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THE GLOBAL DIAMOND REPORT 2014

Diamonds: Timeless Gems in a Changing World

This work was commissioned byAWDC and prepared byBain. This work isbased onsecondary market research, analysis offinancial information
available orprovided toBain &Company and AWDC, andarange ofinterviews with customers, competitors and industry experts. Bain &Company
andAWDC have not independently verified this information andmake norepresentation orwarranty, express orimplied, that such information isaccurate
orcomplete. Projected market and financial information, analyses and conclusions contained herein arebased (unless sourced otherwise) ontheinformation
described above and onBain &Companys andAWDCs judgment, andshould notbeconstrued asdefinitive forecasts orguarantees offuture
performance or results. Neither Bain &Company nor AWDC nor any oftheir subsidiaries ortheir respective officers, directors, shareholders, employees
oragents accept any responsibility orliability with respect tothis document. This document iscopyright Bain &Company,Inc. and AWDC and maynotbe
published, copied orduplicated, inwhole orinpart, without thewritten permission ofBain and AWDC.

Copyright 2014 Bain & Company, Inc. and Antwerp World Diamond Centre private foundation (AWDC). All rights reserved.

The Global Diamond Report 2014 | Bain &Company, Inc.

Contents
Note toreaders 1
1.

Recent developments inthediamond industry 3


1.1. Overview ofkey trends along thevalue chain 3
1.2. Rough-diamond production 7
1.3. Cutting andpolishing 12
1.4. Diamond jewelry manufacturing andretailing 15
1.5. Key takeaways 18

2.

Key challenges facing theindustry 19


2.1. Sustaining long-term demand for diamonds  19
2.2. Securing long-term access todiamonds  26
2.3. Synthetic diamonds 33
2.4. Diamond industry financing (short introduction) 39

3.

In-depth review ofthe diamond-financing industry  41


3.1. Definition andboundaries ofthe diamond-financing business 41

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3.2. The diamond-financing markets evolution andemerging challenges  46


3.3. Perspective onthemarkets future evolution 51
3.4. Key takeaways 56
4.

Updated global supply anddemand model 59


4.1. Global rough-diamond demand forecast: Methodology 59
4.2. Global rough-diamond demand forecast: Base scenario 62
4.3. Global rough-diamond demand forecast: Two alternative scenarios 65
4.4. Global rough-diamond supply forecast: Methodology  65
4.5. Global rough-diamond supply forecast: Base scenario 66
4.6. Global rough-diamond supply forecast: Two alternative scenarios 69
4.7. Global rough-diamond supply-demand balance, 20142024 70
4.8. Risks anddisruptive factors 70
4.9. Key takeaways 71
Conclusion 73
Glossary  75
Key contacts for thereport 78

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The Global Diamond Report 2014 | Bain &Company, Inc.

Note toreaders
Welcome tothe fourth annual report ontheglobal diamond industry prepared bytheAntwerp World Diamond
Centre (AWDC) andBain & Company. Last years report, Journey through theValue Chain, focused onproviding
theinvestment community with adetailed understanding ofthe road tomarket for rough andpolished diamonds.
In this years edition: Diamonds: Timeless Gems inA Changing World, we focus onkey challenges facing theindustry, initiatives under way toaddress them, andpossible outcomes that would support theindustrys continued growth. We believe that thechallenges explored inthis report also present opportunities for all players
inthediamond industry andfor theinvestment community. Thekey challenges include thefollowing:

Sustaining demand for diamonds injewelry andasinvestments. What models ofcooperation are players
adopting tospur demand for diamonds, injewelry andasaninvestment vehicle?

Securing long-term access todiamonds. Aslong-term supply tapers off, what options can retailers consider?

Defining therole ofsynthetic diamonds. What opportunities andchallenges will thecontinued evolution
ofsynthetic-diamond technologies present totheindustry?

Ensuring that diamond financing will continue tosustain industry growth. How should thediamond-finan
cing business model evolve tosustain healthy growth for all industry players?

As inprevious years, thereport also identifies key trends along thevalue chain for rough andpolished diamonds
aswell asdiamond jewelry. We compare 2013 results with theresults ofprevious years andhighlight theimpact
ofcontinuing economic uncertainty onthediamond market.
We also provide anupdate ontheoutlook for thediamond industry through 2024. The2024 demand outlook
isbased onour extensive market analysis andresearch. Theupdated supply forecast is based onthelatest developments among key diamond miners andthelargest diamond mines worldwide.
Readers seeking aquick overview ofthe reports conclusions will find asummary ofkey takeaways attheend
ofeach chapter andintheconclusion ofthis report. Some ofthe most significant points we touch oninthereport are asfollows:

A sustained rebound andpositive market outlook in2013, despite continued macroeconomic uncertainty.
In2013, thediamond industry grew across every link inthevalue chain, powered primarily bydemand
intheUS andChina. Uncertainty for theindustry stems primarily from themacroeconomic environment,
which will determine demand dynamics inthemajor diamond-consuming countries.

New ways tosustain demand for diamonds injewelry andasinvestments. Demand for jewelry isstill
themain driver ofdiamond demand. Diamond jewelry marketing has shifted from generic toretailer-supported branded advertising since 2000. Recent developments include closer cooperation among industry
players andasharper focus onemerging markets. Investment demand remains relatively low, despite diamonds attractiveness asaninvestment. Theindustry is supporting initiatives tospur thelong-term growth
ofinvestment demand byenhancing price transparency andmarket liquidity.

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Strategies for securing access togem-quality diamonds. Because diamond demand is expected tooutpace
future supply, retailers are increasingly looking for options tosecure access togem-quality diamonds. They
are considering long-term contractual agreements andinvestments inupstream or midstream players tosecure such access.

Opportunities andchallenges presented bysynthetic diamonds. Synthetics create new opportunities inhigh-tech
andindustrial applications. Asjewelry inputs, they can coexist with natural stones. There currently isnoindication that consumer preferences are shifting from natural diamonds tosynthetics, but synthetics can erode customer confidence if sold undisclosed. Thetwo major industry initiatives aimed atmitigating this risk are theincreased use ofsynthetics detection technologies andmore frequent certification.

The need toadjust theoperating model ofthe diamond-financing business. Bank lending inthediamondfinancing industry has played avital role, but inthepast few years access toliquidity has become more challenging for middle-market players. Thediamond-financing model needs adjustment toonce again fuel industry growth.

The long-term projection is for demand growth tosurpass supply growth. We expect thedifference between
thedemand andthesupply growth rates tobe positive from 2014 through 2018 andtowiden starting in2019.
Demand is projected tocontinue its long-term growth trajectory, supply is projected tolag behind demand
asexisting mines will get depleted, andno major additions are projected tocome online.

We hope you will find theinsights inthis report useful andcompelling, andwe look forward todiscussing
them with you.

Antwerp World Diamond Centre (AWDC)

Bain & Company

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The Global Diamond Report 2014 | Bain &Company, Inc.

1. Recent developments inthediamond industry


1.1. Overview ofkey trends along thevalue chain
From thepeaks tothe depths andback again: such has been thecourse traced bytheglobal diamond market since
2008. In2013, however, thediamond market showed clear signs that its rollercoaster trajectory ofrecent years has
moderated, andthat it is now onapath ofsteady, sustainable growth across every step ofthe value chain.
In 2013, rough-diamond sales increased by2%, even though four out offive major producers increased their
revenues by516%. According toKimberley Process statistics, smaller producers reduced their output, which
pulled down theaggregate sales total for theyear.
The cutting andpolishing segment ofthe diamond value chain reported a4% rise inrevenues, toabout $22billion. Indias share ofthose revenues increased ataneven more robust rate, tomore than 60%, confirming
thecountrys status asthe center ofthe cutting andpolishing industry.
China, for its part, solidified its position asthe hub ofdiamond jewelry manufacturing, capturing most oftheindustrys revenue growth in2013. China, already theglobal leader inoverall jewelry production, now claims
agrowing share ofglobal diamond-jewelry manufacturing, while theshares ofEurope andtheUS have conti
nued todwindle, asmanufacturers there focus almost exclusively onpieces for thetop end ofthe market.
Retail sales ofdiamond jewelry rose anestimated 3%, andEuromonitor, anemerging source for perspectives
ondiamond jewelry sales, confirmed aneven more aggressive growth trend inthefirst half of2014. Continued
strong demand from China andaresurgence ofdemand intheUS powered therise ofthe retail segment. Inboth
countries retail sales grew, inpercentage terms, atahigh-single-digit rate. Anddespite worries that thepositive
momentum would dissipate inthesecond half of2014, reports from theSeptember Hong Kong Jewellery &Gem
Fair suggest that thecrucial 2014 holiday selling season will be apositive one (see Figure 1.1.1).
Prices ofboth rough andpolished diamonds have corrected since peaking in2011, showing amoderate growth
trajectory in2013 andthefirst half of2014 that is inline with long-term historic trends (see Figure 1.1.2).
Prices ofdifferent categories ofpolished diamonds grew atdivergent rates, with prices for small stones growing faster than those for large stones. For example, prices ofpolished diamonds of0.3carats rose atahighsingle-digit rate, while stones of1 carat andlarger posted declines inthe34% range in2013. Such disparity
inprice growth bycategory also continued inthefirst half of2014, with prices for polished diamonds ofless
than 1carat posting moderate growth inthe46% range andprices for larger stones continuing their slightly
negative trajectory.
TheUS, China, and India remain the worlds three largest markets fordiamond jewelry and power theglobal
industrys growth (see Figure 1.1.3). TheUS confirmed its position astheworlds leading diamond retail
market, powered byeconomic growth ofapproximately 2% in2013abig improvement from the1.6% decline
posted during and immediately after the global financial crisis. The consensus forecast among economists isthat
the US isonpace for aperiod ofsteady long-term GDP growth inthe23% range, which suggests that US
demand fordiamond jewelry will continue torise. Recently released short-term forecasts ofUSGDP are even
more optimistic, with expectations ofeconomic growth slightly above 3% in2015.

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Figure 1.1.1: Revenues across thediamond value chain posted solid growth
Rough diamonds

Diamond jewelry

Polished diamonds

Rough-diamond
sales

Cutting and
polishing

Jewelry
manufacturing

+2%

Global revenues by value chain segment, $

+2%

-17%

-8%

+2%

2011

Retail sales

2012

+3%

+3%

+4%

2013

CAGR 20112012

CAGR 20122013

Note: Jewelry manufacturing value is estimated at approximately 65% of retail sales based on the historic average
Source: IDEX, Tacy Ltd. and Chaim Even-Zohar

China is still thefastest-growing economy among themajor global diamond jewelry markets, although its GDP
growth rate has slowed somewhat from themid-teens before thecrisis toabout 7.7% annually. Inpercentage
terms, Chinas diamond-jewelry retail sales in2013 rose atahigh-single-digit rate from 2012, apace that seems
sustainable going forward given theexpectations for continuous robust growth ofGDP andthemiddle-class
population. That rate would preserve Chinas status asthe main engine ofdiamond-jewelry-industry growth.
Two other developments inChina may have animpact onthedemand for diamond jewelry. New anticorruption
laws could have ashort-term negative impact onthemarket for hard luxuries. Atthesame time, theChinese
retail market is coming toresemble mature, developed diamonds markets such asthat ofthe US, according
toindustry participants. Diamond jewelry, once theexclusive preserve ofChinas wealthiest citizens, is democratizing. Retailers are offering affordably priced jewelry containing smaller, lower-quality stones tomeet increasing
demand from thecountrys fast-growing middle-class population.
Retail sales ofdiamond jewelry inIndia, theworlds third-leading diamond-jewelry market, fell despite positive
GDP growth. There are several reasons for thedownturn, including the12% decline inthevalue ofthe rupee
in2013, adecline ingold prices ofabout 30%, andthenearly flat growth ofthe middle-class population since
2011. Therupees tumble eroded purchasing power, while theplunge ingold prices ontheone hand made diamond jewelry cheaper owing tothe effect onits gold component but ontheother prompted consumers tosubstitute gold jewelry for diamond pieces. Therupees value has stabilized in2014, andIndias economic fundamentals have improvedboth positive indicators ofimproved diamond-jewelry retail sales inthenear term
andthebasis for sustainable growth inthelong term.
Demand inEurope, meanwhile, partially recovered. Conditions there require careful monitoring, however, because theEuropean economys continued stagnation suggests that theGDP growth slowdown is not cyclical but

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 1.1.2: Rough- andpolished-diamond price growth reverts to near its historic trajectory
Polished-diamond price index, 2004 = 100

Rough-diamond price index, 2004 = 100

200

250
CAGR
-2%

CAGR
+6%

CAGR
+2%

200

150

Polished
diamonds
150

100
CAGR
+12%

CAGR
+4%
50

2004

2005

2006

2007

2008

2009

100

CAGR
-2%

2010

2011

2012

2013

Rough
diamonds

50

H1 2014

Note: The CAGR for polished-diamond prices is calculated as the growth rate for year-end or period-end prices; the price index for polished diamonds tracks stones of different sizes
Source: PolishedPrices.com; Kimberley Process; company data; Bain analysis

Figure 1.1.3: TheUS, China, andIndia lead theworld indiamond jewelry consumption
Structure of diamond jewelry retail sales, value, 2013
Change vs. 2012
100%
Others
80

Persian Gulf
Japan
Europe

60

40

20

India
China

US

0
Note: China includes Hong Kong; Others include the remaining geographies; Europe figures estimated based on historical shares in total market
Source: IDEX, Tacy Ltd. and Chaim Even-Zohar; Bain analysis

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Figure 1.1.4: Theshort-term outlook for global economic growth is robust


