in 2006


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ON THE WHOLE, E MERGING MARKET RETAILERS HAVEOUTPERFORMED DEVELOPED MARKETS

For retailers in emerging markets such as China andIndia, sales of gold and gold jewellery, normally alow margin category, represent the majority of theirrevenues. However, retailers in these markets sellingdiamond jewellery have beneted from structuralfactors: growing economies, an increasing base ofconsumers with appetite for diamonds and expandingnumber of stores selling diamond jewellery. InChina, there is also a benet from relative sectorconsolidation, with multiple jewellery retailersoperating at scale.

Over the past few years, however, EBIT margins(which for the major listed developing market

jewellers are similar to those of leading developedmarket peers) have come under pressure8as jewelleryinput costs have increased and the pace of expansion

has slowed (see Fig. 11). In addition, gold demandvolatility has also played a role in weakening nancialresults. As economic growth decelerates in the nextfew years, and competition increases, it is likely thatmargin pressures will also build for diamond jewelleryretailers in emerging markets.

THE IMPORTANCE OF ONLINE CHANNELS RISES ACROSSTHE WORLD

Both emerging and developed markets saw a rise inthe importance of online channels in 2013. More

than one in six diamond jewellery purchases inthe US were made online in 2013, a growth of over30 per cent since 2011 (see Fig. 12). Going onlinealso remains the most popular way for consumersto research a purchase in the US: almost four in 10consumers go online for research purposes beforebuying, ahead of other touch-points such as jewellerystores and advertisements (see Fig. 13).

Although online is not yet a signicant sales channelin China, the internet is already used by a quarterof acquirers for different purposes, such as to learnabout ne jewellery quality and prices, to learn about

brands, and to pre-select designs. The internet is usedmore frequently in the diamond purchase process bysingle women, half of whom use it, and also by afuentconsumers, about six in 10 of whom research online.

Online, including mobile usage, can be expected togrow in importance for diamond jewellery retailerseverywhere, be it for research purposes before apurchase or as a sales channel (pure or hybrid, via

web sales with store pick-up).

FIG. 12: GROWTH OF ONLINE DIAMOND JEWELLERY

SALES IN THE UNITED STATES

Source: De Beers

2013

13

18

2011

12

13

2006

5

8

Per cent of value

Per cent of pieces

Share of online acquisitions in total womensdiamond jewellery market

FIG. 11: FINANCIAL RATIOS FOR A SELECTION OFLISTED JEWELLERS IN EMERGING MARKETS

Source: Bloomberg

Chow SangSang

7 477

Luk FookHoldings

22 121119

Lao FengXiang

15 4514

HengdeliHoldings

8 81110

ThangamayilJewellery

1 1512

TribhovandasBhimji Zaveri

8 7912

ROIC2012 Most recent

EBIT2012 Most recent

Chow TaiFook

14 1215 13CHINA

TitanCompany

22 101035INDIA

Per cent


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FIG. 13: PRE-PURCHASE TOUCH-POINTS FORDIAMOND JEWELLERY ACQUIRERS IN THEUNITED STATESPer cent of acquisitions in 2013

i Multiple responses allowedii Includes all forms of advertising for a piece of diamond jewellery

or brandiii Refers to DJ acquirers who selected look in magazines to see the

range of options

11

19

32

34Online

Magazinesiii

Advertisingii

Jewellery stores

% OF PIECESi % OF ACQUIRERSi

12

22

36

38


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ource: De Beers

1 OFFERIN A UNIQUEPR P ITI N

ewer than one per cent of the worlds diamonds are eligible to become aForevermark diamond.

randed diamonds with strong consumer ene ts can comman a pr ce prem umover unbranded products, translating into a margin uplift.Forevermark provides retailers and consumers alike with the total confidencethat their Forevermark diamond is not only natural and untreated butresponsibly sourced.

Retailers can utilise the Forevermark brand in designs tailored to specific markets andconsumer tastes. I also love the fact that, while Forevermark is a brand in and of itself, we areable to customise the offering and the marketing message to fit our merchandise and imagestrategies. Coleman Clark, B.C Clark Jewelers.

2 INVE TIN IN AWARENEAND DRIVIN F TFALL ACON UMER EEK OUTFOREVERMARK TOCKI T

aunc e in C ina in 2008 an Nort Amer ca in 20 , Forevermar now as over476 and 402 retail partners in the countries respectively.The Forevermark brand continues to make gains in brand awareness in the topdiamond jewellery markets: in 2013, prompted awareness in the US reached one thirdof consumers, and in China prompted awareness was 44 per cent.

Forevermark recently celebrated its one millionth inscription globally, with 45,000diamonds inscribed in the US in 2013, a year-on-year increase of 66 per cent.

e Forevermar US Center of My Universe campaign in 2012 and 2013 wasenthusiastically received by both consumers and retailers: very pleased with overalltraffic that was brought in due to the campaign. Three times better than last years.Forevermark retailer.

