Diamond miners and retailers are directly entering into strategic tie-ups in a bid to protect bottomlines and ensure a steady supply of roughs. Consequently, clear cut distinctions in the upstream and downstream part of the diamond pipeline are getting smudged to yield to the creation of a new business model in the diamond industry and possible obliteration of the smaller market intermediaries.

Like the mining companies, retailers, facing rising operating costs and shrinking margins, in addition to risks of rough scarcity and higher rough prices have entered into direct partnerships with miners, leading to the emergence of a new business model in the industry.

In the earlier version of the diamond pipeline (value chain), the upstream business took care of the exploration, production, sorting and valuation, after which roughs passed through the middle-market which involved trading, cutting and polishing, polished diamond sales and jewelry manufacturing, before the product reached the downstream business of jewelry retail sales. However, in the new business model, the upstream and downstream businesses are tying up directly, thus completely bypassing market intermediaries.

This change in business model was first pioneered by Tiffany & Co., when in 2011 it directly invested in a Sierra Leone mine. Since then, Tiffany has entered into several agreements for securing future output from mines in South Africa to Canada. Similarly, the world’s largest listed jeweler, Hong-Kong based Chow Tai Fook, after collaborating with Rio Tinto for Argyle mine’s pink diamonds and similar tie-ups with Alrosa and De Beers, is now exploring investments in individual mines in Canada and other places. On the other hand, Firestone Diamonds, for its Liqhobong mine in Lesotho, tried to tie up with multiple retailers for direct supply deals.

This new business model is not only about simple tie-ups between miners and retailers. A two-way vertical integration is happening in the industry. Miners are doing a forward integration by getting into mid-stream and downstream businesses. Global mining major De Beers has already ventured into jewelry retail business and runs its own jewelry business – ‘De Beers Diamond Jewellers’ (JV with LVMH) apart from ‘Forevermark’ brand. Retailers, on the other hand, are undergoing a backward integration, as evidenced by some direct investments in mines to secure future rough supplies, and also entering the middle-market business by acquiring or developing in-house mid-stream capabilities. Tiffany & Co. started a new polishing center in Cambodia in 2013.

Cutting & Polishing centre - Botswana - Joan Sullivan - Reuters - Rediff

[Image Courtesy: Joan Sullivan, Reuters, Rediff.com]

As more beneficiation takes place and more players adopt this new business model, the middle-market players – traders, cutting and polishing centers, which employ hundreds of thousands of people, will be running for shelter. Only the bigger intermediaries having the financial muscle to adopt similar forward or backward integration will thrive, while the smaller mid-market players will face the threat of getting obliterated.

 

[Cover Image Courtesy: Vietnam Economic Forum, Vef.vn, Chow Tai Fook]

1 COMMENT

  1. McKinsey had predicted that consolidation in the industry will happen. But this is beyond mere consolidation. Vertical integration will surely transform the industry, just not sure whether for better or for worse.

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