Real GDP CAGR
Crisis
20072009

Rebound
20092011

China

EU
US

1.8%

- 2.1%

Japan - 3.3%

2.3%

2.1%

2.9%
1.0%

2.2%

1.5%

Developing countries

3.9%

2.3%
- 0.4%

2.1%

- 1.5%

6.3%

3.1%

2.2%
- 0.6%

7.2%

5.0%

2.9%

3.4%

- 0.3%

Growth
20132015F

7.7%

4.7%

6.2%

3.3%

Stabilization
20122013

7.7%

8.4%

6.2%

Persian Gulf
World

9.9%

9.4%

India

Uncertainty
20112012

1.5%

2.7%
1.6%

Developed countries

Note: Persian Gulf includes Arabian Peninsula (without Iraq)


Source: EIU; Bain analysis

Figure 1.1.5: Diamond jewelry retail andmining account for themajority ofthe diamond industry profit pool
Rough diamonds
Exploration
and
production

Polished diamonds

Roughdiamond
sales

Cutting
and
polishing

Polisheddiamond
sales

Diamond jewelry
Diamond jewelry
manufacturing

Diamond jewelry retail sales


High dispersion by player:
Top luxury brands 2035%
Majority of big chains 714%
E-tailers 25%
Low-performing traditional retail 25%

Average operating margin, 2013


2125%
Increase in performance
volatility among players:
Top players up to 10%
Middle majority 14%
Low performers <0%

13%

34%

23%

1418%

35%

46%

Large retailers
(~35% of
the retail market)

Small retailers
(~65% of the retail market)

Bar width corresponds


to segment revenue in 2013
Note: Analysis of exploration and production is based on data for De Beers, ALROSA, Rio Tinto, Dominion Diamond, Petra Diamonds; analysis of large chains is based on data
for Blue Nile, Chow Sang Sang, Chow Tai Fook, Gitanjali, LVMH, Michael Hill, Richemont, Signet Jewelers, Tanishq, Tiffany & Co., Zales
Source: Publication analysis; IDEX, Tacy Ltd. and Chaim Even-Zohar; company data; expert interviews; Bain analysis

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The Global Diamond Report 2014 | Bain &Company, Inc.

has instead settled into anew normal oflow or flat growth. Japan, thethird pillar ofthe diamond jewelry market
inthedeveloped world, maintained moderate demand growth despite increasing tax pressures that affected lu
xury-goods sales in2013 (see Figure 1.1.4).
The diamond industrys total profit pool remained stable in2013. Diamond jewelry retail claimed thelargest
share ofthe industrys profit poolslightly less than half. Retailer margins were stable overall but varied significantly among players: from 2035% for luxury players down tothe low single digits for online retailers orsmaller shops. Mining accounts for thenext-largest share, claiming about aquarter ofthe total pool, with profit margins of2125%. Theincrease inmining profits is attributable toincreased production atmost large mines,
higher rough-diamond revenue generated bychanges indiamond production mix andprice, andoperational
improvements.
Cutting andpolishing margins tell asomewhat different story. Although operating margins for cutters andpoli
shers andtraders held steady inthe14% range, margins were more widely dispersed than inprevious years.
Smaller players, facing growing costs for labor, real estate, andenergy, saw their margins shrink tozero or turn
negative. Some larger players, bycontrast, were able toimprove operating effectiveness andtake advantage
oftrends inpolished-diamond prices topost margins ashigh as10%. Most ofthose players were large integrated
companies whose operations run thelength ofthe middle-market value chain, from polishing tojewelry manufacturing (see Figure 1.1.5).

1.2. Rough-diamond production


In 2013, according toKimberley Process statistics, rough-diamond output, asmeasured bycarats, grew amodest
2% to130 million carats. Output in2012, for comparison, increased more, by4%.
Russia claimed thelargest share ofthe production increase3million carats. Production rose because ALROSAs Aikhal underground mine reached its target capacity, ore grade attheJubilee pipe improved, andALROSA
acquired theNizhne-Lenskoye diamond-mining company. Australias production increased 2.5million carats
asaresult ofRio Tintos commissioning ofan underground mine atArgyle. Botswanas output grew by2.5million carats because ofincreased production byDebswana.
At theother end ofthe production spectrum, theDemocratic Republic ofthe Congo andZimbabwe cut their
production byacombined 7.4million carats. Congo reported that production decreased by5.8million carats, but
industry insiders suspect that output might be understated. Zimbabwes production fell by1.6million carats.
Alluvial deposits have been depleted, andproducers have been slow totransition tomore costly underground
mining (see Figure 1.2.1).
Even though overall growth was moderate, all five major rough-diamond-producing companies increased their
output in2013, three ofthem bydouble-digit percentages. ALROSA, which produced 37 million carats, a7%
increase from 2012, was once again thevolume leader (see Figure 1.2.2).
De Beers, whose sales increased 5%, retained its position asthe revenue leader, followed closely byALROSA. Thetop
five players together collected about 85% ofindustry revenues, with Petra Diamonds posting thelargest revenue increase inpercentage terms, 16%. Rio Tintos revenues increased 15%, asunderground operations intheArgyle mine
came online. ALROSAs revenues rose 9%, consistent with its increase inproduction volume (see Figure 1.2.3.).

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Figure 1.2.1: Production volume in2013 grew amodest 2%, but there were wide disparities in output
from major countries

Annual production, millions of carats


176

168

CAGR
(20062013) (20122013)

163

120

128

123

128

130

-4%

2%

Others

-9%

-18%

Canada

-3%

1%

Australia

-13%

28%

Russia
Zimbabwe
Namibia

2006

2007

2008

2009

2010

2011

2012

0%

8%

39%

-14%

-5%

4%
12%

Angola

0%

South Africa

-8%

15%

DRC

-8%

-27%

Botswana

-5%

13%

2013

Note: Only diamonds tracked by Kimberley Process are included; Russia includes ALROSA, Nizhne-Lenskoye (acquired by ALROSA in 2013), and Uralalmaz
Source: Kimberley Process

Figure 1.2.2: Major producers increased their share ofworldwide production, andthetop 5 players
accounted for 70% oftotal volume
Annual production, millions of carats

176

CAGR
(20062013) (20122013)

168

163

120

2006

2007

2008

2009

128

2010

123

2011

128

2012

-4%

2%

Others
Petra Diamonds
Dominion
Diamond*

-3%
51%
-5%

-15%
23%
1%

Rio Tinto
De Beers
ALROSA

-11%
-7%
0%

22%
12%
7%

130

2013

*Combined figures for BHP Billiton and Dominion Diamond in 20062012, FY ends January 31st, year 2006 represents FY 2007 and so on
Note: BHP Billiton sold its diamond business to Dominion Diamond in 2012; BHP Billitons data converted from year-ending in June to year-ending in December,
based on company reports for full year ending in June and reports for half year ending in December; only diamonds tracked by Kimberley Process are included
Source: Company data; Kimberley Process; publication analysis; expert interviews; Bain analysis

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Figure 1.2.3: Most major producers increased revenues, but small producers revenues fell, holding
growth to 2%

World rough-diamond sales by producer (including sale of stocks), $ billions


~18

CAGR
(20062013) (20122013)
~16

~13

~14

~16

2%

Others (estimated) 3%
Petra Diamonds 55%
-1%
Dominion
Diamond*
0%
Rio Tinto
0%
De Beers
6%
ALROSA

-15%
16%
-16%

~12

~7

2006

3%

~14

2007

2008

2009

2010

2011

2012

15%
5%
9%

2013

*Combined figures for BHP Billiton and Dominion Diamond in 20062012, FY ends January 31st, year 2006 represents FY 2007 and so on
Note: BHP Billiton sold its diamond business to Dominion Diamond in 2012; ALROSA revenues represent diamond sales only; Rio Tinto, BHP Billiton, and Dominion Diamond
revenues include diamond mining only; BHP Billiton and Petra Diamonds data converted from year-ending in June to year-ending in December, based on company reports
for full year ending in June and reports for half year ending in December; only diamonds tracked by Kimberley Process are included; Others estimated assuming no price
change for the players in this segment
Source: Company data; IDEX, Tacy Ltd. and Chaim Even-Zohar; Bain analysis

In thefirst half of2014, thedynamics ofproduction among themajor producers changed. ALROSAs output
decreased by7% compared with thefirst half of2013 because ofplanned maintenance attheAikhal
andUdachnaya processing plants anddespite thegrowth ofoutput from recently launched Severalmaz production. Thepace ofgrowth atRio Tinto andPetra Diamonds slowed from thedouble digits to2% and4%,
respectively. Dominion Diamond ramped up its output by7%. De Beers sustained its pace ofgrowth at12%,
thanks tohigher output atVenetia following therecovery from aflood inthepit andhigher output from
processing plants atJwaneng.
Three other events in2014 are worth noting. LUKOIL started diamond production inits Vladimir Grib mine,
selling thefirst diamonds atauction inBelgium. ALROSA commissioned its Udachny underground mine,
andCharles E. Chuck Fipke, alegendary diamond explorer, agreed tosell his remaining 10% stake intheEkati
mine toDominion Diamond.
Profitability
Revenue growth andhigher prices for rough diamonds translated into improved profitability for all major producers in2013, asmeasured both inabsolute terms andby price per carat.
ALROSA remained theleader inabsolute earnings before interest andtaxes (EBIT), followed byDe Beers.
ALROSA recorded EBIT of$1.8billion in2013, delivering astrong growth ontheheels ofits successful IPO earlier
intheyear; De Beers reported EBIT of$1billion. Measured byEBIT per carat, ALROSA leads theway, followed
byPetra Diamonds andDe Beers. While Rio Tinto andDominion Diamond trail thetop three byaconsiderable
margin, both have recovered from losses in2012 andare steadily improving their profitability (see Figure 1.2.4).

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Figure 1.2.4: All major players increased profitability; Rio Tinto andDominion Diamond recovered
from losses

EBIT per carat, 2013, $


50
39
32

12
6

ALROSA

De Beers

Bar width corresponds


to production volume in 2013

Rio Tinto

Petra Diamonds
Total EBIT,
$ millions

Dominion Diamond
1,831

1,003

89

52 119

Note: Rio Tinto and Dominion Diamond EBIT include diamond mining only; Petra Diamonds data converted from year-ending in June to year-ending in December,
based on company reports for full year ending in June and reports for half year ending in December
Source: Company data; Bain analysis

Profitability of major rough-diamond producers


EBIT per carat, $

Total EBIT, $ millions


Year

2012

2013

H1 2014

2012

2013

H1 2014

ALROSA

1,579

1,831

1,121

46

50

70

De Beers

818

1,003

765

29

32

48

Rio Tinto*

- 65

89

71

-5

-109

52

77

-25

12

26

48

119

101

19

39

69

Dominion Diamond*
Petra Diamonds

*Rio Tinto and Dominion Diamond EBIT include diamond mining only, excluding other businesses
Note: Combined figures for BHP Billiton and Dominion Diamond in 2012; Petra Diamonds data converted from year-ending in June to year-ending in December,
based on company reports for full year ending in June and reports for half year ending in December
Source: Company data; Bain analysis

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Figure 1.2.5: Operating margins continued to improve inthefirst half of2014


EBIT margin, %

45
34 33

20
8

11

13

40

38 38

28

24

16

17

16

13

10

ALROSA
2010

2011

-9

-12

Rio Tinto

Dominion Diamond*

2012

20 21

De Beers

35

32

2013

Petra Diamonds

H1 2014

*Combined with BHP Billiton for 20102012; BHP Billiton sold its diamond business to Dominion Diamond in 2012
Note: Rio Tinto, BHP Billiton, and Dominion Diamond revenues and EBIT include diamond mining only; Petra Diamonds data converted from year-ending in June to year-ending
in December, based on company reports for full year ending in June and reports for half year ending in December
Source: Company data; Bain analysis

The trend ofincreasing profitability continued into thefirst half of2014 (see

Figure 1.2.5).

Key challenges
Todays diamond market presents producers with four major challenges:

Reserves replenishment

Environmental challenges

Increasing social awareness

Increasing pressures onoperating costs

Reserves replenishment
There are few known major underdeveloped diamond sites, andno major discoveries have been made over
thepast two decades. Asaresult, thecost offinding new, economically recoverable deposits is rising.
Environmental challenges
Increasing public awareness ofenvironmental topics has had direct impacts onthemining business. Producers
areunder pressure tomake effective use ofenergy andreduce emissions. They must also focus onwaste management

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toincrease recycling andcontrol water consumption, atask complicated bythefact that most important production
sites are located inwater-scarce areas. Andminings impact onbiodiversity andecosystems ingeneral isanissue.
Social awareness
Producers are paying increasing attention tolocal communities inareas ofproduction, resulting indirect
andindirect impacts onoutput. Beneficiation programs are meant tosupport economic development andboost
employment indiamond-producing countries bysetting up local cutting andpolishing operations. Such businesses were set up inAfrica inrecent years, andthere is adiscussion ofdeveloping aRussian cutting andpoli
shing industry under ALROSAs leadership. Indirect impacts are visible inproducers involvement inlocal
communities outside their core mining activities. This involvement often takes theform offinancing ordeve
loping social infrastructure inmining areas.
Increasing pressure onoperating costs
Consistent with themining industry asawhole, diamond producers are facing rising costs for inputs such aslabor
andenergy, aswell asprojects whose increasing technical challenges translate tohigher operating costs.
Confronting mounting challenges that are not unique tothe diamond industry but rather representative oftheentire mining sector, producers must make significant investments innew technology andoperating efficiency
tosustain thediamond mining industry inthemedium andlong term.