3 ENHANCIN THEPURCHA IN EXPERIENCEFOR CON UMER

Consumer initiatives such as branded in-store diamond viewers enhance theconsumers experience, creating a dialogue around the product. Getting a clientinvolved in viewing the Forevermark icon and inscription number is a must. John Borghes,

arci ewe ers.

FIG. 14: HOW THE FOREVERMARK BRAND IS SUPPORTING RETAILERS

LOOKING AHEAD

BRANDS MAY HELP OVERALL PERFORMANCE, ESPECIALLY INDEVELOPED MARKETS

One way for the retail industry to improve itsnancial performance could be a greater emphasis

on branded diamonds and diamond jewellery.Increasing consumer preference for brands is evidentin the US from the jump in claimed acquisition ofbranded engagement rings, from just seven per centof consumers in 2002 stating that their diamondengagement ring (DER) was branded to one-third ofconsumers in 2013 claiming that this was the case.

By offering brands with a specic positioning, and astory that goes beyond the 4Cs, retailers are able toaddress consumer needs for emotional engagement,differentiate the product from generic offerings andreinforce the diamond dream. While scale companiesare better placed to make the level of investmentrequired to benet from this growing preference, allretailers have the potential to benet from this trend.

Branded diamond jewellery can also be an attractivenancial proposition for retailers. Successful brandstypically command a price premium above genericproducts. This is based upon factors such as polisheddiamonds beauty and appearance, jewellery design,

higher levels of consumer condence, and superiorservice, offering retailers opportunities to differentiatefrom generic propositions (see Fig. 14).

The additional revenues from brands help retailersto invest further in the in-store experience and inpromoting their businesses and the category,helping to generate growth.

GLOBAL LUXURY BRANDS ARE SUPPORTING THE DIAMONDDREAM AND CHANGING CONSUMER EXPECTATIONS

Many global luxury players such as Chanel and Diorhave entered the market for diamond jewellery, andtheir approach to retailing is raising the bar for all(see Fig. 15). As consumers become accustomed tothe retail standards set by the luxury houses, theirexpectations of the store environment and customerservice are rising with important consequencesfor other ne jewellery retailers.

Global luxury companies are not only changingconsumer expectations of how to buy, but alsoconsumer beliefs about what to buy. When selectingdiamonds, a consumers focus is often on acquiringthe best diamond possible: the carat content andquality are critical. Global luxury brands are oftentrying to shift the focus towards acquiring distinctivedesigner pieces, adorned with diamonds.


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If I have chosen diamonds it is because they representthe highest value in the smallest volume

Ga rielle Chanel

hanel is an example that epitomises the level of sophistication that luxury retail has reached.

Chanel has been careful to differentiate its store formats, opening specialist boutiques exclusivelyto serve customers who are shopping for fine jewellery and watches rather than fashion. Thisallows Chanel to offer an experience tailored specifically to selling jewellery, with the right storeambience, specially trained staff and accompanying security.

MARCHMARCHO/SHUTTERSTOCK.COM

At the same time as investment in store and customer experience has grown, Chanels marketinginvestment has also risen (as has that of its peers in the luxury world). Chanel more than doubledits overall advertising spend over the last five years (up from US$67 million in 2008 to US$153million in 2013), pulling ahead of branded jewellery specialists whose advertising spend decreasedover the same period13. This level of investment, in both advertising and the retail experience,helps to reinforce the consumers desire for diamonds as precious and beautiful gems that areparticularly appropriate to mark significant life occasions and milestones.

TKKURIKAWA/SHUTTERSTOCK.COM

MARTINGOOD/SHUTTERSTOCK.COM

he brand has invested heavily in stores, securing prime locations for its flagships, (eg New BondStreet in London and New Yorks Fifth Avenue). Additionally, the quality of materials andarchitecture of these stores is rising fast: leading architect Peter Marino was engaged to work onChanels flagship New Bond Street store in London, and this one store alone is estimated to havecost 30 million to design and refurbish9. Chanel has also created pop-up stores, such as itstemporary boutiques in St Tropez10 and Courchevel11, aimed at attracting wealthy holidaymakers.

RADUBERCAN/SHUTTERSTOCK.COM

Chanel is using technology and ata in innovative ways to enhance the customer experience.For instance, new stores feature a large screen on which to stream live coverage of Chanels

fashion shows. Chanel also communicates with its customers through a twice-daily newsletter,Chanel News .

FIG. 15: CASE STUDY: CHANEL


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CONTINUED CONSOLIDATION CAN BE EXPECTEDA possible response to rising consumer expectations,and the increased investment required to supportthem, could be retailer consolidation. In fact, giventhe recent weakness in the worlds economy and thenumber of underperforming retailers, consolidationmight already have been expected to happen.

In reality, deal numbers and volumes in the industryhave grown slowly, at only two per cent CAGR from2003 to 201314(see Fig. 16).

The recent transaction announced between Zale

Corporation and Signet Jewelers in the US may signala change in the US jewellery retail space. The newcombined Signet/Zale entity could have as much as10 per cent of total diamond jewellery sales in the US.The US$100 million of annual savings estimated tobe achieved by scal year-end 201815, which the newentity hopes to generate through store rationalisationand increasing buying power, are meant to support itsprotability and allow it to invest in responding to thechanging consumer landscape.

