[SCMP Column] Losing Glimmer?

October 22, 2016

Impetuous, romantic and old fashioned as it may seem, I got married last month. So diamonds have been much on my mind, and of course have knocked a large hole in my bank balance. No comfort, then, to discover how poor an investment diamonds are. I’m sure the quality of the marriage more than makes up for it.
It seems the world’s diamond business – very important to Hong Kong, as one of the world’s leading diamond trading centres after Antwerp and Tel Aviv and host to at least nine diamond and jewellery fairs every year – is in a bit of a tizz. The value of worldwide sales last year fell by 2% to US$79bn – but the volume of sales of rough diamonds tumbled by around 30%. In Hong Kong, jewellery-shop leader Chow Tai Fook has seen sales fall by 12% this year, while Tse Sui Luen has reported an 8.6% fall.

People in the business are bravely insisting that this is just a cyclical thing, and that we can expect a rebound by the end of the decade, but there is evidence that the slippage may be structural and long term.

On the cyclical side, people talk of lots of new diamond mines coming on stream. Most awesome is the Gahcho Kue mine recently opened in Canada’s steel-shatteringly cold Northern Territories which, coupled with Lukoil’s Grib mine in Russia will be adding around 10m carats of new diamonds a year by 2019. Add in the other new mines and the global output is expected to jump by 15% to 150m carats a year.

The cyclical argument also focuses on the 2008 global recession, its impact on diamond demand in the hard-hit rich markets of the west, and the fierce anti-corruption campaign in China that has dulled all sorts of luxury spending over the past three years.
The slowdown in Chinese enthusiasm for life’s little luxuries has been a particular blow, not least here in Hong Kong where two thirds of the 140,000 buyers at this year’s two main shows were either from Hong Kong or the Mainland.

In principle, Mainland Chinese demand has a long way to grow. Only 30% of Shanghai women claim to own a diamond, whereas in Hong Kong over 80% own a diamond or three. Annual growth in demand for diamond and gold jewellery from the Mainland was growing a 7% a year for most of the past decade, but has now slipped to barely more than 4%. This will arguably improve as China’s middle classes grow (almost 300m households are expected to earn over US$15,000 a year by 2030, by comparison with 153m last year) but big bets had been put on faster growth, with a result that the supply of diamonds has swollen much faster than demand.

The industry’s darker moments are focused on the structural changes that are challenging a highly profitable luxury market which, underpinned by De Beer’s six decade “A Diamond is Forever” mantra, has delivered strong profit growth over most of my lifetime. At least six structural factors cloud the future. First is a changing fashion among the Millennial youngsters of the US, Europe and Japan that are now moving into marriageable and gift-giving age. Still today, in the US, engagement and wedding rings dominate the retail market for diamonds (10 million marriages in the past five years), so a decline in formal marriages – and the frequency of divorces – is having a big impact. Second, there are many other little luxuries competing against diamonds for attention among increasingly individualistic buyers – from the newest smartphone to a Caribbean breakaway.

Third, bad press over “blood diamonds” that have leaked into the market to finance civil wars in countries like Angola, the Ivory Coast or Sierra Leone has raised concerns about the ethics of buying diamonds. Nor does it help that almost one third of the world’s diamonds come from Russia. The Kimberley Mark certification process has helped – it is estimated that just 1% of the world’s production today is being sold for illegal or unethical purposes compared with an estimated 20% in the 1980s – but the taint sticks.

Fourth is the emergence of high quality synthetic diamonds, which today can be produced in weeks without the ethically awkward back-breaking labour of poorly-paid mine workers, are indistinguishable from “natural” diamonds, and cost a fraction of the “real” thing. Today, synthetics account for less than 1% of the market, but how long will it stay that way? I sentimentally pray that the ring on my loved-one’s finger is the real thing, but in truth neither she nor any of her admiring girlfriends would be able to tell if it is not.

Fifth, the smart marketing of diamonds has floundered since the “good old days” in the 1980s when De Beers accounted for 90% of the world market. In those days, De Beers spent $200m a year on marketing, and the rest of the industry rode on its marketing coat-tails. Today it accounts for just 31% of world diamond sales, and has become increasingly reluctant to underwrite the the industry’s marketing bill. As its own marketing budget has shrunk to $120 a year, it last year succeeded in establishing the Diamond Producers’ Association with six other mining giants, which has agreed jointly to fund marketing. Perhaps the new “Real is Rare” slogan will capture the luxury buyers’ imagination, but let’s see.

The sixth and final long term challenge is the simple reality that diamonds offer a very poor investment return compared to gold, or rare wines, or trendy paintings. The resale market for diamonds is tiny and illiquid – between 3-5% of sales in any one year – and even the experts complain that the “4Cs” benchmark for valuing diamonds – colour, cut, clarity and carats – is subjective and intransparent. Clearly that did not bother Chinese Estates’ Joseph Lau who in the past year has bought a 12 carat fancy vivid blue diamond for $48m, and a 16 carat vivid pink diamond for $28.5m (calling it Sweet Josephine after his daughter). Of course, when I was choosing my loved-one’s wedding ring, investment value was the last thing on my mind – but then, perhaps I was putting less of my life savings at risk. 
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