1.3. Cutting andpolishing


The cutting andpolishing market swung back topositive growth in2013 after receding in2012, with revenues
increasing toapproximately $22 billion, a4% rise. That growth was confined toIndia, which solidified its position attheheart ofthe cutting andpolishing industry with a12% revenue increase. India now claims more than
60% ofthe cutting andpolishing market (see Figure 1.3.1).
India delivered growth even asChina, another major cutting andpolishing region, saw its market share reverse its growth trajectory anddecline by6%. Two major factors contributed toIndias outperformance. Technological innovations andincreased operating efficiency propelled India into aclear position ofcost leadership anddrew rough-diamond volumes away from China. AndIndian banks continued tosustain
theindustrys liquidity despite tightening their lending standards, while decreased financing availability
forced players inother marketsmost notably Europe, Israel, andtheUSto deleverage.
Chinas cutting andpolishing costs for small diamonds are higher than Indias, andChina also lacks Indias range
ofviable financing options. Unlike India, mainland China has not yet developed anetwork oflocal players tosupport
local cutters andpolishers. Yet themarket shares ofChina andSoutheast Asia could have decreased even further were
it not for several mitigating factors. Thegrowth oflocal jewelry manufacturers that seek direct control ofprocess efficiencies anddetection ofsynthetic stones has prevented more volumes from migrating toIndia. Inaddition, social
pressures have persuaded manufacturers tokeep some polishing operations near manufacturing sites.
A number ofkey downstream players have decided toretain some production capacity inSoutheast Asia, andsome
have even enlarged their footprint. Tiffany &Co., for example, opened anew polishing facility inCambodia in2013.

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Figure 1.3.1: India continues to dominate cutting andpolishing andsustained thesegments growth in2013
Global sales of polished diamonds by selling country, $ billions

CAGR
(20062013) (20122013)
23

20
19

21

20
18

13

2006

2007

2008

2009

2010

2011

2012

2%

4%

Others

-7%

-2%

Africa

22

12%

-12%

China and
Southeast
Asia

6%

-6%

India

3%

12%

2013

Note: Distribution between countries is based upon expert assessment; Africa includes South Africa, Namibia, and Botswana; Others includes Russia, US, Israel, and Belgium
Source: IDEX, Tacy Ltd. and Chaim Even-Zohar; Bain analysis

Belgium, Israel, andtheUS, whose cutting andpolishing industries concentrate almost exclusively onvery
high-end stones, saw slight revenue declines ofabout 2%, breaking astreak of8% annual declines every year
from 2006 through 2012.
Recent story ofcutting andpolishing
The recent story ofthe cutting andpolishing sector is consistent with theindustrys historical development.
Intheindustrys early days, cutting andpolishing operations set up shop close totrading centers, asinEurope,
Israel, andtheUS, orclose tomining locations, asinSouth Africa andRussia. Over time, cutting andpolishing
businesses started moving tolower-cost areas such asIndia, China, and, later, Southeast Asia. Asaresult, traditional cutting centers refocused their operations onthemost expensive stones, for which labor cost isarelatively
small component andwhich require advanced technical skills tocut diamonds. Thecombined market share
forsuch centers has consistently declined andnow accounts for about 10% ofthe cutting andpolishing market
byvalue.
The lower-cost regions, bycontrast, have gained inimportance andnow constitute about 80% ofthe total market
byvalue. Thereminder comes from other countries, including African countries, where thebeneficiation policies require local diamond processing despite relatively high production costs.
New advances intechnology andskills development have enabled Indian andChinese cutting centers tocompete
inthemarket for larger andmore expensive stones. This development has forced traditional cutting andpolishing
centers toreevaluate their focus andbusiness models. Because significant cost differences among cutting-center
locations continue togrow, we expect this trend tocontinue into thefuture (see Figure 1.3.2).

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Figure 1.3.2: Cost differentials drive market share trends inthecutting andpolishing industry
Estimated cutting and polishing cost per carat, $
~100200

~60160

~70100
~50100

~3050
~1050

New York
Belgium

Africa

China and Southeast Asia

India

Israel
Russia

Bar width corresponds


to sales value of polished
diamonds in 2013

Source: Expert interviews; IDEX, Tacy Ltd. and Chaim Even-Zohar

Key challenges
The cutting andpolishing segment ofthe diamond industry must contend with three major, interconnected
challenges:

The need tocontinuously improve operating effectiveness tomitigate thepressure onmargins caused
bygrowing input costs andlong-term rough- andpolished-diamond price trends

Obtaining needed financing ofcutting andpolishing activities

Increasing requests for certification from jewelry manufacturers

As we discuss ingreater detail inChapter 3, financing issues are reshaping themiddle markets way
ofdoing business, andmarket risk is increasing asmiddle-market margins tighten. More restrictive regulatory
regimes such asBasel III have compelled traditional finance playersparticularly diamond bankstoreduce
their debt loads.
Concerns that synthetic stones are entering themanufacturing pipeline undetected have prompted anuptick
indemand for certification. Thedemand puts additional pressure onthecutting andpolishing segment andextends processing times.

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The financing andcertification trends have lent new urgency tothesearch for greater operating efficiency. Labor
cost optimization andtechnological innovations such asnew cutting machines are key elements ofthis search.

1.4. Diamond jewelry manufacturing andretailing


As ageneral rule, theperformance ofthe downstream segments ofthe diamond industrymanufacturing
andretailingcorrelate closely with theperformance ofthe global market for luxury andhard luxury goods such
asjewelry andwatches. In2013 theglobal luxury market grew 5% to$288billion, onthestrength ofunexpected
shifts inregional trends (see Figure 1.4.1).
Europe, for example, improved inthesecond half of2013, with thelargest contributions coming from France
andtheUK. TheUS continued togrow, albeit ataslower pace than in2012. Together, Europe andtheUS
account for 6570% ofworldwide demand for luxury goods.
Japan booked double-digit growth inreal terms, but theyens devaluation inthewake ofJapans expansionary
monetary policy offset that growth. Growth inChina slowed markedly, especially inmainland China, asthegovern
ments new anticorruption measures, still being implemented invarious regions, began totake hold. Other
emerging markets, such asthe Gulf region andAfrica, reported healthy growth.

Figure 1.4.1: Thegrowth trend inluxury goods consumption, up 5% in2013, is expected to continue in2014
Volume of global market of luxury goods, Index, 2006 =100 ($200 billions)
Expansion

Crisis

CAGR
16%

CAGR
-13%

CAGR
16%
116

123

Stabilization
CAGR
5%
134

136

144

151

115
107

100

2007

2008

2009

2010

Hard luxury market


(jewelry and watches)

CAGR
5%

CAGR
13%

CAGR
-1
-11%

CAGR
15%
2006

Rebound

2011

Note: Nominal prices


Source: Bain & Company Luxury Goods Worldwide Market Study, spring 2014

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Figure 1.4.2: Diamond jewelry sales in2013 exceeded precrisis levels; thevalue ofdiamond content
grew atthesame pace

Global diamond-jewelry retail sales, $


Expansion

Crisis
CAGR
-9%

CAGR
7%

CAGR
9%
2006

Rebound

2008

CAGR
3%

CAGR
18%

CAGR
CAGR
30%

CAGR
-14%
2007

Stabilization

2009

2010

Diamond content

CAGR
3%
2011

2012

2013

Diamond jewelry sales

Note: Diamond content includes sales of polished diamonds including stocks and synthetic and recycled diamonds
Source: IDEX, Tacy Ltd. and Chaim Even-Zohar; Bain analysis

The product category that led thegrowth ofthe luxury sector was accessories, which benefited from global price
increases. Shaking off theimpact ofreduced demand inChina, thehard luxury subsector grew 5%, inline with
theoverall market inluxury goods. Thetrend toward democratization ofhard luxury items was clearly visible
intheoutperformance ofaffordably priced jewelry andwatches. Both diamond jewelry retail sales andthevalue
ofdiamond content roughly mirrored thegrowth ofthe hard luxury market itself, posting 3% gains andtopping
their precrisis levels (see Figure 1.4.2). Euromonitor confirmed thegrowth trend.
Notable trends
There are three notable trends inthediamond jewelry retail: diamond recycling, thegrowing role ofe-retailers,
andforays into further upstream integration bythemajor retailers.
Diamond recycling
Recycling has now arrived attheretailers shop floor. A number ofhigh-end retailers now offer torepurchase
stones from customers. De Beers, through astand-alone venture, theInternational Institute ofDiamond Valuation (IIDV), isrunning asmall-scale program with alimited number ofretailers intheUS toassess theeffectiveness ofexisting approaches tore-selling and toexplore how they can bedeveloped and improved fortheconsumer. These activities will probably reinforce certain brands, such asDe Beers Forevermark. They might also
contribute toincreased market transparency andliquiditycrucial elements inthedevelopment ofdiamonds
asaninvestment. Following asurge involume during andimmediately after thefinancial crisis, diamond recycling now accounts for about $1 billion inpolished diamonds. Recycling is gaining popularity intheUS, asisvintage or recast jewelry.

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Continued advance ofe-tailers


Online stores such asBlue Nile andmarketplaces such asAmazon.com, Alibaba.com, andeBay claimed agrowing share ofdiamond anddiamond jewelry distribution, atarate consistent with theoverall growth
ofe-tailing. IntheUS alone, e-tailers account for 13% oftotal jewelry sales and18% ofvolume.
Growth ofonline sales presents theindustry with both anopportunity andachallenge. Ontheone hand, online
offers anadditional sales channel; ontheother, it poses athreat tobrick-and-mortar retailers because online channels offer greater price transparency andwider inventory, enable shoppers toquickly andeasily compare indivi
dual stones, andhave lower operating costs. Theonline channel likely represents thebiggest threat tosmaller
chains with unclear differentiation oftheir diamond jewelry.
Forays by jewelry retailers upstream
Over thepast few years, diamond jewelry retailers have been expanding their operations further upstream
bysetting up cutting andpolishing operations. Tiffany & Co. AndChow Tai Fook, for example, have established
operations incutting andpolishing, with Chow Tai Fook most recently opening its fourth diamond-cutting
and-polishing site inBotswana. Signet Jewelers, one ofthe largest specialty jewelry retailers intheUS andUK
andtraditionally abig buyer ofpolished stones, acquired acutting andpolishing factory inGabarone, Botswana.
Even though thepolishing andcutting businesses production accounts for asmall portion ofthe overall poli
shed-diamond demand for some ofthese players, such moves nevertheless represent animportant step for
theindustry.
In 2014, thediamond jewelry retail sector saw two major acquisitions. InMay, Signet Jewelers announced that it
had completed its acquisition ofZales, leading tosignificant consolidation ofthe US market. Another big deal was
theacquisition byChow Tai Fook, theChinese jewelry giant, ofHearts onFire, aUS maker ofbranded luxury diamonds. Theacquisition, announced inJune, confirmed theincreasing strength ofAsian downstream players.
Recent developments injewelry manufacturing
Turning tojewelry manufacturing, we noted earlier that manufacturing revenues grew 3% from 2012 through
2013. Atthesame, themanufacturing business has become significantly more concentrated. China cemented its
leadership position injewelry manufacturing, asglobal players such asChow Tai Fook andChow Sang Sang
continued toconsolidate multiple steps ofthe value chain inChina, integrating cutting andpolishing operations
with manufacturing andretailing tobetter control theefficiency andreliability ofproduction processes.
Indias manufacturers posted growth inthelow single digits asthey continued tocede volume toChina. All other
manufacturing countries andregions, including Europe, North America, andSoutheast Asia, saw their shares
contract further asthey confirmed their niche asspecialists inhigh-end stones.
The major trend shaping themanufacturing subsector is market consolidation. InChina especially, major players are capturing scale economies byconsolidating thevalue chain andintegrating polishing, manufacturing,
andretailing. Scarce liquidity has also worked tothe advantage ofdeep-pocketed major players, which, unlike
many smaller players, have thefinancial wherewithal towithstand prolonged credit squeezes.

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1.5. Key takeaways


Every segment ofthe diamond industry value chain bucked thenegative trends of2012 andposted moderate
growth of24% in2013.

In line with anincrease inKimberley Processcertified production volumes andrising rough-diamond


prices, rough-diamond sales grew by2% in2013. Cutbacks atsmaller producers smoothed theincrease.

Prices ofboth rough andpolished diamonds have corrected since thepeak of2011 andare beginning totrend
moderately upward. There is variation within polished-diamond price growth, with prices for small stones
growing faster than prices for large stones. Stones ofless than 0.5carats are showing particular strength,
growing inthemid-single digits.

All five major producers increased both production andprofitability, despite rising operating costs andproduction challenges.

Cutting andpolishing revenues topped $22 billion in2013, a4% increase. India, thesegment leader, accounted
almost solely for themarkets growth. Thesegment faces three major continuing challenges: achieving greater
operational efficiency, meeting increasing demands for certification, andsecuring financing.

Retail sales ofdiamond jewelry grew by3% in2013, supported bycontinued strong demand from China
andarecovering US market.

The most recent GDP growth forecasts suggest healthy diamond-jewelry demand growth inthemedium
term inboth developing anddeveloped countries. Some uncertainty remains, however, about theEuropean
economic outlook.

Jewelry manufacturing revenues grew by3%. China now accounts for thelargest share ofglobal jewelry
production.

Industry insiders report that thepositive trends held up during thefirst half of2014, positioning theindustry
tomaintain momentum along every step ofthe value chain andraising expectations for thecrucial holiday
selling season.

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2. Key challenges facing theindustry


Now that thediamond industry has successfully recovered from theeconomic downturn andreturned toastable
growth trajectory, we have identified four questions that currently are top ofmind for various industry participants andare important indefining thelong-term outlook for theindustrys development.

How can theindustry sustain long-term demand for diamonds, both indiamond jewelry andfor investment
purposes?

How can jewelry retailers andmanufacturers secure long-term access togem-quality stones ofan assortment
that fits their specific requirements (a must if they are tosustain their growth)?

Do synthetic diamonds pose athreat todemand for natural diamonds injewelry? What is their role
inthemarket?

What impact will theevolution ofdiamond financing have ontheindustry?