F I G . 1 6 : J E W E L L E R Y M A R K E T M & A V O L U M E S A N D N U M B E R S O V E R T I M E

Source: Dealogic

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

2013201220112010200920082007200620052004

# DEALSSUM OF DEAL VALUEUSD million

Includes US$5.2 millionLVMH/Bulgari deal


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C U T T I N G A N DP O L I S H I N G

2013 SNAPSHOTThe cutting and polishing industry is global in nature.It remains fragmented, with thousands of companiesoperating with multiple business models, including

wholesalers, rough dealers, manufacturers andpolished dealers, as well as combinations of theseactivities. The Israel Diamond Exchange, for example,has more than 3,000 members16, many of which are

very small companies or sole proprietors. Even amongthe leading companies in the sector, there are manytraditional family-owned businesses with a long historyin the diamond industry.

However, recent years have seen the midstream sectorcoming under increasing pressure for a number ofreasons. These include lower carat supply, increasingcosts in the upstream, and growing pressure fromthe retail sector, where consumers make higherdemands and brands take greater share (as describedin the Diamond Jewellery Retail chapter of thisreport). These trends are compounded by signicantnancing challenges: as polished demand increases,the midstream needs additional funding. Decliningoverall central bank interest rates17have not resultedin lower borrowing costs for midstream companies,

indicating that banks perceive increasing risks in thediamond sector overall (see Fig. 17).

FIG. 17: DIAMANTAIRES BORROWING COSTS OVER

TIME VS LIBOR RATES

Source: De Beers estimates; ICE Benchmark Administration Limited(IBA) for Libor rates

8

6

4

2

0

20112010 201420132012

INTEREST RATE

2009200820072006200520042003

Average interest ratepaid by diamantaires

Libor

Per cent


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An interview with Erik A. Jens, CEO, ABN AMRO InternationalDiamond & Jewellery Clients

A D I A M O N DI N D U S T R YB A N K E R S V I E WO N M I D S T R E A MI S S U E S A N DS O L U T I O N S

CAN YOU BRIEFLY INTRODUCE YOURSELF AND YOUREXPERIENCE WITH THE DIAMOND INDUSTRY?I joined ABN AMRO International Diamond& Jewellery Clients, one of the major lenders to

the midstream over the last century, as the CEOmore than two years ago. My background is inprivate banking and nance, particularly hedgefunds, so I entered the diamond industry witha fresh perspective.

HOW HAVE YOU SEEN THE MIDSTREAM E VOLVESINCE YOU FIRST STARTED WORKING HERE?I have seen the industrys attitude to change evolve.A couple of years ago, the midstream had a largeculture of blame: blaming miners for high prices,retailers for stealing margins and bankers forlimited support. Recently, however, midstream

players have looked at themselves in the mirror, andbecome self-critical in their practices. There appearsto be a readiness to embrace change from within,in order to tackle the increasingly competitivelandscape. I believe this is a positive thing becauseit means the industry is becoming more transparentand sustainable.

Q

Q

LOOKING AHEADPRESSURE ON THE MIDSTREAM IS LIKELY TO LEAD TOPROFESSIONALISATION AND CONSOLIDATION

Financing challenges are increasingly critical andcould intensify over the coming years. Rising inventorycosts, and diamond banks drive to constrain thegrowth of their lending to the midstream, will meannancing costs are unlikely to decrease, particularlyif the trend of low interest rates begins to change.

Additional nancial scrutiny of the midstreamsector can therefore be expected. Leading banks in

the diamond sector have come to realise that theyhave been taking equity-type risks in the diamondmidstream without getting the corresponding returns.This is now changing and, as a result, borrowing costsare going up while banks are asking their borrowersto professionalise their capital management.

Overall, this trend is expected to affect the way theindustry operates. New lending standards will increasethe regulatory burden on the midstream, leading tohigher costs and operational complexity. One possibleconsequence is that less well-established companies

may even exit the industry, leading to some levelof consolidation.

Over time, those rms that are able to add signicant

value in the diamond cutting and polishing processare more likely to be successful.

To succeed in todays highly competitive midstream,diamond businesses must develop stronglydifferentiated, value-added propositions that setthem apart from their competition. Diamantairesat all stages of the value chain have approachedthis challenge in their own unique ways. Roughdealers and preparers, such as Dianco, Diarough,De Toledo and Fruchter Gad, have developed theirown unique, proprietary and bespoke assortments

which are carefully targeted and adapted to theneeds of specialist manufacturers.

Rough polishing has been the source of tremendousinnovation over the past decade, with Indian rmssuch as K Girdharlal, Venus, Karp and Kiran leadingthe way: their implementation of advanced IT andlaser technology has revolutionised the precision and

yield recovery of the cutting and polishing process.

For other rms, polished diamond distribution hasbecome the key to their differentiation. Sophisticatedinternet-enabled stock management systems allowbusinesses such as EZ Diamonds, YDI and Star Rays torespond with speed and precision to their customerschanging needs, often integrating seamlessly with acustomers own order management systems.


