Diamond value chain ebbing control in favor of consumers?

Prices for diamonds are controlled by three major factors – demand for rough and polished diamonds, supply of diamonds from mines and finally the bargaining power of the players in the value chain from mines to end consumers. Diamond industry has its own characteristics in all three factors.

For years the diamond industry has been a monopoly with De Beers controlling 90% of seller market in 1980s. Over years due to multiple reasons, its share has fallen down to 35%. De Beers has joint ownership with governments where its mines are located but diamonds are sold via De Beers’ distribution system, DTC (Diamond Trading Company). This gives the company control over supply and prices. Second largest diamond seller is Alrosa, a JV between Russian state and local government. In total the two companies control 62.4% of world’s diamond supply. Both companies use the sightholder model where only pre-approved dealers can buy roughs at prices decided by the respective company.

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[Image Courtesy: Paul Zimnisky]

 

Demand for diamonds is ultimately controlled by end consumption of polished pieces, which comes from gems and jewelry market and industrial and research applications. Manufacturers, traders and retailers try to anticipate the demand for polished diamonds and tailor-back the demand for roughs accordingly. US is the largest consumer of diamonds with close to 37% share, while India and China have a combined share of 26%. Developing economies like China and India are major markets for diamonds due to their rising middle class and growth in disposable incomes. An estimate for coming years indicates demand from India and China will gradually increase and surpass the demand from US.

Supply from a diamond mine falls over time while the cost of production increases. The mining company typically has forecasts for production capacity of the mine and closure of a mine is carefully planned by the company by looking for deposits elsewhere. Argyle diamond mine owned by Rio Tinto has been operating since 1983, and recently exhausted production from the open pit. Production will move to underground exploration and is expected to produce diamonds till 2020. However the cost of production would increase thus pulling prices up. Recently 400 mine workers were laid off in Marange, Zimbabwe, due to fall in deposits. Rising production in Russia and Canada will change the reliance of roughs from Africa.

On all fronts – demand, supply and control the diamond scene is gradually dispersing from handful of players to a broader scale with multiple players deciding the prices of diamonds. The traditional players in the Value Chain are also apparently reducing their control over the pipeline. An introduction of Lab-grown diamonds whose share in current market is small but growing would add more equality in the equation and ultimately put power in the hands of the consumers.

 

1 COMMENT

  1. Though it may seem that power and control is disseminating from one to many, it surely is not going to end up in the hands of the consumers. What we see is transformation of a monopolistic industry to an oligopolistic.

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