There is agrowing consensus among players inthediamond business that thedeclining availability offinancing
is one ofthe industrys most pressing issues andthat it particularly affects theability ofmiddle-market players
tomaintain andgrow their businesses. We will address theramifications ofthat issue inthenext chapter. This
chapter focuses onthethree remaining challenges, each ofwhich carries significant consequences for producers,
middle-market players, manufacturers, andjewelry retailers.

2.1. Sustaining long-term demand for diamonds


The diamond industry has enjoyed aremarkable run ofsuccess since themid-twentieth century, compiling arecord ofstrong growth andrecovering with impressive speed andresiliency from macroeconomic andpolitical
turbulence. Tosustain that run, players along every segment ofthe value chain have one crucial task toexecute,
andexecute well: keeping alive theemotional appeal ofdiamonds.
Other opportunities exist tostimulate demand for diamonds over thelong term, chief among them thedevelopment ofamarket for diamonds asaninvestment. But complexities andchallenges hinder that markets
development, andovercoming them will require theindustrys collective effort.
As long asthe potential ofthe diamond investment market goes unfulfilled, consumers will remain themain
engine ofdemand. Consumer demand accounts for 95% oftodays diamond market; demand for investment
diamonds accounts for less than 5% ofthe total value ofpolished diamonds. Multiple stakeholders are tracking
thelatter number carefully for signs that aninvestment market for diamonds is gathering momentum.
Consumer demand for polished diamonds injewelry
The industrys support for consumer demand has gone through three major phases since thesecond half
ofthetwentieth century. Inthefirst phase, De Beers invested heavily ingeneric marketing topromote diamond
jewelry inthemajor international markets (listed bysize) ofthe US, Western Europe, andJapan. Inthesecond

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Figure 2.1.1: Intheearly 2000s, marketing efforts shifted from De Beers to retailers andfrom generic
tobranded advertising

Generic marketing

1940

19501990

Diamonds are
advertised with
paintings by famous
artists
Advertising via
product placement
started: diamonds
are presented to
high-level officials

Branded marketing

A diamond is
forever slogan is
coined
Advertising via
product placement
continues: Hollywood
stars are photographed
wearing diamond
jewelry

19902000

2000 2013

Diamonds campaigns
shift to developing
markets (mainly
India and China)

De Beers refocuses
its marketing on its
own retail stores and
the Forevermark brand

Focus on new
segments beyond
engagements and
weddings

Advertisements for
branded diamond
jewelry replace
generic marketing

What new models


of supporting longterm emotional
connection of
diamonds will
emerge?

Industry players team


up to co-promote
diamonds

Focus on promoting
diamond rings for
engagement

US and Japanese markets experience high growth

Future

Building emerging markets

Source: Expert interviews; publication analysis; Bain analysis

Figure 2.1.2: Focused spending, innovative channels, andincreasing value-chain cooperation drive
changes inindustry marketing

Cooperation

Description

Focused spending

Innovative channels

Increasing cooperation between

Marketing spending focused on:

Introduction of innovative marketing

retailers and upstream/midstream

Emerging markets

channels to reach the client

players to promote branded stones


New purchase opportunities
Rio Tinto: support to downstream

Rio Tinto: launched geographically

De Beers: focus on social

players (e.g., sales support, search

targeted campaigns

network:

for partners) during The Fashion

The Fashion of Diamonds (China)

#Natural Brilliance campaign

of Diamonds campaign; marketing

The Nazraana (India)

on Twitter

partnerships with Chow Tai Fook


Examples

and Tiffany & Co.


Dominion Diamond: promoting its
CanadaMark diamonds jointly
with retailers using a new

Graff Diamonds focused

Rio Tinto: use of virtual reality

on developing new purchase

technology (e.g., 3D rendering

opportunities:

of mines) during fairs

Hair and Jewel Recreation

or other events

to support jewelry for hair

business platform

Source: Expert interviews; publication analysis; Bain analysis

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The Global Diamond Report 2014 | Bain &Company, Inc.

phase, De Beers shifted its focus tobuilding affinity for diamondsand thus demandindeveloping markets
such asChina andIndia. Inthethirdand currentphase, branded marketing has replaced generic marketing,
anddownstream players, including diamond jewelry retailers andmiddle-market players, are taking more responsibility for its execution (see Figure 2.1.1).
Branded (as opposed togeneric) advertising emerged intheearly years ofthe new century. De Beers took part
inthis shift, moving away from generic campaigns andtoward supporting its retail business, its proprietary Forevermark brand, andproprietary collections ofdiamond jewelry. TheForevermark brand has gained new slogans
such asA true promise will never be broken, andnew jewelry collections such asthe Aria Collection andcampaigns such asMoments inLight andNatural Brilliance reinforce each other. Other players have made similar moves, such asRio Tintos marketing campaigns for its pink stones andHearts onFires heavy advertising
ofits proprietary diamonds (Chinese jewelry giant Chow Tai Fook acquired Hearts onFire in2014). Inparallel,
major branded diamond jewelry retailers have invested inpromoting their own branded diamond products
tomaintain demand andsustain their growth plans.
Different players intheindustry have also teamed up topromote diamonds anddiamond jewelry. Rio Tinto, for
example, launched aninitiative called The Fashion ofDiamonds in2014, engaging Chinese designers andje
welry manufacturers toincorporate diamonds from Rio Tintos Argyle mines injewelry that caters toChinese
consumer tastes. Theyear 2014 also marks thefourth anniversary ofRio Tintos marketing partnership with
Chow Tai Fook. Thepartnership promotes jointly created jewelry collections that feature Argyle stones. ALROSA,
for its part, has been working with Christies andSothebys tomarket its unique polished diamonds through auctions designed togenerate excitementand headlines (see Figure 2.1.2).
Amid all these efforts, one question looms large: What new modes ofevoking theemotional power ofdiamonds
will emerge togenerate long-term demand andsustain theindustrys success?
Demand for diamonds asinvestment products
Demand for diamonds asinvestments is still quite limited, accounting, we estimate, for less than 5% ofthetotal
value ofpolished diamonds. Togauge thesignificance ofthat numberand hence themarkets growth potentialitishelpful tocompare investment demand for diamonds with investment demand for precious metals
such asgold andplatinum (see Figure 2.1.3).
There are two main motivations for investing inprecious metals: maximizing returns andhedging. Return-oriented investors invest inthemetals inhope ofgenerating above-market returns through price appreciation.
Hedge-oriented investors seek astable store ofvalue topreserve their capital or todampen thevolatility oftheir
overall portfolios. Atdifferent stages ofthe economic cycle, one or theother category ofinvestor typically dominates themarket for agiven commodity.
Experts intheprivate banking industry attest that after the2008 financial crisis, hedge-oriented investors accounted for most ofthe demand for commoditiesespecially precious metals. Although thelarge majority
ofsuch investing is still focused onpaper assets such asexchange traded funds (ETFs) concentrated ingold,
demand for hard assets grew atastronger rate than overall demand.

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Figure 2.1.3: Investment demand is less than 5% oftotal demand, meaning theinvestment markets
growth potential is high

Structure of demand for diamonds and precious metals, 2013


100%

<5%

~10%
~20%

80

60

40

20

Diamonds

Gold
Investment demand

Platinum

Non-investment demand

Source: Publication analysis; Bain analysis

Figure 2.1.4: Prices of polished diamonds have been more stable than those ofsilver, gold, platinum,
andsome other commodities

Price index of polished diamonds vs. other price indexes, Jan 2009Aug 2014, nominal $, 2009 = 100
500

400

300

200
Iron ore
Silver
Inflation

100

Platinum
Gold

0
2009

Polished
diamonds
2010

2011

2012

2013

Note: Inflation is represented by US Consumer Price Index; price index for polished diamonds tracks stones of different sizes
Source: Markets; PolishedPrices.com; EIU; publication analysis; Bain analysis

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Figure 2.1.5: Polished diamonds are significantly more stable but have generated lower returns than
other commodities

Historical volatility of polished-diamond price


vs. other price indexes

Historical return (CAGR) of polished diamonds


vs. other indexes

12%

40%

10%

33%

10

10%

30

19%

20

8%

25%

6%

5%
13%

12%

10

Inflation
~2%

2
0

Silver

Iron ore

Gold

Platinum

Polished
diamonds

Silver

Platinum

Gold

Iron ore

Polished
diamonds

Note: Volatility is calculated as the standard deviation over the arithmetic average; historical indicators for period Jan 2009Aug 2014;
inflation is represented by US Consumer Price Index; price index for polished diamonds tracks stones of different sizes
Source: Markets; PolishedPrices.com; EIU; publication analysis; Bain analysis

Investors looking for ahedge against inflation might be persuaded toconsider diamonds, which historically have
combined low volatility with price growth inexcess ofthe inflation rate. Overall, polished-diamond prices have
risen atacompound annual rate of5% since 2009, higher than theinflation rate, andcertain categories ofdiamonds have grown ateven higher rates. Atthesame time, diamond prices have been more stable than those
ofsilver, gold, andplatinum, fluctuating 12% since 2009, 2.8times less than silver prices, 1.6times less than
gold prices, and1.1times less than platinum prices (see Figures 2.1.4 and2.1.5).
In addition, diamonds possess anemotional characteristic that differentiates them from precious metals: their
aspirational status asaluxury good.
Investors considering taking aposition indiamonds have several options. Individuals can purchase physical stones
either individual stones or sealed boxes ofstones known asdiamond bullionsfrom diamond traders orspecialized
retailers. Diamond bullions are usually filled with small stones ofadefined type andcan range inprice from approximately $100 tothousands ofdollars. One company currently offering diamond bullions is Provident Metals.
Some private banking clients can also invest directly inphysical diamonds. A few private banks offer their highnet-worth individual customers access todiamond purchasing, valuation, andcertification services. For example,
Singapore Diamond Investment Exchange (SDIX) partners with private banks tooffer such dedicated services,
asdoes theLos Angelesbased Investment Diamond Exchange (IDX).

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Investors can also gain exposure toprices ofpolished diamonds through asset management firms, ahandful
ofwhich buy andhold stores ofphysical diamonds. They sell shares that entitle holders toapro rata portion
ofthe value ofthe diamond stores. Thefunds typically purchase polished colorless stones weighing 1 to5carats,
which are considered tobe investment-grade diamonds. Among theasset managers offering such funds are Diamond Capital Fund andSwiss Asset Advisors.
As analternative tobuying physical stones, investors can purchase shares ofcompanies inthediamond industry.
Thevalue ofsuch shares, however, does not correlate perfectly with thevalue ofdiamonds themselves, because
thedynamics andrisks ofdiamond industry companieswherever they stand inthevalue chaindonot perfectly match those ofphysical diamonds.
That said, investors can gain exposure todiamonds bypurchasing either theshares ofcompanies that participate
directly inthediamond value chainthat is, miners, cutters andpolishers, jewelry manufacturers, andretailersortheshares ofstrategic suppliers tothose companies. Themarket, especially private equity funds, has
displayed aparticularly strong appetite for shares ofstrategic suppliers focused onkey technologies for thediamond value chain, including exploration andproduction equipment, cutting machines, synthetic-diamond production technology, andsynthetic-diamond detection technology.
To facilitate such investments, some fund managers have repeatedly attempted tocreate funds backed byshares
ofdiamond industry companies. These funds typically acquire shares ofcompanies involved invarious segments
ofthe value chain, with theaim ofreplicating industry-specific risks andgrowth opportunities such asexposure
topolished-diamond prices.
Despite theappeal ofdiamonds asapossible alternative component ofadiversified investment portfolio, persistent structural issues have constrained thegrowth ofan investment market for diamonds. These issues include
thefollowing:

The difficulty ofappraising diamonds andthelack ofuniform pricing. Unlike gold, diamonds are not fungibleone carat isnot necessarily equal toanother carat. Diamond pricing is inherently subjective, based
onemotional factors aswell asconsiderations ofclarity, color, cut, andcarat size (the diamond industrys
4Cs). There are more than 20,000 possible permutations ofthose characteristics, which defeats
attempts toestablish astandard per-carat price.

Lack ofpricing transparency. Although e-tailers andother new players have brought ahigher level oftransparency tothe market, theindustry is still far from creating anindustry-standard, reliable price index embraced andtrusted bydiamond andinvestment professionals alike. Such anindex would enable investors
tomark physical-diamond portfolios tomarket andalso serve asabenchmark for communication andtargetsetting between investors andadvisers.

Lack ofmarket liquidity. Most diamonds are still bought andsold inprivate transactions, andeven diamond
exchanges that centralize trading activity donot guarantee that diamond holders can sell their diamond stock
atamoments notice. Andthemyriad product segments, created bythousands ofpermutations ofdiamond
characteristics, also make it difficult toliquidate adiamond portfolio quickly if necessary.

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These structural issues have created several secondary challenges:


A lack ofconvenient financial instruments. Intheabsence ofaprice index, theindustry has been unable
todevelop anETF or other tradable instrument that would approximate diamond price trends without requiring physical goods. According tofinancial services experts, such products are key tosupporting diamond
demand within theprivate banking industry.

Shortage ofmarket knowledge andtransparency. Because ofits intrinsic complexity, theindustry is still
opaque andarcane tomost market participants, which hinders their ability totrade diamond investments for
their own accounts or sell them tocustomers. Much progress already has been made inenhancing market
transparency inrecent years.