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WHAT ARE YOUR KEY CONCERNS REGARDING THE FINANCIALHEALTH OF THE MIDSTREAM?There is general lack of transparency in business

practices and quality of reported nancials across

the midstream, leading to a loss of trust. This iscompounded by the fact that the midstream is highlylevered. Banks are therefore being more critical andthorough with funding decisions, and looking for agreater level of security against their loans.

HOW DO YOU THINK THE MIDSTREAM CAN ADDRESS THESECONCERNS FOR THE FUTURE? WHO HAS BETTER ACCESS TOFUNDING AND WHY?When approaching nancing decisions, we assess thebankability of the clients whether their business isin good nancial health with transparent business

plans, if they apply IFRS or equivalent GAAP

standards especially when reporting receivables andinventory, and streamlining processes such as theremoval of inventory round-tripping. Financiersreward sound scal management and goodcompliance by providing better lending conditionsand more favourable rates. I also believe in opennessbetween banks and their clients in order to workthrough any issues which in the end comes back tothe importance of transparency.

WHICH DO YOU BELIEVE ARE THE MOST SUCCESSFUL PLAYERSIN THIS INDUSTRY AND WHAT ARE THEY DOING THAT ISMAKING THEM SUCCESSFUL?In an increasingly competitive landscape,

competitors have to adopt strategies to ensuresurvival and sustainability. Sustainability, inmy opinion, is the right to exist. This is achievedby being prepared to compete in a saturatedspace with dynamic and exible business plans,investment in infrastructure and technology anddiversication. Some successful players have showninnovative manufacturing and cutting strategiesto produce greater yields as well as developing aunique product.

DO YOU E XPECT CONSOLIDATION GOING FORWARD?The rate of change is still very slow, so I do not

envisage much consolidation in the next ve yearsor so. However, I do see the competitive landscapegetting tougher, which will lead to those lesssustainable businesses disappearing.

Q Q

Q

Q

Many midstream companies now also offer a

consumer branded proposition that creates aunique identity around the precision cuts theymanufacture. These include Leo Schachter withthe Leo cut, Exelco with Tolkowsky and Crossworks

with the Ideal Square and Ideal Cushion.

THERE WILL BE A CONTINUED PUSH FOR IN-COUNTRYBENEFICIATION

When it comes to the geographical location of cuttingand polishing, the move towards low-cost centres inIndia and the Far East is likely to have reached itspeak. Over recent years, producing countries suchas Botswana, South Africa and Namibia have beenstriving for increased domestic beneciation, leadingto some cutting and polishing jobs migrating tothose countries.

Diamonds are critical to the economies of someproducing nations. In Botswana, for example,diamonds represent more than one quarter of GDP18and over three-quarters of overall exports19, whereasin Namibia they represent eight per cent of GDP20,and almost 20 per cent of exports21(see Fig. 18).However, diamond mining in itself only creates a

limited number of jobs (as is also the case with othertypes of mining) since it is capital-intensive ratherthan labour-intensive.

FIG. 18: DIAMONDS SHARE OF GDP IN KEYPRODUCING COUNTRIES IN 2013

Source: The World Bank; Kimberley Process Statistics; De Beers analysis

Per cent

10

60

70

80

50

0

30

40

20

26

8

76

19

Diamond production, byvalue, as per cent of GDP

Diamond exports, by value,as per cent of total exports

NamibiaBotswana


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This is one of the main reasons why the governments

of southern African countries, for example, have beenkeen to ensure their countries expand along the valuechain to sectors that create more jobs, such as cuttingand polishing.

At the same time as creating local jobs, beneciationpolicies create a challenge. Lower worker productivitymeans that cutting costs are higher in southern Africathan in countries such as India, and so the movetowards local cutting increases costs and reduces theprot pool that can be shared between producers andgovernments (see Fig. 19).

In order for local beneciation to be sustainable in the

long term, producing countries will need to make aneffort to develop competitive downstream industriesthat can create value as well as generate jobs.

This will require investment in skills development andinfrastructure as well as thoughtful regulation. Only inthis way can the downstream diamond industry ensurelong-term job creation that will attract investors anddevelopers to the sector.

APPROXIMATE TOTALCUTTING AND POLISHING JOBS

APPROXIMATE CUTTING ANDPOLISHING COST USD/CARAT

Producer countries are gaining share onthe back of government policy, despitehigher costs than traditionalmanufacturing locations

Old cutting locations have lost share ofmanufacturing following migration first to

low-cost locations and subsequently toproducer countries

The trend of growth in low-cost locationshas recently started to reverse

00CUTTING CENTRE

Canada 300 50-80180 Ontario

2,200 3,75060-12045->125Botswana

1,000 150-200150+120Belgium

1,0001,800130-15060-100South Africa

2,000 400140->30047->55Israel

29,000 10,00020-5015-35Far East

850,000 800,00010-506-50India

013 00 01

Namibia 9701,50060-14045->125

US 80-100100300110

ource: De Beers estimates

i T ese are estimates for t e majority of pro uction units an exc u e out iers

FIG. 19: CONSENSUS VIEW OF CUTTING AND POLISHING COSTS ANDEMPLOYMENT IN CUTTING CENTRES


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R O U G H D I A M O N D S A L E SA N D D I S T R I B U T I O N

2013 SNAPSHOTGlobal rough diamond sales by producers increasedapproximately ve per cent from 2012 to 2013, toreach a total of just under US$18 billion.

