Diamond manufacturing
“Cyclically, the industry has recovered from the challenging 2015 environment, which was particularly acute for midstream players due to inventory overhang combined with unprecedented, ill-conceived and overly aggressive pricing of rough stones.” Helena Coles, Edison Analyst
How has the diamond manufacturing market fared over the last few years?
The diamond market is seasonal, meaning second and third quarters are historically down cycles. This makes it difficult for manufacturers, which plan three to six months ahead of peak sale quarters, to react to undersupply.
As a result, manufacturers fared badly in the 2015 diamond downturn, a slowdown caused by aggressive pricing, leading to unsustainably poor margins, together with weak polished diamond demand as a result of China’s economic slowdown and anti-corruption policies.
Has the market recovered from the 2015 downturn?
The retail environment recovered in 2016 on the back of strong economic growth. Momentum has continued into 2018, especially in China where the country’s largest jewellery retailer, Chow Tai Fook (1929.HK, market cap $91bn), posted like-for-like growth of 12% in 2017.
The recovery in the manufacturing market happened slightly later, as in 2016 the Indian government demonetised and reformed its economy. This led manufacturers to postpone the purchase of rough diamonds in India, the world’s largest diamond manufacturing hub, until the reforms were complete.
Who are the big players in diamond manufacturing?
In total, 60% of all polished diamond exports by value and 85% by volume come from India. Specifically, they come from the coastal town of Surat, 200 miles north of Mumbai, and its monopoly in Indian diamond manufacturing. The Gems and Jewellery Export Promotion Council reported that Surat exported $22.8bn of polished diamonds in 2017, up from $20.7bn the year before.
This is considerably more than the $8.9bn exported by the second-largest producer, China, whose recent entry into the market saw it grow its polished diamond export by 72% over the last five years. Russia is the third-largest diamond producer, followed by Israel, whose diamond trade far exceeds its dwindling diamond manufacturing capabilities, as cheaper Indian and Chinese labour force it out of the market.
How are diamonds manufactured?
The diamond itself varies with the qualities of the raw material. Some rough diamonds provide high-quality emerald or pear cuts, whereas others are better suited for round or brilliant cuts.
Rough diamonds need to be assayed before being cut into shape. In modern laboratories, high-precision geometrical modelling is used to detect flaws in the rough diamond and help the manufacturer choose how best to use the rough stone. The stones are then sawed or cleaved with a diamond-coated saw or laser, roughly formed in a process known as bruting then polished into their final shape.
What is driving the diamond market?
The market is concerned with raising its margins, either through better grading systems to value stones, or advanced modelling in the planning phase of a diamond’s manufacture. One of the market’s drivers is the increased popularity of high-precision geometrical modelling, which can define rough diamonds, increase yields and help apportion rough stones to their correct use and market.
Another driver is consistent pushes in diamond valuation technologies, as companies attempt to modernise an antiquated system that still depends on hand-valued gems. Major retailers are also increasingly concerned with tracking the diamond supply chain, due to clients’ increasingly uncompromising stance on provenance.
How are diamonds graded?
There is no industry standard for grading diamonds and inconsistencies have been problematic for the industry. The GIA is by far the largest certifier and provides grades for around 35% of the world’s production – 14,000 stones per day – with its 4Cs grading method.
The 4Cs refer to colour, clarity, carat weight (one carat equals 50g) and cut; each of the Cs is given a rating. In the GIA valuation, the colour is graded from D to Z, with D, E and F representing a colourless gem and S to Z a light yellow stone. The clarity is rated from flawless (FL) to a slight blemish invisible to the naked eye (IF) to minor defects (VS), noticeable faults (IS), or a significant lack of transparency or brilliance (I1, I2, I3).
The cut is examined after the diamond is weighed. It is often the most difficult C to value, as it is rated not only by the symmetry and dimensions of the gem but also the popularity of certain styles. This means it can be variable. Recently some manufacturers, Sarine and Gem Entry being the most prominent, have begun to use artificial intelligence to help standardise 4Cs valuation.
How are diamond manufacturers innovating the market?
In the traditional diamond market, companies such as Sarine (Sari.SI, market cap $418m) are pushing automation techniques as a way of significantly improving yield, as they have been shown to increase the proportion of polished diamonds extracted from a rough stone by 10%. And software improvements in the planning and evaluation phases of production have significantly improved buyer confidence and allowed flexibility in how a diamond is cut.
In addition, synthetic diamonds have finally become economically viable, produced either by growing diamonds from a crystal seed in a methane filled vacuum or using a hydraulic press to crush carbon into shape.
Many think this manufacturing innovation will disrupt the industry, as a flood of cheaper and equally brilliant laboratory-grown diamonds depress an artificially high diamond price, highly dependent on restricted supply.
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