To overcome or mitigate these challenges andtostimulate investment demand for diamonds, theindustry must
meet anumber ofrequirements. Thefirst is toenhance andautomate appraisal procedures. That would facilitate
theexchange ofinformation andhelp industry participants narrow thegap between their valuations. Thesecond
is tocreate atransparent, universally recognized andaccepted price index that would establish afirm spot price
for diamonds.
The industry also needs todevelop widely accessible andscalable diamond-trading platforms. Thepresence
ofsuch platforms would reassure investors that they could, if necessary, liquidate their holdings quickly, easily,
andat afair price. As mentioned before, De Beers through IIDV iscurrently assessing the effectiveness ofexisting reselling approaches and exploring directions ofpotential improvement, aninitiative that will likely contri
bute toincreasing market liquidity, atleast for aspecific brand ofdiamonds. Creating financial products directly
linked todiamond prices is another requirement for developing theinvestment market. Such products would
expand themarket beyond investments inhard stones. Andfinally, it is intheindustrys interest toinvest incontinuing education for both finance professionals andinvestors, who without help may find thediamond market
overly complex andintimidating.
Key takeaways

Since theearly 2000s, thediamond industrys marketing efforts have shifted from generic marketing, largely
supported byDe Beers, tobrand advertising supported byretailers or producers.

De Beers is still anactive marketer, but it has shifted its focus topromoting its own Forevermark diamond brand
andits retail business. Major players along thevalue chainincluding retailers, jewelry manufacturers, cutters
andpolishers, andproducersare teaming up inincreasing numbers, onthetheory that collaborative marketing encompassing multiple segments ofthe value chain can better address consumer preferences.

Major players have started tocreate innovative marketing tools inthechanging media space tokeep abreast
ofchanging consumer preferences andhabits.

Investment demand for diamonds still accounts for less than 5% ofpolished-diamond value; comparison
with gold andplatinum indicates that this market has ample untapped potential.

Diamonds could serve asalow-volatility hedge against inflation. Diamond prices are almost 3times less
volatile than silver prices, 2times less than iron ore prices, and 1.5times less than gold prices.

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The Global Diamond Report 2014 | Bain &Company, Inc.

Investors can take aposition indiamonds bypurchasing physical stones. Alternatively, they can purchase
investment vehicles that give them exposure toeither hard assets or diamond-related companies.

There are three persistent fundamental challenges that hinder thedevelopment ofadiamond investment market: difficulty ofvaluation andappraisal, lack ofprice transparency, andlack ofmarket liquidity. Theindustry
continues towork oninitiatives toaddress these challenges. Accelerating thecreation ofadiamond price index
andsetting up aliquid secondary market are key tostimulating investment demand for diamonds.

2.2. Securing long-term access todiamonds


In 2013, producers extracted 130 million carats ofrough diamonds andtheproduction ofpolished diamonds was
about 25 million caratsroughly 20% ofrough-diamond output. Some 55 million to65million carats ofroughdiamond production were classified asindustrial grade, andabout 40-50million carats ofthe remaining volume
were lost inthepolishing process (see Figure 2.2.1).
Large stones ofone carat or more are relatively rare, making up only about 10% ofpolished-diamond volume
but accounting for about 35% ofpolished-diamond value. Stones ofthree or more carats make up less than 2%
ofpolished-diamond volume andabout 5% ofvalue. Major luxury retailers are themain purchasers ofthese extra
ordinary gems. Because such large stones, especially ofhigh clarity andcolor, are increasingly rare, their prices
have historically outperformed price growth intheoverall market, rising 150% inthepast ten years, compared with
a120% increase for stones of12.99carats anda60% rise for theoverall market (see Figure 2.2.2).

Figure 2.2.1: Rough-diamond production amounted to 130 million carats in2013; thevolume ofjewelrygrade polished stones was only about 25 million carats

Volume of diamonds at different stages of production chain, 2013, millions of carats

130

~55 65

~65 75

~40 50

~20 25

Total rough-diamond
production

Industrial-grade
rough diamonds*

Gem-quality rough
diamonds

Waste from
cutting and polishing

*The definition of industrial rough diamonds differs by producer; may contain diamonds eventually used in jewelry manufacturing
Note: Share of industrial-grade diamonds and waste from cutting and polishing are estimated based on historical proportions
Source: Kimberley Process; Bain analysis

Page 26

Total polished
diamonds

The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 2.2.2: Stones ofone carat or more account for only about 10% ofpolished-diamond production
but about 35% ofpolished-diamond value
Structure of the market, in volume and value terms, 2013
Price change
(20032013)
RDI*

D-IF**

3+ ct

~150%

~165%

12.99 ct

~120%

~145%

Exceptional stones, very scarce, sought by major


high-end branded retail chains
Second most sought-after size category
by major branded retailers
Mass-market retailers such as Signet Jewelers and
Zales also account for a large part of demand

0.250.99 ct

~50%

~65%

Scarcity rapidly growing in this segment


Currently demand is fragmented but consolidation
is expected in the near future

<0.25 ct

Volume

~10%

~15%

Sizes mostly for cheaper jewelry


Also used as secondary stones in jewelry
(if high-quality), watches, and accessories

Value

*Rapaport Diamond Index (RDI) is the average price per carat for D-H, IF-VS2, VG+, RapSpec-2, and better diamonds
**D-IF diamonds are diamonds of color D clarity IF
Note: Shares in volume are estimated based on respective shares of high-quality diamonds (H+ or G+ in melee, VS+)
Source: Kimberley Process; Rapaport; alls and visits to retail stores; expert interviews; Bain analysis

Figure 2.2.3: Projections indicate that demand will outpace supply


Rough-diamond supply and demand 20132024, 2013 = 100 Index; 2013 prices
175
Forecasted
demand
150

125

Forecasted
production

100

75
2013

2015F

2017F

2019F

2021F

Note: Rough-diamond demand has been transformed from polished-diamond demand using historical rough-diamond/polished-diamond ratio
Source: Euromonitor; Kimberley Process; IDEX, Tacy Ltd. nd Chaim Even-Zohar; publication analysis; expert interviews; Bain analysis

Page 27

2023F

2024F

The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 2.2.4: To sustain their rapid growth, themajor branded retail chains increasingly needtosecure
diamond supplies

Revenue CAGR of retailers selling diamond jewelry, %, in fixed 2013 prices, 20112013

Companies in the selection:


Blue Nile

26%
17%

Michael Hill

17%
Chow
Sang Sang

Richemont

Chow
Tai Fook

Signet
Jewelers

Gitanjali

Tanishq

LVMH

Tiffany & Co.

14%
13%
11%
11%

Average selected
retailers ~14%

10%
8%
5%

Note: Whole company revenues for Blue Nile, Chow Tai Fook, Michael Hill, Signet Jewelers, and Tiffany & Co.; watches and jewelry segment revenue for LVMH;
jewelry revenues for Chow Sang Sang, Richemont, Tanishq; diamond segment revenue for Gitanjali
Source: Company data; Bain analysis

Adding further stress tothe supply-demand balance for polished diamonds is thegrowing demand for diamond
jewelry, which is expected tooutstrip supply byaconsiderable margin inthelong term. Thegap is expected
towiden beginning in2019 asproduction flattens (see Figure 2.2.3).
At thesame time, toensure that diamonds come from ethical, conflict-free sources andare natural, diamond
jewelry retailers increasingly feel theneed totrace thediamonds totheir origins inaparticular country or even
aparticular mine.
Historically, themajor branded retail chains, including theluxury segment maisons andthebig Asian players,
have posted greater revenue gains than theoverall diamond-jewelry market. From 2011 through 2013, for example, therevenues ofthe select top retailers climbed 14% onaverage. If top-performing retailers plan tocontinue
their considerable growth into thefuture, they need toensure theavailability ofthe right assortment ofpolished
diamonds (see Figure 2.2.4).
Before we analyze theoptions available todiamond jewelry retailers toresolve their long-term supply dilemma,
consider again thestructure ofthe value chain that supplies gem-quality stones toretailers. Incontrast
totheconcentration ofthe upstream segment, which is dominated byahandful ofmining companies, themiddle anddownstream segments ofthe diamond value chain are highly fragmented, with more than 200,000
retail players, 10,000 jewelry manufacturing companies, and5,000 cutting andpolishing companies. Thetop
miners account for about 85% ofall rough production byvalue, andup to110 long-term contract holders
andsight holders, most ofwhich are vertically integrated toagreater or lesser degree, control more than 70%
ofthat supply byvalue (see Figure 2.2.5).

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 2.2.5: A few players control therough-diamond supply; themiddle anddownstream markets
are highly fragmented
Upstream
Exploration
and production

Middle market

Rough-diamond
sorting and
valuation

Roughdiamond
sales
Other roughdiamond
traders
(~30% of
supply by
value)

Miners

Cutting
and polishing

Downstream
Polisheddiamond
sales

Polisheddiamond
traders
(independent)

Cutters &
polishers
(independent)

Long-term contract holders


(~70% of supply by value)

Top 5 players provide ~70% of


volume, ~85% of value,
<100 players overall

~5,000 players

Diamond
jewelry
manufacturing

Jewelry
manufacturers
(independent)

Diamond
jewelry
retail sales

Retailers
(independent)

~110 players, most are integrated

>10,000
players

>200,000
players

Arrows denote flows of rough diamonds, polished diamonds, and diamond jewelry
Source: Expert interviews; publication analysis

This environment presents downstream players with two major challenges: securing along-term supply ofstones
andverifying those stones traceability. Theverification process includes two primary elements. Thefirst istoconfirm that thediamonds were traded through official channels andthat they comply with theKimberley Process,
which bars trading indiamonds mined inconflict zones andother embargoed areas. Thesecond is toauthenticate thediamonds asnaturalanincreasingly necessary measure that reflects growing industry concern over
thethreat ofsynthetic diamonds entering theproduction pipeline undetected.
As aresult, anincreasing number ofplayers along thevalue chain are demanding that stones be authenticated
andtraceable, andtothat end, theplayers are taking action towork more closely with producers. Both luxury
andmass-market retailers, despite thedifferences intheassortments ofgems they seek tosecure, want tolock
inaccess toeither miners or key traders (that is, long-term contract andsight holders).
In pursuit ofthis objective, diamond jewelry retailers inrecent years have been moving further upstream. Tiffany
&Co. was one ofthe earliest upstream movers, consistent with its overall strategy ofvertical integration that
encompasses every segment ofthe value chain. In2002 it established Laurelton Diamonds, awholly owned
subsidiary that sources, cuts, andpolishes rough diamonds. From 2003 to2013, Laurelton opened facilities
forquality assurance, sorting, cutting, andpolishing inAntwerp, Botswana, Cambodia, Canada, China, Mauritius, Namibia, South Africa, andVietnam.
In addition, from 1999 through 2013, Tiffany &Co. signed purchase agreements with producers including Aber
Diamond Corporation, BSG Resources, DiamondCorp, Gem Diamonds, andTahera Diamond for supply from
specific mines. Insome instances, Tiffany &Co. complemented these agreements with equity investments.

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 2.2.6: From 2010 through 2013, retailers grew from about 10% to about 20% ofmajor
producers long-term customers

Number of long-term customers for diamond producers

~100

~110

83

41

17

Customers with
retail as % of all
customers

Total 2010

Total 2013

De Beers

ALROSA

Rio Tinto

~10%

~20%

20%

20%

35%

Not integrated with retail

Integrated with retail

Source: Company data; Bain analysis

Figure 2.2.7: Four major options are available to secure long-term access to rough-diamond supply
Upstream
Low

Midstream
2

Supply agreement with


a middle-market player

Contractual
agreements

Investment in a middle-market player

Investments

Supply agreement or sight/


contract holding with a producer

Level of access
security

Investment in a producer

High

High

Level of access security

Source: Expert interviews; publication analysis; Bain analysis

Page 30

Low

The Global Diamond Report 2014 | Bain &Company, Inc.

In2004, for example, thecompany secured theentire production ofTahera Diamonds Jericho mine inexchange
for financing thesites operation. In2009, it signed apurchase agreement tobuy yellow diamonds from Gem
Diamonds. In2012, Laurelton Diamonds obtained along-term supply contract from ALROSA andnow is asight
holder ofall three top rough-diamond producers: ALROSA, De Beers, andRio Tinto.
Graff Diamonds is another co-owner ofGem Diamonds, with a15% equity stake. Graffs relationship with Gem
Diamonds includes anagreement topurchase thelargest stones from theLesotho mine andjoint use ofacutting
facility inJohannesburg.
Chow Tai Fook is another leading retailer that is pursuing avertical integration strategy byextending itself
upstream, inits case byentering into long-term supply contracts with thethree largest diamond producers
byvolume, ALROSA, De Beers, andRio Tinto. Chow Tai Fook has also positioned itself inthemidstream,
starting in1988 with theopening ofFoshan Yu Shun Fu Jewellery &DiamondCo., whose holdings include
adiamond-processing and-manufacturing facility inShunde. In2011, theretailer acquired Zlotowskis Diamond Cutting Works, aDiamond Trading Company sight holder with which it had been linked for nearly
30years through acontractual relationship. More recently, Chow Tai Fook opened adiamond-cutting and-poli
shing facility inBotswana.
Another retailer that recently integrated upstream was Signet Jewelers, which bought apolishing factory inBotswana.
In addition tothese examples, thepush bylarge integrated retailers tosecure long-term diamond supplies isevi
dent intheevolution ofthe producers contract-holder portfolios. Since 2010, thepercentage ofintegrated retai
lers inlong-term contracts or insight holder status with producers has roughly doubled, toabout 20%
(see Figure 2.2.6).
Based onthehistorical experience ofdiamond jewelry manufacturers andanalysis ofthe current situation, wesee
several strategic options available toretailers for securing diamond supplies. These can be summarized inasimple,
two-dimensional scheme. Those dimensions are theretailers target level ofintegrationdoes it extend all theway
upstream or stop atthemiddle market?andthetype ofagreement theretailer enters into with theproducer.
Theagreement could take theform ofalong-term supply contract or, alternatively, aloan orequity investment.
Typically, retailers can structure their agreements inone offour ways: asupply agreement or sight or contract
holding with aproducer, asupply agreement with amiddle-market player, aninvestment inaproducer, oraninvestment inamiddle-market player (see Figure 2.2.7).
In choosing among theoptions tosecure long-term access tothe diamond supply, retailers need toweigh carefully thecosts ofeach option, given their required assortment ofsmaller or larger stones, therisks ofdoing business inaparticular geography ofoperations, thenew capabilities (if any) that they will need, andtherisks inhe
rent inentering new businesses.
A supply agreement with aproducer
The most secure type ofagreement is asupply agreement or sight or contract holding with aproducer. Such
anagreement would allow theretailer tosecure asignificant portion ofthe specific assortment ofrough diamonds that it needs andthegreatest degree oftraceability. This option, however, requires retailers tohave
thestones cut andpolished andtooffload stones that do not match their specific needs.