De Beers remained the largest supplier with roughly33 per cent of overall sales measured by value (thesame share as in 2012), followed by ALROSA with25 per cent of sales (vs 23 per cent the year before).Other primary suppliers included SODIAM (Angola)

with an estimated six per cent share, Rio Tintowith a ve per cent share and Dominion DiamondCorporation and the Zimbabwe alluvial producers

with about four per cent each, all in approximateUSD value terms (see Fig. 20).

A variety of rough diamond sales channels are usedby primary suppliers (see Fig. 21). De Beers usesmulti-year contracts with more than 80 term contractclients Sightholders to sell most of its production.De Beers has also used sophisticated online auctionssince 2008 to sell a proportion of the Groupsproduction. In recent years, ALROSA has establishedthree-year supply agreements with a selection ofcustomers and supplements these sales with one-

time sales as well as competitive bidding (auctions)22

.However, some producers, such as Gem Diamondsand Petra Diamonds, use an auction-only platform.

FIG. 20: GLOBAL ROUGH SUPPLY

Source: De Beers

Per cent

i Okavango Diamond Company sales are accounted for in the DeBeers number as sales from DTC Botswana

ii Excludes sales of polished diamonds and sales of roughdiamonds to Gokhran

iii Company Annual/Quarterly Reports

iv De Beers estimatesv Includes 40 per cent of Diavik production and 80 per cent ofrevenue from Ekati from April 2013

vi Company reports including Gem, Petra, Firestone, Lucara,Kimberley Diamonds, among others

2013 ROUGH DIAMOND SALES BY VALUE SHARE

De Beersi

33

ALROSAii

25

Rio Tintoiii

5

SODIAMiv

6

Artisanal/Informaliv

12

Othervi

11

Zimbabwe/Marange

(Chiadzwa)iv

4

Dominionv

4


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In fact, supply through term contracts with a number

of selected customers seems to be the preferred modeamong suppliers offering a relatively stable volumeand mix of goods, often supplemented by auctions,especially of large stones.

Whereas BHP Billiton used auctions to sell productionfrom its Ekati mine, Dominion Diamond Corporation,

which acquired 80 per cent of the mine from BHPin 201323, has recently announced that the companyplans to sell its production from Ekati and its share ofthe Diavik mine production through contract sales toapproximately 30 companies from July 201424.

MORE ROUGH DIAMONDS ARE BEING SOLD LOCALLY

Producing countries have been playing a more activerole in the sale and distribution of rough diamonds.This is driven by a strong desire on the part of nationalgovernments to increase their share of value-addof the primary resource, and has resulted in theestablishment of domestic sales channels such asthe State Diamond Trader in South Africa, and theOkavango Diamond Company in Botswana.

The trend towards in-country value addition todiamonds saw perhaps its largest milestone yet in 2013,

with the move of De Beers Global Sightholder Sales toBotswana, and the organisation of De Beers rst everinternational Sight in Gaborone in November 2013.

FIG. 21: ROUGH DIAMOND SALES METHODOLOGIES

ource: De Beers

DESCRIPTIONALE METH D

Agreement for the continued sale of a certaintype and amount of rough diamonds over anxtended period. Contract lengths vary.

Generally, the price is set by the seller and theame prices are charge for the same pro ucts

to all buyers.

TERM CONTRACT

Ad hoc sales agreement between seller andbuyer for a particular type of range of rough

iamonds with no guarantee of continuedupply. Price, either set by seller or subject toegotiation between buyer and seller.

WILLING BUYER,

WILLIN SELLER

( R P LA E D

SALES)

iscrete sales event at which i ers competefor the purchase of a parcel of rough diamondsthrough a series of rounds. Various types canbe employed such as multiple unit auctions and

pen ascending price auctions. In most auctiontypes (except for tenders see below),

articipants have the opportunity to amendtheir offers in response to other bids submitted.When one bidder has outcompeted the others

n the process, the auction is complete. Price isan outcome of the competitive bidding process.

AUCTIO

iscrete sales event at which bidders submit aingle bid for the purchase of rough diamonds

through a closed envelope approach. The

highest bid submitted is the winner and as arule participants have no opportunity to amendtheir offer once submitted.

TENDER


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This move followed the conclusion of a new diamondsales and marketing agreement between De Beersand the Government of the Republic of Botswanaand involved the transfer of the majority of DeBeers sorting and rough diamond sales activities,including 84 employees, from De Beers Londonofces to Gaborone. Employees who relocated from

London continue to work to integrate and harmoniseinternational skills, while also developing the skills ofthe Batswana, strengthening the domestic talent pooland the Botswana diamond sector overall.

