Diamond Cutters Approaching an Era of Disruption

Diamond manufacturers are entering an era of fierce competition as the looming decline in rough diamond supply is expected to place additional pressure on their already razor-thin profit margins. 

"A manufacturer always operates with a benchmark margin, which is the minimum he needs to make a reasonable return on equity," explains Vishal Doshi, executive director of the manufacturer Shrenuj & Co. "In spite of all the efficiencies, we have reached the border between the business being either sustainable or unsustainable."

Some manufacturers are already adapting their business models to cope with this problem, in ways that industry observers believe will alter how the entire diamond pipeline operates in the coming years. 

Differentiate or Disappear

However, Dinesh Navadiya, president of the Surat Diamond Association (SDA), notes that manufacturers have limited options to cut costs and improve margins. While they tend to expand their labor force when rough supplies grow, cutters avoid retrenchments when the profits run dry, he explains.

"Employers never lay off workers," Navadiya says. "There is a scarcity of artisans in the industry so the question of layoffs does not arise." 

Even during the 2008 financial crisis, factory owners in Surat tried to avoid layoffs, preferring to retain their workers by instituting temporary salary cuts. 

Navadiya further dismisses the likelihood that factory owners will increase profits by absorbing smaller or weaker companies to reduce competition. He states that no notable consolidations have occurred in Surat in recent years and that he does not expect significant consolidation to occur in the future.

Consequently, the only way that manufacturers will be able to contend with tightening profit margins is through product differentiation and factory closures, concludes Mike Aggett, managing director of H. Goldie & Company, a De Beers accredited broker. 

"Certainly in India a number of smaller operations have disappeared," he says. "It will be a slow, ongoing process but the less sustainable businesses will disappear." 

Declining Rough Supply 

Most manufacturers who spoke with Rapaport News agreed that manufacturing rough into polished alone is not sufficient to cope with high rough prices and the further forecasted increases. 

According to industry consultants at Bain & Company, diamond prices are expected to rise in the long term as supply is forecasted to decline from 2018 onward, while demand continues to grow. 

De Beers expects that global rough diamond supply will peak at slightly over 160 million carats in 2018 but will plummet to 120 million carats around 2025. This constitutes a 25 percent drop from peak production in less than a decade. De Beers estimates that approximately 146 million carats were recovered in 2013.

De Beers attributes this drop in production to a lack of new mining projects expected to come on stream after 2025 that have potential production volume large enough to impact the overall market. Even if new, large mines are discovered, De Beers noted in its recently published Diamond Insight Report that these would not be developed fast enough to prevent the contraction in supply. The company estimates that the latest generation of large diamond mines have taken on average 22 years to reach production from their initial discovery.

Survival Not Guaranteed

The consulting company therefore expects further consolidation and integration in the middle of the diamond pipeline as manufacturers seek to maximize their profit margins through efficiencies of scale and scope.

Some manufacturers already predict that there will be consolidation in the cutting and polishing industry even if polished prices rise in the coming decade.

Namdar expects that polished prices will rise significantly in the next decade but diamantaires will need to continually find ways to add value along the pipeline in order to survive and benefit from these higher prices.

"There will be an industry and people will work hard because the ones that won't work hard won't be around in 10 years' time," he says. "I can't even guarantee that I will be there, but I know that many good companies that are here today have a roadmap to get there."