Finding Dory? No, Finding Diamonds

Sure, "Diamonds are forever," but is the industry? It's not all that clear.

Diamonds: "a girl's best friend and a man's worst nightmare." Many know the story of De Beers' stellar marketing campaign that brought diamonds into the limelight as the gift for a marriage proposal. The campaign has been around since the late 1930's and has catapulted the stone to a $20 billion industry, but what does it say about the future of the stone?

Let's just say that the diamond industry isn't shining (pun intended): large growth from 2009 to 2011 has been cut down over the past 5 years, with a sharp pullback in mid-2015. Millennials are being singled-out as the generation that aren't dazzled by diamonds, which spells disaster for an industry that relies on weddings for almost half of its sales. That's because, not only are millennials (the generation with the highest marriage demand at the moment) waiting longer to get married (until age 28, on average), but they're also opting to buy gemstones over diamonds for a more personal gift. That's leading to a dramatic slowdown in diamond sales, from an annual growth rate of 7% from 2009-2014, to only 2% this year.

But don't let anyone tell you that it's a product of a slower economy. The Consumer Discretionary Sector, which is a look at non-essential goods and services; it's everything from diamonds to clothes, cars, movies, and everything else that people buy when they have extra money--hence "discretionary." These are things that people will often choose to "go without" when they lose a job, have an unexpected medical expense, or are hit with a downturn in the economy. Diamonds--if you can believe it--fall into the Consumer Discretionary Sector, with their purchase being reserved for the most special of occasions (at least when it comes to the general public, that is). The sector has posted large year-over-year third quarter revenue gains, approximately 10.3% (the highest of all 11 sectors), showing that the greater economy is not the cause of diamond woes.

So how does the diamond industry play catch-up? The prevailing method of diamond mining has been in the form of land operations that have spread quickly across the world and, unfortunately, caused turmoil nearly everywhere the precious stones are found (though it is out of the scope of this article, it's important to understand the darker side of diamonds). However, in 2014, a new method of diamond mining appeared: deep underwater excavation. De Beers set out to diversify their mining operations in the 1960's, but only recently developed the technology to go deeper underwater, allowing them to mine some of the purest diamonds in the world. These underwater diamonds, which are 95% pure, are worth nearly 3x their land-mined cousins, which are only 20% pure, resulting in Debmarine, De Beers' marine operation that accounts for 4% of its production, bringing in 13% of the company's total annual value.

Even with these new efforts, however, the diamond industry is poised for a cutback on supply, especially given the huge oversupply in the market. Russia's Alrosa has set a production target of 37-39 million carats for the year, falling back to pre-2014 levels, while De Beers is targeting a 26-28 million carats, a 5-10% cut from 2015. The big threat is a decrease in demand from Chinese markets, which have slowed tremendously over the past two years, after several years of boom. Due to the lack of demand, diamond inventories of Chinese retailers has grown by over 15% since 2013, bringing the price of top-quality diamonds from $12,000 per carat to nearly $7,400 in the last five years.

Another large factor on the global diamond industry is the fact that it's, well--global. Currency risk is the risk involved when converting between currencies, and leads to a bit of a tricky situation for these mining companies. For example, De Beers is mining underwater off the coast of Namibia, and paying for the right to do so in Namibian dollars. Well, when they sell the diamonds to a middle-man to sell to retailers (like Tiffany & Co.), they sell them in, let's say, Canadian Dollars. From there, the middle-man sells them to Tiffany, based in New York City, in the form of, you guessed it, U.S. Dollars. So we have Namibian Dollars to Canadian, and finally to USD. All of those exchanges are affected by the interplay between currencies: one day the Canadian Dollar could be strong, which means the middle-man can buy more diamonds per dollar, or the USD could be weak, making Tiffany pay more per diamond. In fact, the USD has been strong against the Canadian dollar until 2016, when it has fallen about 10%.

Long gone may be the days when every engagement ring proudly sported a huge, clear rock, but in spite of all this bad news, the diamond business doesn't seem to be going anywhere any time soon. It's still a $20+ billion industry with markets, like China, still relatively untapped compared to the U.S. and Japan. So the real question in all of this: will golden age of diamonds ever return?

Well, forever is a long time, so I guess we'll find out.

Adios, Maduro.

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