Long Way of Diamonds

Diamonds are known for their stunning beauty, incredible luxury, unique properties and of course high price. While the first three are determined by physical characteristics, the last is normally dictated by the way diamonds come from mining to marketing and it can be quite long. There is the article accurately telling you the details of the process that raw diamonds go through to be sparkling as we usually see them:

Compare the business Diamonds to the business of Gold, the Diamond industry is very small.

The worldwide retail market for diamond jewelry was $60-B in Y 2010, and like the Gold business, the Diamond business involves several sectors:
1. Miners, producers and sellers of the rough goods.

2. Cutters and polishers.

3. Jewelry manufacturers.

4. Retailers.

The Miners and Producers

According to the data about 133-M carats of rough Diamonds are mined annually. Botswana and Russia are the 2 largest producers; between them they have 50% of the world’s production. Australia, Angola, Namibia and Canada make up the rest.

The producers, 4 control about 65% of the market: De Beers, Russia’s Alrosa, and diversified mining companies BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO) . De Beers controls about 35% of the market, with Alrosa about 20%.

Large, commercial Diamond mines are rare, there are only about 20 major Diamond mines in the world. And the big supply is even rarer, only 11 mines make up 62% of the world’s production of Diamonds by carat weight. The last major diamond mine was discovered in Zimbabwe in Y 1997.

Production varies by mine, but the world’s richest mine; the Jwaneng mine in Botswana has to move a ton of rock to get 1.4 carats of rough diamond, on average.

That mine moves 8-M tons of rock a year and sells the rough diamonds for an average of $134 a carat. That is $1.5-B in revenues, from a single mine, it produces profit margins of 24%.

Cutters and Polishers

Producers sell their rough Diamonds to intermediaries who cut and polish them. It is a costly process: most rough Diamonds lose 50 to 60% of their weight going to polished form, as the material is cut or polished away.

De Beers has a particular sophisticated system for selling their rough Diamonds. They sell roughly 80 clients they call “Sightholders,” using long-term contracts, other sales are made using auctions.

Most of the cutting and polishing is done in a few centers: Antwerp, Tel Aviv, New York, and Russia. The smaller stones, less than 3 carats are cut in India and China. This is cost related: its $100 a carat to cut a Diamond; in India, it costs $10.

To lower production costs, Diamond cutters are using sophisticated computer programs that map out the most efficient way to cut a Diamond. And recently huge advances have been made using sophisticated laser cutting machines that can cut and polish Diamonds with minimal human labor.

Jewelry Manufactures

Once the Diamonds are cut and polished they go to jewelry manufacturers. These sales take place in the central and regional offices of the Diamond cutters, and at exhibitions that are held in different cities around the world. The 2 biggest are held each year in Hong Kong and Las Vegas.

The Jewelry manufacturing is highly diverse: there’s more than 10,000 in the world, most are anonymous.

There are, of course, a few very famous names who act as manufacturers as well as retailers: Tiffany (NYSE:TIF), Cartier, Bulgari, Louis Vitton, Gucci, and Chanel, but more than 80% are in India or China and do not brand their work.

Branding is where the big money is. Branding is crucial to profitability. According to the data a Diamond engagement ring by Cartier may enjoy a premium of 40% over an unbranded ring with a stone of identical size and quality.

The Retailers

This group is even more fragmented than the manufacturers. There’s roughly 250,000 jewelry retailers worldwide, most of them locally owned and operated.

In the past, diamond sales were done largely through specialized stores. Some were famous: Tiffany, Zale (NYSE:ZLC), Kay Jewelers. Most are not.

Today, independent jewelry stores are declining. Department stores like Macy’s (NYSE:M), JC Penney (NYSE:JCP), and Neiman Marcus, as well as discounters like Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST) and Target (NYSE:TGT), have become a bigger part of jewelry sales.

Of the 133-M carats produced, just 50% go to jewelry. The rest go to industrial production, where Diamonds are used for cutting, grinding and polishing, usually other Diamonds, they are the smallest, lowest value stones. The majority of Diamonds for industrial use are synthetic.

It is the jewelry business that generates the big money; it represents about 95% of the value of production.

Diamond Pricing

Like Gold, the Diamond industry has had high expectations for Diamond demand, primarily due to the huge emerging middle class in India, China, and Latin America. Sales have indeed increased dramatically in those regions.

This signals that prices for Diamonds should be steady to slightly higher. Prices for bigger, higher-quality diamonds have risen, but prices for smaller, more commercial stones have remained flat or increased modestly.

Diamond Demand is dictated by macro-economic trends, or simply put, the state of the consumer. Prices are affected by economic booms and by recessions, like those in Y 2001 and Y’s2008-2009.

While prices did drop during the last global recession in Y 2008-2009, rough and polished diamond prices increased Y’s 2010 and 2011.

Diamonds are a luxury item, and as such demand growth is expected to parallel GDP growth. Slower GDP growth, which is now the expectation for the next couple years, particularly in the US and Europe, is a problem for the Diamond industry, and currency fluctuations are also an issue.

The declining value of the Indian Rupee, for example, is a major reason why Diamond sales in that country declined in Q-2 of Y 2012 compared to the same period last year.

Bigger Diamond are Hot. The biggest increase in pricing has been for larger stones of 2 carats and above.

Between Y 2006 and 2010, prices for a polished 1-ct diamond went up 5% a year, but prices for a 3-ct Diamond went up 10%, prices for a 5-ct stone increased 17%.

On the supply side: the Diamond industry has a problem similar to the Gold business, as known reserves are declining, costs are going up, and grades are lower.

The article is taken from http://www.livetradingnews.com/diamonds-from-mining-to-marketing-83816.htm#.UD-vsvLNJON


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