As of 2014, the majority of De Beers rough diamondavailability is sold in Botswana. This will help positionthe country as a global centre for the diamondindustry. The holding of Sights in Botswanas capitalmeans that representatives of De Beers Sightholders more than 80 of the worlds leading diamantaires travel to Gaborone up to 10 times a year, creatingadditional demand for local goods and services. It

will also facilitate the expansion into downstreambeneciation and the development of diamond-relatedservices. All of this has the potential to contribute tosubstantial job creation in the Botswana economy wellbeyond the jobs created by De Beers activities directlyrelated to diamond selling (see Fig. 22).

For more than 45 years, the partnership betweenDe Beers and Botswana has delivered signicantbenets to the people of Botswana. At the heart ofthis partnership is Debswana, the diamond mining

joint venture between the Government and De Beers.Similar arrangements exist in Namibia and South

Africa, where partnership agreements are also in

place in Namibia with the Government throughNamdeb Holdings, and in South Africa with itsBlack Economic Empowerment partner Ponahalo.Governments in all these countries, as well as thethousands of local workers in the diamond industry,have made substantial efforts to support the industry.However, to ensure the long-term sustainability ofthe domestic diamond sector, it remains criticalthat all stakeholders work together to maintain andstrengthen the productivity and competitiveness ofthe sector.

FIG. 22: REACTIONS TO THE MOVE OF DE BEERS GLOBALSIGHTHOLDE R SALES TO B OTSWANA

LOCAL BUSINESSES FEEL THE BENEFITSI started off my business on my own a year ago.Just before the rst Sight I had six people and nowI have 13 people working for me. In ve years I wantto expand my business across Southern Africa.

A Sight guarantees me a certain income every month you still have to work hard, but it gives you a base I wish we could have Sights every day, though!

Everyone is grateful everyone in my company.

For us, the move has been terric. Our business waslargely started on the back of the move.

I really feel a sense of excitement for the city at themoment. Theres a lot thats need to be done, butthere is a real feeling of momentum.

BOTSWANA GOVERNMENT STAKEHOLDERSBELIEVE THE MOVE HAS DELIVERED VALUEDe Beers handled the moving process very well.

De Beers and Botswana have been strategic partnerssince before the term existed this has delivered a lotto the country.

People are now more aware of Botswana globally,because they have to come here more often.

Botswana can show other countries how they canbenet from natural resources.


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LOOKING AHEADSALES CHANNELS WILL CONTINUE TO EVOLVE

In rough diamond sales, there are signicant benetsto being a scale producer and supplier. The variousmines offer quite different production proles, andproduction uctuates in the quantity, size and qualityof diamonds. This means that a companys ability tooffer a consistent supply of gems is strengthened byoperating several mines.

This kind of offering attracts the best diamantaires andalso allows for a steadier cash ow for the company.

Rough diamond sales channels will continue toevolve as producers strive to maximise value creationfor their production. De Beers is in the process ofredesigning its distribution system.

The company remains committed to its model of term

contract sales to Sightholders, to which the companywill continue to allocate the majority of its supply.However, in May 2015, it will introduce a new categoryof rough diamond customer: the Accredited Buyer.

An Accredited Buyer will not be supplied by way of aterm contract, but will be eligible to purchase roughdiamonds not already committed for sale by way ofterm contracts. Over time, Accredited Buyers thatdemonstrate sufcient demand for De Beers goods

will be eligible to apply for Sightholder status.


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R O U G H D I A M O N DP R O D U C T I O N

2013 SNAPSHOT

CURRENT PRODUCTION IS WELL BELOW ITS 2005 PEAK

De Beers estimates that overall global rough diamondproduction increased by three per cent from 2012to US$18 billion in 2013. Measured in carats, theincrease was seven per cent, to reach 146 millioncarats. This is still well below the production peak in2005, when overall production was above 176 millioncarats25(see Fig. 23).

The largest diamond producing country, by volume,is Russia, which in 2013 produced 25 per cent

of total carats, and 26 per cent of overall roughdiamond value. Botswana produced 16 per cent ofcarats, corresponding to 21 per cent of overall value.

Another large volume producing country is the DRC,which has historically produced on average 19 percent of total volume, but equivalent to only roughlysix per cent of value due to low value per carat26(see Fig. 24).

De Beers and ALROSA continue to be the two largestdiamond producing groups by value. De Beers 2013share of volume was 21 per cent and its share of value

33 per cent, while ALROSAs share of volume andvalue were 25 per cent and 26 per cent respectivelyin 2013 (see Figs. 25 and 26).

The third largest company in the sector is Rio Tinto,

which produced 11 per cent of total carats in 2013,corresponding to approximately ve per cent of globalproduction value. Another large producer is AngolasCatoca mine, generating approximately ve per centof both volume and value of production in 2013. Thecompanies operating the alluvial elds of Chiadzwa inZimbabwe contributed an estimated eight per cent of

volume and four per cent in value in 2013.