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The Global Diamond Report 2014 | Bain &Company, Inc.

Long-term contracts afford retailers only alimited ability tomatch theassortment ofdiamonds they purchase
with thepreferences oftheir customers for stones ofaparticular size andquality. Because under long-term supply agreements companies receive anassortment that is wider than their specific requirements, retailers need
todevelop trading operations tooffload unwanted inventory.
As well, theretailers need tofigure out how tocut their stones inthemost effective way. They can choose either
toset up their own cutting andpolishing operations, asmany have done inthepast, or tosubcontract cutting
andpolishing tomiddle-market players or rough-diamond producers that have such capabilities.
A supply agreement with one or more middle-market players
Supply agreements with middle-market players enable theretailer toselect only thetypes andquality ofdiamonds they need tomanufacture jewelry. Asaresult, retailers do not need toenter thecutting andpolishing
business or develop trading capabilities tooffload unwanted supplies. Inassessing this option, retailers need
toconsider that therisks ofdoing business indeveloped countries are lower but that theeconomics for manufacturing smaller stones are better inthedeveloping countries.
The key challenges ofsuch agreements are that they do not provide direct access torough-diamond supplies
andthus will not fully ensure thetraceability ofthe stones. They can also require multiple agreements tofulfill
therequired volumes.
An investment inaproducer
Investments inproducers can be structured aseither equity investments or loan commitments. They typically
accompany along-term supply agreement onterms favorable tothe investing retailer. These investment agreements often serve toadvance anddeepen anexisting relationship with theproducer, strengthening both sides commitment tothe partnership byimposing more rigorous contractual obligations onthem. Byformally establishing
theretailers financial influence over theproducer, theagreement secures thehighest degree ofaccess tothe producers output. That is anespecially important consideration for very large retailers buying significant volumes.
Some retailers also favor these agreements because they allow theretailers totrace any given stone all theway
back tothe mine. But only ahandful ofsmall producers are available toaccept investments atany given time.
These agreements also require retailers toinvest infacilities tocut andpolish theoutput, either byintegrating
into themiddle market or bypartnering with acutting andpolishing specialist.
Perhaps most important, investments inproducers expose retailers tothe risks inherent indiamond production
operationsrisks that (as we described inChapter 1) are quite unlike therisks ofretailing, or indeed any other
part ofthe diamond value chain.
An investment inamiddle-market player
Investments inmiddle-market players can take several different forms, including loans, joint ventures,
andequity investments ateither theminority or thecontrolling-stake level, andcan involve players atany point
inthemiddle market, including rough traders, cutters andpolishers, or polished-diamond traders. Like investments inproducers, partial investments inmiddle-market players typically accompany long-term supply agreements with these companies.

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The Global Diamond Report 2014 | Bain &Company, Inc.

In one respect, thefragmentation ofthe middle market works toretailers advantage. They can choose astheir
investment target aspecialistagain, either atrader or acutter andpolisherwhose assortment matches up
well with thestyle andquality ofthe diamond jewelry they offer their customers. If, ontheother hand, thetarget
does not specialize inaparticular type or quality ofstone, theretailer will need trading facilities tooffload unwanted diamond inventories. Inaddition, compared with upstream investments, middle-market investments
afford retailers less-secure access toproduction volumes.
The middle markets fragmentation also has another potential downside for retailers. If their planned purchase
volumes are high, they may need toinvest inmultiple middle-market players tosatisfy their demand for gems.
Key takeaways

The growing gap between demand for diamond jewelry andthesupply ofrough diamonds andthe increase
in demands from customers toensure theauthenticity andethical origin ofstones have led diamond jewelry
retailers toreconsider their long-term sourcing strategies.

Diamond jewelry retailers have addressed theissue ofsecuring long-term access bymoving up thevalue
chain: from setting up cutting andpolishing operations all theway toinvestments inthemine producers.

Four strategic options are available todiamond retailers tosecure long-term supplies ofdiamonds andtheabi
lity totrace their origin: asupply agreement with adiamond producer, asupply agreement with amiddle-market
player, aninvestment inadiamond mine or producer, or aninvestment inamiddle-market player. Each option
has its benefits anddrawbacks.

In selecting theright option for them, diamond jewelry retailers need tocarefully consider economics,
required capabilities, andtherisks inherent ineach option.

2.3. Synthetic diamonds


The technology toproduce synthetic diamonds has evolved significantly inthepast decade andnow presents
thediamond industry with both anopportunity andachallenge. Technological advances have made it topossible
tocreate customized diamonds with particular properties suitable for advanced applications inquantum compu
ting, biotechnology, laser optics, infrared radiation transmission, high-sensitivity sensors, andmany more fields.
There are two broad categories ofproduction technology. Theolder technology, high-pressure high-temperature
(HPHT), emerged inthe1950s toproduce industrial diamonds, used mainly asabrasives intheconstruction
andmanufacturing industries. Thebrown or greenish hue ofHPHT diamonds andtheir general lack ofclarity
andsize make them unsuitable for use injewelry.
A newer technology, known asachemical vapor deposition (CVD), is capable ofproducing synthetic diamonds
ofjewelry-quality size, color, andclarity. CVD technology also makes it possible tocustomize thecharacteristics
ofindividual diamonds byusing additives. Such bespoke diamonds are well suited touse inhigh-technology
industries.

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 2.3.1: Industrial-grade diamonds dominate synthetic manufacturing


Consumption of industrial diamonds by volume, 2013
100%

Consumption of gem-quality diamonds by volume, 2013


100%

< 1%

80

80

60

60

40

40

20

20

0
Synthetic

< 1%

Natural

Note: The share of industrial-grade diamonds estimated as the average for 20042012; gem-quality synthetic diamonds represent only disclosed synthetic diamonds,
whose share is estimated based on expert interviews
Sources: US Geological Survey; Kimberley Process; expert interviews; Bain analysis

Producers use thetwo synthetic-diamond technologies togenerate thevast majority ofindustrial diamonds. In2013,
producers turned out some 7billion carats ofindustrial stones; natural diamonds accounted for less than 0.7 million
carats ofthe industrial diamonds produced in2013less than 1% oftotal output (see Figure 2.3.1).
The construction industry uses some 6065% ofindustrial diamonds, manufacturers andenergy companies use
1520%, andhigh-tech applications account for 1525. Asapplications for industrial diamonds expand, themarket could double insize within seven toten years (see Figure 2.3.2).
According tointerviews with experts atcompanies participating intheindustrial diamond market, prices for most
synthetic-diamond powders range from $0.25 to$0.50 per carat. Prices for high-quality CVD diamonds are much
higherup toseveral thousand dollars for asingle flawless stone. Further technological refinements could result
inmore affordable synthetics, adevelopment that would spur additional demand for them for industrial applications. Infact, theindustrial diamond markets prospects offer attractive opportunities for theproducers ofsynthetic
diamonds, given theindustrial markets potential scale, growth possibilities, andstable profit margins.
Advances inCVD technology, however, present thediamond industry with achallenge aswell asasignificant
opportunity, because it is now possible tocreate large synthetic stones ofjewelry-quality color andclarity.
Thecomposition ofthe market for gem-quality diamonds is thereverse ofthat seen intheindustrial market, with
natural diamonds dominating commerce ingem-quality stones.
In part thats because several consumer studies, including one performed byBain & Company in2012, found
that consumers are reluctant toconsider synthetic diamonds for important life occasions such asengagements
andweddings. Thestudy also showed that ingeneral, customers perceive synthetic stones ascheap, fake, andarti
ficial andso prefer natural gems (see Figure 2.3.3).

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 2.3.2: Industrial diamond consumption, driven byconstruction andhigh tech, could grow byabout
7% ayear through 2020

Global industrial-diamond production by application, billions of carats, 20022020

CAGR
(20102020)
~13

7%

Mechanic and energy

4%

High-tech
High
tech
-

10%

Building

7%

~7

~23

2002

2010

2020

Source: US Geological Survey; expert interviews

Studies andsurveys conducted in2013 have confirmed that consumer perceptions changed little from 2012.
Forexample, asignificant percentage ofjewelers interviewed for one study report that their customers liken buying synthetic diamonds tobuying afake painting. Thestudies also revealed that customers would not feel comfortable proposing with aring whose box clearly identifies thesynthetic origin ofthe stone inside.
To further support thethesis that substitution ofsynthetics gems for natural ones is unlikely, consider
thebehavior ofthe jewelry markets for other gems, which actually expanded when lab-created gems appeared.
For example, cubic zirconia, moissanite, andSwarovski crystals established themselves inthejewelry market
bysatisfying specific customer needs atappropriate price points.
It appears, then, that potential substitution ofsynthetics for natural diamonds injewelry does not pose athreat
tothe industry atthis time. Thechallenge comes from undisclosed attempts topass off synthetic stones asnatural. Such covert substitution undermines consumers confidence that they are acquiring amiracle ofnature
whose formation began billions ofyears ago rather than astone created recently inthelab.
Undisclosed synthetics have entered thepipeline posing asnatural diamonds onseveral occasions inthepast five
years. They have been found incertification labs all around theworld (see Figure 2.3.4).
The amount ofundetected synthetics circulating intheindustry is amatter ofdebate, but industry participants
including both producers anddownstream playersunderstand that it is intheir joint interest toprotect consumers from undisclosed synthetics entering themarket.

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 2.3.3: Consumers are generally quite reluctant to buy synthetic diamonds
What words come to your mind when you think about synthetic diamonds?

US
China

India

Note: Unprompted question, size of font shows frequency of mentioning


Source: Bain online consumer survey (N=542, JulyAugust 2012)

Figure 2.3.4: Several events involving undisclosed synthetics have triggered widespread industry concern
2006

200 undisclosed synthetic


diamonds found in Japan
Found by Zenhoyko lab
in Japan
200 synthetics found from
sample of 600 small melee
stones

2012

2013

600 undisclosed synthetic


diamonds found by labs
in Antwerp and Mumbai

200 undisclosed synthetic


diamonds found by labs
in Shenzen, China

Sizes ranged from 0.3 to 0.7 ct

Sizes were mostly 0.3 ct

Both the polished dealer and the supplier


involved were under the impression
that the stones were natural

The stones were of comparable


quality to naturals

I dont feel assured that the smaller stones I get


from our suppliers are in fact mined diamonds
as they purport to be.
Principal, International Diamond Club
No solution is possible without the full cooperation
of the natural and synthetic diamond industries.
The risk is too great otherwise.
Principal, Canadian Diamond Consultants
Source: Expert interviews; publication analysis

Page 36

I was surprised to find so many. This was


a very expensive lot, with a lot of nice
colors. Someone deliberately mixed the
right stones in, and it seems like they
were trying to fool people.
CEO, AG&J

The Global Diamond Report 2014 | Bain &Company, Inc.

Key features

Verification instrument

Figure 2.3.5: Technologies for synthetic-diamond detection have been developed rapidly since 2012
Name

DiamondSure

DiamondView

DiamondPlus

DiamondCheck

AMS

D-Screen

ADA

Developer

IIDGR

IIDGR

IIDGR

GIA

IIDGR

WTOCD

WTOCD

Compact
manual device

Short description

Intended for
colorless or
near-colorless
goods

Designed
to examine
any diamonds
that have been
"referred" by
DiamondSure

Loose and
mounted
polished goods

Compact
screening
device for
polished
diamonds
Performs best
on high color
type-II
diamonds

Colorless stones Screens


that fall into
near-colorless
the D to N color
and colorless
range on the GIA round diamonds
color chart
Take up to
One stone at
500 carats at
a time
any one time

Mobile handheld device

Only loose
stones

Works with all


shapes, one
facet is enough

Screens nearcolorless and


colorless
diamonds
Colors D to J

Universal
detector:
distinguishes
other gems,
imitations, and
primary selection
from HPHT and
CVD synthetics
Any color
Wide range
of shapes

Possible stone size,


carats

0.110

0.110

0.0510

0.0110

0.010.2

0.210

0.0270

Scan speed,
seconds per stone

35
(manual use)

35
(manual use)

15

10

10

~18
(manual use)

60

Estimated price, $

18,000

34,000

19,000

24,000

75,000

3,000

35,000

Note: IIDGR = International Institute of Diamond Grading and Research (De Beers group of companies); GIA = Gemological Institute of America;
WTOCD = Wetenschappelijk en Technisch OnderzoeksCentrum voor Diamant (Scientific and Technical Research Center for Diamond under coordination of AWDC)
Source: Company data; expert interviews

A number ofinitiatives are under way toaddress thechallenge ofsynthetic diamonds entering thediamond
market undisclosed. Industry players have developed advanced detection technologies tofilter out even
high-quality synthetics. Middle-market players, meanwhile, increasingly request certification, even ofsmaller
diamonds. Andproducers have warned sight holders andother long-term customers that if they are caught dealing inundisclosed synthetics, they will be struck from therolls oflong-term customers anddenied direct access
torough diamonds inthefuture. Theindustry is also considering pushing for thedevelopment ofclear, unambiguous nomenclature for synthetics andstrict disclosure requirements for trades andcertifications.
The two initiatives that will likely have themost visible impact ontheindustry are thedevelopment andinstallation ofdetection technologies andtheincreasing demand for gem certification. Thelatest advances indetection
technology enable instruments andmachinery toquickly scan large quantities ofdiamonds for synthetics.
Andsome state-of-the-art devices can process stones bythebatch rather than individual piecesakey advance.
The machines are faster now, toosome now onthemarket can assess astone inten seconds. Themachines are
also able tohandle abroader assortment ofcolors, sizes, anddegrees ofclarity. Detection quality continues torise
aswell, andthetechnology is becoming cheaper, aslow as$20,000 to$25,000 for amachine that can process
diamond inbatches, adevelopment that will attract more retailers anddealers. De Beers is one oftheleaders
indeveloping detection technology, with four major machines toits credit: DiamondSure, DiamondView, DiamondPlus, andtheAutomated Melee Screening (AMS) device. Its International Institute ofDiamond
Grading andResearch (IIDGR) is aninfluential force inthemarket. AWDC-funded research center WTOCD
isalso contributing tothis technological improvement; it developed ahandheld machine called D-Screen that
can scan diamonds ofdifferent shapes (see Figure 2.3.5).

