Rough diamond sales, prices and revenues are down this year, in certain cases by double digit percentages, a fact being keenly monitored by the Finance Ministry which has said it stands ready to slash the growth forecast and up the expected budget deficit.
The crisis building for rough producers such as Botswana has largely been caused by high inventory levels of polished diamonds in the midstream, that section of the diamond pipeline occupied by cutters and polishers, who buy from mines and sell to jewellers.
Debswana’s sales reached an all-time high of P56.5 billion last year, helped by a warming global economy, which in turn has contributed to the high levels of inventory this year.
Ongoing global economic uncertainties, especially in major markets such as the US, a softer than expected contribution from China, the industry’s reputational knock from the continued flow of sanctioned Russian diamonds into the market as well as stiffer competition from synthetics, have worsened the industry’s challenges this year.
The rough diamond industry operates in cycles, alternating boom and bust periods, when supportive economic conditions see consumers snap up diamond jewellery, clearing the midstream and encouraging more production, before the inevitable build-up of inventory and often, some economic slowdown, raises inventory and impacts producers.
This year’s troubles for the rough diamond industry are reminiscent of 2019 when the global rough diamond industry again experienced the build-up of rough diamonds in the midstream as well as tightening margins amongst cutters and polishers.
However, the challenges this year feel different. More and more analysts suggest that rather than being a particularly nasty trough in the cycle, the downturn in diamonds this year is more structural, a settling in of what could become the new normal for the shiny stones.
The major difference between 2019 and 2023 is synthetics, the increasingly cheap lab-grown diamonds that are taking up more space in the diamond jewellery market, and in a year of economic uncertainties, providing a strong alternative for the natural diamonds dug by producers such as Botswana.
Martin Rapaport, the founder of RapNet, the world’s largest diamond trading network with daily listings of diamonds valued at $7.4 billion, is renowned for being steadfastly outspoken against the suggestion that synthetics could significantly cause problems for natural diamonds in the retail market.
In Las Vegas in June, Rapaport told Mmegi that the synthetics could not store value and “the idea that a synthetic diamond is a substitute for natural does not work in the long term interests of the jeweller”. Rapaport also said jewellers who stocked synthetics just because these were flying off the shelves faster than naturals, might as well be selling ping pong balls.
In an update to clients last week, Rapaport struck a decidedly different tone.
“We are talking about an entire restructuring of the diamond industry and these changes will remain,” he said in a virtual briefing attended by Mmegi.
“The real diamonds industry will be reduced in certain areas.
“We are looking at a market that’s going down and the rate of increase is faster, and it’s scary and people are afraid and they should be and they should be worried.”
While adding that the trends seen this year may not continue, Rapaport added that there were concerning, long-term patterns in the retail market. One of these is how synthetics have “attacked” the bridal market, which has long been the natural diamonds’ niche, promising the highest prices.
For producers such as De Beers, the core of the natural diamond marketing campaigns over the years has been their rarity, formed over three billion years, the inimitable sentimentality and emotion around the natural diamond and the measurable impact the stones make for producers such as Botswana, where health, education and other social benefits are anchored on diamonds.
Natural diamonds are thus the greatest gift possible, the ultimate expression of enduring love and a successful symbol for weddings and engagements. The diamond jewellery market is valued at about $80 billion per annum and much of this is sourced from the bridal market. The fact therefore, that last year in the United States, one in every three diamond engagement rings sold were synthetics, is jarring to natural producers. The US accounts for 54% of the $80 billion market.
For Rapaport, the challenge goes even deeper and extends to the new generation of diamond jewellery consumers.
“The real problem synthetics are bringing is teaching millennials to spend less on engagements and saying why spend more.
“What kind of business does that? What kind of business asks if marriage is important?
“Synthetics are almost like a parasite that’s living on the real thing.
“They are competitors and they are replacing real diamonds demand and eating our lunch.”
These structural issues involve a turning point in the market beyond the downtrend of 2023. They undermine the idea that when a customer carrying $8,000 and shopping for diamonds, walks into a jeweller, even if the synthetics are going for ever cheaper prices, the customer is likely to prefer whatever natural is available at that price range even if this is smaller than a large lab grown.
The natural diamond industry’s reputational knock from sanctioned Russian diamonds which continue to flow into the market also means synthetics producers have been able to market themselves as more ethical and also more environmentally friendly.
Whether the challenges are structural, De Beers’ latest response to the situation appears to concede that the fightback is more than about just a tough cycle. The diamond giant is the entity most responsible for constructing value around diamonds over the past century, through intelligent storytelling at a global level. Besides the billions of dollars spent over the years searching for diamonds in deserts, oceans, under glaciers and everywhere else, De Beers spends more than any other entity every year creating demand for diamond jewellery and highlighting the positive impact of the stones in countries such as Botswana.
Traditionally the more than $100 million De Beers spends in marketing, is largely focussed on the period between Thanksgiving in the United States (November) and the Chinese New Year (February), which represents the peak retail selling period every year.
This year, De Beers is adding another $20 million to the hundreds of millions in marketing spend for this season, but is also resuscitating the “A diamond is Forever” tagline that essentially built the global diamond jewellery industry.
The return to the historic tagline that shook up the worlds of advertising and luxury spending, as well as the additional millions pumped into the marketing budget, are being seen as the diamond giant’s way of defending natural diamonds in a period where a cycle might be evolving into a norm.
This can also be seen in De Beers’ decision to end its experiment in producing synthetic engagement and wedding rings, which, when combined with the additional spending and nostalgic tagline, amount to a doubling down on naturals.
“A recent lab grown engagement ring test has now ended and through the test the company deepened its understanding of lab growns and evaluated the changing landscape and consumer perceptions associated with them,” said Al Cook, De Beers’ CEO, recently.
“The engagement ring test reinforced existing insights into the wider lab grown sector that indicate the commercial proposition for many lab grown engagement ring offers is likely unsustainable, with retailers already needing to double the number of lab grown carats sold every two years just to maintain a flat absolute gross profit.”
He added: “Natural diamonds have remained icons of love for centuries and De Beers advertising has remained iconic over the decades.
“We are proud to build on this tradition by reviving and refreshing one of our most successful campaigns. “By investing ahead of the holiday season, we aim to support the industry, drive consumer demand and underline our confidence in the future of the diamond dream.”
Other analysts, however, say while synthetics have certainly piled pressure on the rough diamond industry this year, the panic over the steepness of the downtrend may be being misread as a structural crisis.
Okavango Diamond Company (ODC) managing director, Mmetla Masire, acknowledges that the year has been both “delicate and unprecedented,” but cautions against reading too much into the cycle.
“Right now what we are seeing is distorted because people are worried about the economy, but lab growns are also oversubscribed and many players there are going to drop off,” he said at the Africa Mining Summit on Wednesday.
“We should accept that lab growns are here to stay, are part of the industry and we ignore them at our own peril.
“But we must also be realistic and not panic.
“It’s a difficult year and it’s confusing, with experts giving their different opinions about lab growns and the US economy.”
Much of the debate on whether a cycle or a norm is developing in the diamond industry, will become clearer after the peak retail period.
Government, De Beers and other players in the rough diamond industry will be hoping retail demand perks up enough in coming months to mop up the high inventories in the midstream, allowing room for producers such as Debswana to stabilise their output.
In 2019, the peak retail period cleared up the midstream glut. All eyes are on whether the same will happen this year.