FIG. 23: GLOBAL PRODUCTION VOLUME (1882-2013)

Source: De Beers

160

140

120

100

80

60

40

20

0

180

1882 2013

Million carats (gem only 1882-2008; all carats included 2008-2013)

Note: Prior to 2008, Russian industrial carats were excluded from thetotal. From 2008, they are included


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FIG. 25: GLOBAL ROUGH DIAMOND PRODUCTIONVOLUME

Source: De Beers estimates, Kimberley Process Statistics

10

140

120

80

40

60

100

20

0

30

50

70

90

110

130

150

160 153

-4

2013

146

20122011201020092008

-8

1

2

22

0

1

Informal/ArtisanalOther Major/Junior

ALROSA Catoca

Zimbabwe (Chiadzwa)De Beers

2008-2013 CAGRPer cent


Million carats

FIG. 26: GLOBAL ROUGH DIAMOND PRODUCTIONVALUE

Source: De Beers estimates

0

8

71

3

10

5,000

0

20,000

15,000

10,000

+17

2008 20112010 201320122009

Catoca

Other Major/Junior

ALROSA

De Beers

Informal/Artisanal

Zimbabwe (Chiadzwa)

1



USD million

Source: De Beers estimates

F I G . 2 4 : R O U G H D I A M O N D P R O D U C T I O N B Y M A I N P R O D U C I N G C O U N T R Y

VOLUME

Million carats

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150+7

20132012

All others

Botswana

DRC

Angola

South Africa

Canada

Australia

Russia

VALUE

USD million

0

5,000

10,000

15,000

20,000+3

20132012

GROWTH

Per cent

GROWTH

Per cent


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F I G . 2 7 : P R O J E C T E D G L O B A L R O U G H D I A M O N D P R O D U C T I O N

Source: McKinsey & Company, Perspectives on the Diamond Industry, September 2014

60

30

90

40

10

20

130

160

140

150

110

0

50

120

100

80

70

170

2023

2028

2029

2030

2025

2026

2024

2027

2022

2020

2017

2016

2019

2014

2013

2012

2021

2015

2018

ExpansionsNew projects ExistingMillion carats

LOOKING AHEAD

DIAMOND PRODUCTION IS EXPECTED TO FALL GRADUALLYWHILE OPERATING COSTS WILL CONTINUE TO INCREASE

Overall diamond supply is expected to increase inthe next few years, driven by new projects coming

on stream. By 2020, when many of the existing mineswill begin to see declining outputs, overall supply isexpected to plateau (see Fig. 27).

A number of projects are under way to expanddiamond production. By 2020, about 25 per cent ofcarat production will come from projects currentlyunder development, but much of this increase inoutput comes from projected expansion at currentmines such as Rio Tintos Argyle mine in Australia.

Among new developments, the largest are ALROSAsBotuobinskaya, Lukoils Grib and De Beers/Mountain Province Diamonds Gahcho Ku projects.

Beyond 2020, there is a risk that production levelswill begin to decline unless major new discoveries aremade in the coming years and rapidly developed. Asillustrated elsewhere in this report (see DiamondExploration chapter), the likelihood of largeeconomically viable discoveries is low, and so supplycan be expected to decline gradually after 2020.

1

2

3

4

Rio Tintos decision to continue tooperate in the diamond industry. Rio

Tinto conducted a strategic review ofits diamond business, which included apotential divestment. In June, the companyannounced its decision to retain thediamond business27.

In April, Rio Tinto commencedunderground operations at its Argylemine in Australia28.

BHP Billitons exit from the industry uponcompleting the sale of its stake in the Ekatidiamond mine to Dominion DiamondCorporation in April29.

In October, the Russian governmentprivatised 16 per cent of its stake in

ALROSA, by way of an Initial PublicOffering, for US$1.3 billion.

MAJOR EVENTS IN 2013DIAMOND PRODUCTION


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Source: De Beers

F I G . 2 8 : D I A M O N D P R O J E C T P I P E L I N E ( 2 0 1 4 - 2 0 1 7 )

Note: All data estimated based on best available public information as of May 2014

DEPOSIT NAME OWNER(S)DISCOVERER ANDYEAR OF DISCOVERY COUNTRY STATUS

EST. FIRSTPRODUCTION

AVERAGE ANNUALPRODUCTION(MCTS)

ADC (1997) Development 2014 4Grib Lukoil Oil Company

ALROSA (1994) Development 2015 2Botuobinskaya ALROSA

ALROSA (1982) Development 2015 1Karpinsky-1 ALROSA

Mountain ProvinceDiamonds (1995)

Permitting 2016 5Gahcho Ku De Beers/MountainProvince Diamonds

Ashton (2001) Permitting 2017 2Renard Stornoway, Newmont

Rio Tinto (2004) Pre-feasibility 2017+ 2Bunder Rio Tinto

Falcon Bridge(1981)

Construction 2014 0.4Ghaghoo Gem Diamonds

Uranerz (1988) Feasibility 2017+ 2Star-Orion South Shore Gold Inc

Russia

Russia

Botswana

India

Canada

Canada

Canada

Russia

In order to make a difference to global availability,

any discovery would have to be substantial even thelargest of new projects under development, GahchoKu, will only expect to add approximately vemillion carats per year at its peak of production,about three to four per cent of annual globalproduction (see Fig. 28).