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The Global Diamond Report 2014 | Bain &Company, Inc.

The threat ofundisclosed synthetics has also stimulated demand for certain types ofcertification. For example,
thebacklogs ofstones awaiting certification bytheGemological Institute ofAmerica, theInternational Gemo
logical Institute, andHoge Raad voor Diamant have swelled significantly inthepast year. A disproportionately
large number ofrequests issue from Chinese retailers, whose consumers appear tobe very sensitive tothe status
ofnatural stones. Not only are retailers requesting certification ofhigher volumes ofdiamonds, but therequests
have also expanded toencompass smaller-size stones. Requests for certification ofdiamonds of0.5 andeven
0.2carats are coming much more frequently than inthepast.
Market participants report that increasing demand for certification has led toconstraints oncertification capacity.
Asaresult, wait times for certification have stretched from two tothree weeks tothree months or longer, creating
delays intheprocessing ofstones through thevalue chain. This is likely ashort-term issue that will ease asthe
industry expands thecertification business.
The two remaining reactions tothe threat ofsynthetics aim toestablish alegal andregulatory framework togovern thetrade insynthetic diamonds. Some producers andretailers advocate laws that would define anddifferentiate natural andsynthetic stones. Such laws would require traders todisclose explicitly what they offer, be it
anatural stone or amanufactured one. Others would prohibit theuse ofthe word diamond inthename andcerti
ficate ofthe synthetic stone.
As along-standing matter ofpractice, diamond miners require their long-term customers todisclose any business
they do insynthetic diamonds. A company caught dealing inundisclosed synthetics risks banishment from thecommunity oflong-term suppliers andloss ofaccess tothe primary source for rough diamonds. Complementing
thethreat ofsuch sanctions are miners marketing efforts toemphasize thenatural origin oftheir stones.
Reinforcing these industry-led efforts, consumers are also increasingly demanding assurances ofauthenticity,
spurring downstream players totake additional action. Asdiscussed inChapter1, some key jewelry manufacturers, especially Chinese players, are exerting closer control over thesupply chain through certification, vertical
integration, closer physical proximity tokey suppliers, andperiodic audits ofsuppliers operations.
Key takeaways

We believe that themost attractive opportunity for synthetic diamonds is themarket for high-tech andindustrial applications rather than thejewelry market. Demand for industrial synthetic diamonds could double
inthenext ten years onthestrength ofincreasing demand for high-tech andconstruction applications.

There is no indication atthis time that consumers view synthetic diamonds asacceptable substitutes fornatu
ral diamonds when they make anemotional purchase. There may be amarket niche for synthetic, gemquality diamonds similar tothe niches created bycubic zirconia, moissanite, andSwarovski crystals.

The most pressing issue involving synthetics inthepast few years has been theundisclosed entry ofsynthetics into thediamond supply chain.

The diamond community is addressing this issue infour ways. It is developing technology todetect synthetics
ofsmaller andsmaller sizes, promoting diamond certification more than before, working onclear legal definitions andterminology tobe used bythetrade andretailers when dealing insynthetic diamonds, andpolicing
themarket toensure severe legal repercussions for companies caught dealing inundisclosed synthetics.

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The Global Diamond Report 2014 | Bain &Company, Inc.

2.4. Diamond industry financing (short introduction)


In Chapter 1 ofthis report, we briefly discussed theindustrys access tobank liquidity, describing it asone
ofthemost urgent challenges facing theindustry. InChapter3, we will describe more fully thedynamics ofdiamond financing andhow recent developments have affected industry players access tocrucial capital.
As ageneral rule, diamond financing refers tofinance for themiddle markettraders, cutters andpolishers,
and, toacertain extent, jewelry manufacturers. Traditionally, this segment was served byalimited number
offinancial institutions, sometimes known asdiamond banks (see Figure 2.4.1).
The financing provided bydiamond banks has played avital role insustaining theindustrys growth during
thepast decade, asoutstanding debt has more than doubled, from about $7billion in2002 toabout $16billion
in2013. Inthepast few years, however, middle-market players once-easy access toliquidity has been hampered
byobstacles. Tosome extent, liquidity has tightened because ofconditions inthediamond industry itself. Collectively, themiddle markets leverage has swelled inrecent years (despite afocus onoperational efficiency),
inventory andcredit-collection cycles have lengthened, andaverage margins have tightened.
Conditions inthebanking industry have changed aswell inrecent years, adding tothe financing stresses
onthemiddle market. Banks have taken onincreasing credit andconcentration risk andface tighter regulations
such asthe Basel III framework andmore stringent enforcement ofanti-money-laundering laws. What is more,
inthewake ofthe financial crisis, theindustry has undergone adeep restructuring that has reduced credit availa
bility inEurope and(toalesser extent) intheUS.

Figure 2.4.1: Specialized diamond financing is typically concentrated inthemiddle market


Industry players
Roughdiamond
sorting and
valuation

Exploration
and
production

Roughdiamond
sales

Cutting and
polishing

Polisheddiamond
sales

Jewelry
manufacturing

Retail sales

Funding source

Diamond banks

Corporate financing
(bonds, loans, etc.)

Equity financing

Estimated number of
companies globally

<100

Primary source

~5K

Secondary source (for major companies)

Source: Publication analysis; expert interviews

Page 39

>10K

>200K

The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 2.4.2: After double-digit growth, diamond financing is expected to enter adeleveraging phase
Industry level of outstanding debt
Growth
2.3X

Decrease
~$13B
~$16B
$1315B*

~$7B

2002

2013

*Estimate
Source: Expert interviews; Allan Hochreiter; Bain & Company Diamonds financing model; Bain analysis

Deleveraging
scenario

As aresult ofthese converging changes, thediamond industry could be infor ashort-term round ofdeleveraging
asthefinancing market seeks anew equilibrium (see Figure 2.4.2).
In thenext chapter, we will examine thediamond industrys financing environment andsuggest actions todevelop
amore sustainable business model for both diamantaires andbanks.

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3. In-depth review of the diamond-financing industry


We will address three topics inthis chapter: thedefinition andboundaries ofthe diamond-financing business,
thebusinesss historic evolution andemerging challenges, andour perspective onits future.

3.1. Definition and boundaries of the diamond-financing business


Diamond financing, inindustry parlance, typically refers tofinancing for thesegments ofthe value chain that
stretch from thepurchase ofrough diamonds from theproducer tothe manufacture ofjewelry containing polished diamonds. Players within this segment ofthe value chainincluding rough traders, cutters andpolishers,
polished-diamond traders, andjewelry manufacturersare integrated tovarying extents. They need working capital tobuy rough diamonds, which are typically paid for up front, andtosupport different activities along thevalue
chain. They also need investment capital topurchase specialized cutting, polishing, andjewelry-manufacturing
machinery aswell asoffice facilities (see Figure 3.1.1).
The producers andretailers ateither end ofthe value chain can usually access other financing sources, such
ascommercial banks andthedebt andequity capital markets. Andin contrast topractices insome other
industriesproducers do not provide trade credit totheir buyers, instead requiring payment up front.

Figure 3.1.1: Middle-market players needs vary, depending ontheir position along thevalue chain
Middle market
Exploration
and production

Rough-diamond
sorting and
valuation

Rough-diamond
sales

Other
roughdiamond
traders

Miners

Cutting and
polishing

Polisheddiamond sales

Jewelry
manufacturing

Jewelry
manufacturers
(independent)

Polisheddiamond
traders
(independent)

Cutters and
polishers
(independent)

Long-term contract holders

Middle-market financing needs, by value chain step

Working
capital

Capital
expenditures

Purchase on
cash from
producer
Activities along the middle-market value chain financed
with credit from seller or/and banking loans
Office facilities

Cutting and polishing


machinery
and facilities

Source: Expert interviews; publication analysis

Page 41

Office facilities

Diamond jewelry
machinery
and facilities

Retail sales

Retailers
(independent)

The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 3.1.2: We developed our diamond-financing model bottom-up from underlying needs and
adjusted it top-down
1
Underlying
segments

2
Identification
of financial needs driver

Market sizing

Identification and sizing of segments (key activities) along the middle part of the diamond industry value chain
Rough-diamond trading
Cutting and polishing operations
Polished-diamond trading
Diamond jewelry manufacturing
Definition of drivers for working capital by segment
Average payment terms for purchases/sales
Inventory turnover
Definition of needs for capital expenditures by segment
Percentage of revenues by segment

Estimation of each value driver based on needs and usage by region


Estimation of total market size
By geography
By product (receivables financing, purchase financing, capital expenditures)

4
Top-down
verification

Confirmation and adjustment of market size, based on interviews with industry players and financial institutions
in each region, and available public data (e.g., annual reports)

Source: Bain analysis

We have developed amarket model toestimate thesize ofglobal diamond financing anddisaggregate it byregion
andfinancing product. Our methodology consisted ofthe four steps described inFigure 3.1.2.
The financing needs ofdifferent players along thevalue chain vary bythestructure oftheir working capital.
Rough traders, for example, need mainly tofinance purchases ofrough diamonds, typically paid for up front.
Cutters andpolishers, ontheother hand, need tofinance inventories ofstones held for processing. Longer assetrotation cycles are one ofthe chief reasons that outstanding middle-market debt has swelled inrecent years.
Cutters andpolishers also need capital topurchase themachinery necessary totheir business.
Polished-diamond traders financing needs are different. Not only must they finance their inventories, they have
agrowing need tofinance accounts receivable generated bytransactions with wholesalers, retailers, andjewelry
manufacturers. According toindustry participants, these debts are taking longer tocollect than inthepast. Jewelry
manufacturers, too, have agrowing need for receivables financing. Their receivables collection times have also
lengthened, areflection ofthe increased bargaining power ofretailers (see Figure 3.1.3).
It is inany case difficult tosize this market precisely. Theborders between diamond financing andother lending
instruments have become blurred, starting with themanufacturing segment, where purchases ofdiamonds represent only ashare ofthe players overall cost bases. Andit is not particularly helpful toanalyze themarket
byvalue-chain segment, given theincreasing level ofintegration inthemiddle market discussed inChapter2.
Borrowing inthediamond-financing market is highly concentrated, with fewer than 5% ofplayers accounting
forapproximately 80% ofoutstanding debt. Thebiggest borrowers are also thelargest players inthemarket,
such assight holders andother long-term customers ofthe producers. Aswe mentioned inChapter2, these players are increasingly integrated along thevalue chain. Theremaining 20% ofbanking credit is extended toother

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 3.1.3: Polished-diamond trading andcutting andpolishing account for thegreatest share
offinancing demand

Average days receivable


(D/R)

Rough-diamond
sales

30 120

Cutting and
polishing

40 120

Polisheddiamond sales

70 120

Jewelry
manufacturing

30 180

Average days inventory


(D/I)

20 40

Average days payable


(D/P)

Working capital per activity


(index)*

100

0 10

30 120

~160

100130

40 120

~140

60 130

70 120

~120

80 160

Note: Working capital index = D/R * (Industry revenues of activity / Industry revenues of previous activity on value chain) + (D/I D/P); rough diamond sales index = 100
Source: Customer interviews; ompany data; Bain analysis

players inthemiddle market, including secondary traders andcutters andpolishers, which combine banking
credit with credit extended bylarger traders andself-financing tofund their activities. Athird cluster ofplayers,
consisting almost entirely ofsmall andmedium-size enterprises (SMEs), has no access tothe financing market
andisincreasingly reliant oncredit extended bylarger traders, which are progressively stepping up their role
infinancing theindustry.
In 2013, theglobal diamond market accumulated some $16 billion indebt, including about $1 billion insecuritizations. India accounted for about 40% ofall borrowings. India andBelgium together grew toabout 65%
ofborrowing worldwide from about 55% in2002. Receivables financing was themost common product,
accounting for about 65% ofdebt outstanding (see Figure 3.1.4).
Three main products have evolved toaddress themiddle markets financing needs.
The first, receivables financing, isimplemented bydiscounting invoices that middle-market players pledge
tolenders. This is alow-risk product, because theinvoicesthat is, theaccounts receivablegenerate direct payment flows.
The second product, purchase financing, provides cash advances todealers andmanufacturers toenable roughdiamond purchases. Inthemiddle-market segment ofthediamond value chain, most banks typically finance
individual transactions rather than issue anapproved credit line, asininventory financing. Purchase financing
ismore risky than receivables financing, andthat risk isgrowing, prompting banks tolimit financing
to7075% ofatransactions value, compared with 100% intherecent past.