Even if new discoveries were made, the impact of suchdiscoveries on production levels would be likely tobe slow. From 1950 to today, it took an average of14 years between the discovery of a diamond depositand the start of production. For projects currentlyin development, however, this time is even longer:it will take more than 20 years from discovery to rstproduction. Gahcho Ku, for example, was discoveredin 1995, but is not projected to enter productionuntil late 2016.

Diamond production is also becoming increasinglychallenging as mining moves towards deeper, lessprotable and more remote sources. This trendis explored further in the In Focus section, Themiracle of production.


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D I A M O N DE X P L O R A T I O NThe chase is on: diamond miners continue to search the endsof the earth for the next big nd.

2013 SNAPSHOTAROUND US$7 BILLION HAS BEEN SPENT ON EX PLORATIONSINCE 2000

Diamond mineral systems occur in very speciccratonic target areas these are well-known.

With growing demand for diamonds and dwindlingsupplies from existing mines, the search for thenext diamond mines is expected to continue.Since 2000, the diamond mining industry hasspent almost US$7 billion on exploration30.To date, these efforts have yielded relatively meagre

results: only one diamond deposit of signicant size(Bunder, in India) has been discovered during thisperiod31, in addition to other smaller deposits suchas Orapa AK6 in Botswana (now the Karowe mine),owned by Lucara Diamond Corporation.

Today, the majority of diamond exploration spendtakes place in relatively underexplored Africancountries such as Angola, the DRC and Zimbabwe,as well as the vast swathes of Arctic Siberia andCanada. Recently, there has been some change inthe allocation of this spending: from 2011 to 2013the share of global exploration spending that went toRussia increased from 27 per cent to 54 per cent, atthe expense of countries such as Canada, South Africaand India32(see Fig. 29).


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2 2 4 5 7 10 13 7 11 16 21

Source: SNL Metals & Mining's Corporate Exploration Strategies 2013; includes grassroots, late stage, and mine site exploration expenditures

F I G . 3 0 : G L O B A L D I A M O N D E X P L O R A T I O N B U D G E T S , 2 0 0 1 - 2 0 1 3 B YC O M P A N Y T Y P E

0

200

400

600

800

1,000

2012 201320112010200920082007200620052004200320022001ALL MINING EXPL.EXPENDITUREUSD billion

2

USD million (nominal)

i A company with adjusted annual nonferrous mining-related revenue of US$500m or moreii A company whose principal means of financing exploration is through equity financingiii Entities not included in the above categories

Otheriii

Majorsi

Juniorsii

14

14 54

4

1

7

0

0

1ii

2i

0 1

0

1

13

1

0iii

F I G . 2 9 : S H A R E O F G L O B A L D I A M O N D E X P L O R AT I O N S P E N D B Y C O U N T R Y2 0 1 3 - 2 0 1 4 More than 50% share

549% share

0.14.9% share

NonePer cent

i Guinea: 0.5%; Sierra Leone: 4%;

Liberia: 0.5%

ii Lesotho: 0.9%

iii Paraguay and Brazil: 0.1%

Note: Total may not sum due to rounding

Source: De Beers estimates based on company publications and websites, SNL Metals & Minings Corporate

Exploration Strategies 2013; includes grassroots, late stage, and mine site exploration expenditures


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7

Tier 1iTier2 & 3

53

Economicaldeposits

60

Non-economical

Diamond-iferousdeposits

1,000

Non-diamond-iferous

5,800

Kimberlitepipessampled

6,800

FIG. 31: NUMBER OF DIAMOND DEPOSITSSUFFICIENTLY RICH TO WARRANT DEVELOPMENT

Source: De Beers

i Over US$20 billion reserves. 7 Tier 1 finds are: Jwaneng,Orapa, Udachny, Venetia, Catoca, Premier (now Cullinan), Mir

While the appetite for exploration remains high(2013 spending was 2.5 times that of 2001), overallspending has still not reached the record levels of2007, when companies spent almost US$1 billion ondiamond exploration (see Fig. 30). The trend herediffers from the mining sector in general, where 2013expenditure, although lower than in 2012, remains

well above 2007/2008 levels. De Beers and ALROSArepresented almost 75 per cent of explorationspending in 201333.

LOOKING AHEAD

LARGE-SCALE PROFITABLE DISCOVERIES WILL MOST LIKELYREMAIN ELUSIVE

The large diamond mining companies are expectedto continue to invest in exploration, but theprobability of a major protable new diamond

discovery will remain relatively low. This is simplybecause nding economic diamond deposits isdifcult: even spending billions of US dollarsin exploration carries no guarantee of actuallydiscovering economically viable deposits.

Over the last 140 years, almost 7,000 kimberlite pipeshave been sampled by geologists, about 1,000 of

which have been diamondiferous. However,

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De Beers report