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 3.1.4: India (by region) andreceivables financing (by product) represent thebiggest shares
ofthe market

Global market share by region

100%

Global market share by financial product used

100%

Other
UAE
Israel
US

80

Capital expenditures

80

Purchases

China & Hong Kong


60

60
Belgium

40

40
Receivables
India

20

20

Note: Industry debt market includes total outstanding debt including securitized credit and packing credit
Source: Bain & Company Diamonds financing model

Figure 3.1.5: Six main hubs dominate diamond financing


1

India

Legend

Cutting and polishing, and


associated polished-diamond
export activities

Position by diamond
financing global
market share

Jewelry manufacturing
2

Belgium (Antwerp)

Cutting and polishing


of high-end stones
3

Outstanding debt for


diamond hub, 2013

China & HK

Trading of polished diamonds


in Hong Kong
Jewelry manufacturing
in mainland China
Shanghai also plans growth
in polished trading
4

US (New York)

Jewelry manufacturing
Polished-diamond trading
Cutting and polishing
of high-end stones

Region

Primary underlying
activities

Rough- and polished-diamond


trading

Israel

UAE (Dubai)

Rough- and polished-diamond


trading

Rough- and polished-diamond


trading

Cutting and polishing of highend stones

Jewelry manufacturing

Source: Expert interviews; Bain analysis

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The Global Diamond Report 2014 | Bain &Company, Inc.

The third group offinancing products includes mortgages or term loans needed tofinance capital expenditures
onoffice facilities or machinery. Inthis case, thelevel ofrisk depends ontheavailable collateralthat is, whether theborrowing is secured bypledge or byguarantee or is unsecured. Typically, theleast risky credits are those
issued against pledges ofthe goods being financed.
Most borrowings are collateralized with ahigh proportion backed byreceivables andtoalesser extent bydiamonds,
during themanufacturing process andwhile ininventory. Inventory financing provides more challenges because
ofthe difficulty ofappraising polished diamonds. Ontop ofthese floating-asset collaterals, borrowers typically offer
corporate guarantees. A less common practice is for borrowers tosupplement their collateral with hard assets, especially when they are financing capital investments, andpersonal guarantees issued byborrowers shareholders.
In India, lending products andfinancing modalities differ from those inmore developed markets. A product that
covers alarge share ofthe Indian market is thepacking credit, which is ameans ofinventory financing; more
specifically, thelender extends packing credit tothe seller before thecompletion ofasset rotation cycle. Typically
thecredit is unsecured andmore risky than thereceivables financing commonly used inother markets.
The typical financial modalities inBelgium, Israel, andtheUS consist ofbilateral transactions between one borrower
andone lender. InIndia, bycontrast, lending is usually done through bank consortia. Although somewhat similar
tosyndicated finance, consortia can specify different repayment terms andconditions for each participating bank.
Geographically, there are six main diamond-finance hubsBelgium (specifically Antwerp), China (including
Hong Kong), Dubai, India, Israel, andtheUS. Financing demands andproducts vary bytheactivities that predominate ineach region (see Figure 3.1.5).
In addition tothe traditional diamond hubs, other markets could grow into sizeable centers. Aswe saw inChapter2.1, theindustry is pursuing initiatives tospur demand for investment diamonds, such asSingapores SDIX,
but financing volumes are still very modest.
Historically, alimited number ofbanks have covered thediamond market (see Figure 3.1.6). Thetraditional players
ABN AMRO Bank andAntwerp Diamond Bank (ADB), aunit ofKBC Group, have historically accounted for asigni
ficant share ofthe global market. They both have significant global coverage ofthe industry from their bases inAntwerp.
Standard Chartered has more recently emerged asone ofthe leaders interms ofmarket share, significantly
expanding its diamond-related portfolio inthepostcrisis period. Standard Chartered covers more segments
ofthe value chain, such asminers, than either ABN AMRO Bank or ADB.
Indian banks are powerhouses ofthe financing market, accounting for 40% ofthe global market and80%
oftheIndian market. State Bank ofIndia andits regional affiliates hold thelargest share, emerging inthepast
ten years asasignificant player globally. A handful ofmajor players, known asTier 1 banks, dominate themarket.
These banks are now establishing footholds indiamond hubs such asBelgium (specifically Antwerp) andChina.
About 50 smaller, Tier 2 banks participate inlending consortia.
Historically, Israeli banks ranked among theleaders inthediamond-financing market, but since thecrisis, promi
nent names such asBank Leumi, United Mizrahi-Tefahot Bank, andUnion Bank ofIsrael have trimmed their
diamond-related portfolios. Declining volumes ofcutting andpolishing activities inIsrael are among thekey factors contributing tothe cutbacks. These banks have also curtailed their roles intheUS market since thecrisis.

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 3.1.6: Historically, ahandful ofspecialized players have served themarket


Banks share of outstanding diamond industry debt, 2013
100%
Other banks
Israeli banks
~60
banks

Other Indian banks

State Bank of India

4
banks

Standard Chartered
Antwerp Diamond Bank
ABN AMRO

Traditional banks: HSBC, Barclays


New players recently emerging (e.g., in Dubai)
Leading players on Israeli banking market
(Union, Mizrahi, Discount, with Leumi withdrawing)
>50 Indian banks involved in the industry
Tier 1 players including country leaders such as State Bank of India
and associates, Bank of India, ICICI Bank
Emerging player among industry leaders, largely
expanding portfolio since 2009
Apart from middle market also serves miners
Traditional player in industry financing, main lender
to small and medium-size companies
Expected to cease diamond lending activity*
Dedicated division of ABN AMRO integrated
within ABN AMRO / RBS** network

*According to announcement by owner KBC Group from September 2014, following group restructuring
**Royal Bank of Scotland
Source: Company data; publication analysis; expert interviews

3.2. The diamond-financing markets evolution and emerging challenges


Since 2008, thediamond-financing markets growth has been inthedouble digits, but challenges have
appeared during this period that we expect will accelerate theevolution ofthe businesss operating model insignificant ways.
Diamantaires have increased their leverage asinventory andcollection cycles have lengthened andprofit margins
have narrowed, while banks must contend with increased risk inthediamond industry aswell astighter regulation andindustry-wide restructuring.
Diamantaires increasing leverage
Since 2002, excluding thecrisis year of2008, thediamond-financing markets growth has been robust, posting
acompound annual growth rate (CAGR) ofabout 13% before thecrisis anda23% CAGR since 2009. During
thesame time span, theratio ofdebt tothe value ofpolished diamonds (aproxy for thediamond industrys
leverage) grew from about 50% toabout 73% (see Figure 3.2.1).
India made thelargest contribution tothe growth inoutstanding debt, accounting for more than $5 billion
or55%of the$9 billion total increase. Thefactors that account for that growth include anincrease inunderlying
diamond activities, especially asIndia has consolidated its role asaglobal cutting andpolishing center, andasignificant increase intheleverage ofbank clients. Theentry into themarket ofanew generation ofplayers has contributed toareshaping ofthe competitive dynamics. Ontheone hand, thenew players have strived tomake their
businesses more corporate; ontheother, theestablished traders andcutters andpolishers lack ahigh level ofretained earnings, asituation that contributes torising debt levels (see Figure 3.2.2).

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The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 3.2.1: Double-digit growth indebt accompanied arise inindustry leverage


Outstanding debt,
$ billions

Polished-diamond value,
$ billions

CAGR
~14

50%

~13%
2008

CAGR

~7

2002

Debt/value ratio

~8%

~13

+15%

~20

65%

Global
Financial
Crisis
2009

~8.5

~12.5

68%

~23%
2013

~20%

~16*

+5%

~22

73%

Note: Level of outstanding debt in 2013 includes securitization


Source: Allan Hochreiter; expert interviews; Bain analysis

Figure 3.2.2: India has been thesingle biggest contributor to growth, accounting foralmost 60%
oftheincrease indebt

Industry level of outstanding debt, $ billions


~3
~1.5
~5

~0
~-0.5

~16
Other
UAE
China &
Hong Kong

CAGR
(20022013)
n/a
n/a
18%

US

1%

Israel

-5%

Belgium

6%

~7

India

Drivers

2002

India

Belgium

Israel

Companies leverage
Diamond cutting and polishing
and polished-diamond
trading volumes
Source: Allan Hochreiter; expert interviews; Bain analysis

Page 47

US

Emerging
and other

2013

15%

The Global Diamond Report 2014 | Bain &Company, Inc.

Debt levels have increased inAntwerp aswell, though ataslower rate than inIndia, ascustomers have added
leverage while underlying volume levels have remained stable. Israel andtheUS have decreased their role
inthefinancing market, consistent with their diminishing role inthemiddle market.
India has managed todistribute thegrowth ofdebt across multiple banks through consortium structures,
incontrast toEurope, where thegrowth offinancing volumes remained concentrated within alimited number
ofmain lenders.
An extended value chain
Despite thedrive for improved operational efficiency bytraders, cutters andpolishers, andmanufacturers, processing andtrading cycles have not been reducedin fact, they have stretched out insome cases. Since 2013,
jewelers, wary ofundisclosed synthetic diamonds entering thesupply chain, have stepped up their demands for
certification ofeven smaller stones, asdiscussed inChapter 2. Thecertification agencies have increased their
capacity but have not kept pace with theincrease indemand. Asaresult, wait times have stretched from two
tothree weeks toas much asthree months or longer (see Figure 3.2.3). Whats more, asretailers have consolidated, their negotiating strength has increased along with their time topayment, which adds tojewelry manufacturers working-capital needs. Some US retailers have gone so far astopush jewelry manufacturers tosell
some inventory onconsignment.

Figure 3.2.3:

Longer inventory andcredit-collection cycles have increased theneed forworking-

capital financing

Average certification time during cutting and polishing process

4X

2 3 months

2 3 weeks

2012

2014

Source: Expert interviews; Bain analysis

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Narrowed profit margins


Since the2008 crisis, theoperating margins ofmiddle-market players have trended downward, tothe detriment
oftheir financial fundamentals. Banks have shown little appetite for lending tolower-performing players.
A sharp increase in credit risk
At thesame time, credit risk has increased sharply: since thecrisis, theratio ofnonperforming loans (NPLs)
tototal assets rose from less than 1% across theindustry tothe 410% range. Moreover, since 2012, several
instances ofdefault have shaken lenders confidence that diamantaires are low-risk credits. Andit bears repeating that concentration risk has increased, with about 80% ofdebt owed byfewer than 5% ofplayers andthelending market outside India still limited toasmall number ofmajor institutions.
Tighter regulations
The recent evolution inbanking regulation, especially theprogressive introduction ofBasel III rules, has
increased thecosts ofcorporate lending, which is expected torise atahigher rate than thecosts ofretail banking
andtrade finance (see Figure 3.2.4). Basel III will progressively tighten risk-weighted asset (RWA) calculation
andregulatory capital requirements. We expect that thetighter requirements will take adisproportionately large
toll ontheSMEs that are thelargest component ofthe diamond middle market.

Figure 3.2.4:

Tightening regulation imposes stricter requirements onbanks, leading to higher

financing costs

Expected change in return on RWA* caused by Basel III capital requirements, bps**
Delta

- 70bps

- 40bps

- 20bps

- 5bps

~0

*RWA = risk-weighted assets


**bps = basis points
Source: Company data; Bain analysis

Page 49

Pre-Basel III

Post-Basel III

Segment

~2.3%

~1.6%

Corporate and
investment banking

~1.9%

~1.5%

Corporate commercial
banking

~2.2%

~2.0%

Retail banking

~0.8%

~0.8%

Asset-based finance
(e.g., traditional trade
finance)

~3.2%

~3.2%

Wealth management

The Global Diamond Report 2014 | Bain &Company, Inc.

Basel III also introduced leverage, liquidity coverage, andnet stable funding ratios, aswell astightened rules
governing concentration risk.
More stringent antimoney laundering regulations have added tobanks reporting andorganizational requirements andfocused their attention onindustries with ahigh potential togenerate reputational risk.
Banking regulators have long maintained vigilant oversight ofdiamond financing. Asregulation has intensified,
oversight agencies have progressively increased their scrutiny ofdiamond-related lending activities, which are
perceived toentail high reputational risk. Themarkets limited transparency andsome players questionable
behavior have contributed tothis trend.
Overall restructuring of the banking industry
The banking industry, especially inEurope andtheUS, is proceeding with its own restructuring, andin some
cases shareholders andother stakeholders have insisted ontighter lending restrictions than regulators have
demanded. Themain features ofthis restructuring effort include rebuilding ofcapital bases eroded bythecrisis; tightening ofrisk standards, sometimes inexcess ofregulatory requirements; andenhancing risk management capabilities by, for example, adding or fortifying resources, IT platforms, andrisk models. Asaresult,
thebanking industry, especially inEurope, is deleveraging, with thegreatest impact falling onSMEs
(see Figure 3.2.5).

Figure 3.2.5: Industry restructuring since 2009 has significantly constrained corporate credit growth
Reduction of credit availability, according to SMEs, 20092012
Average
- 25%

- 31%

Netherlands

- 31%

Spain

Italy

- 21%

- 16%

France

Source: "Restoring financing and growth to Europes SMEs, joint report from Bain & Company and the IIF

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Conditions inother regions differ invarying degrees. Indian banks are already moving toward more conservative
credit policies, but theleading players intheMiddle East, which are not subject tothe constraints imposed
bytheEU andBasel III, are still busily building up their balance sheets. Banks operating onaglobal basis are
trying toseize similar opportunities insuch geographies, although regulatory requirements for consolidated
reporting andBasel III credit policies act asconstraints. Despite these different regional trends, banking industry
participants expect toconverge onacommon lending approach inthemedium tolong term.
In this newly cautious andconstrained environment, many traditional diamond banks are reducing their exposure tothe industry or planning todo so. ABN AMRO Bank, Standard Chartered, andState Bank ofIndia are
introducing more prudent approaches tocredit. For example, they are reducing thepercentage ofstones financed
to7075% from 100%, while tightening borrower solvency ratios. AndIsraeli banks have reduced their exposure
tothe overall industry andnarrowed their focus tothe domestic diamond market.
ADBs situation is different. Following thecrisis, parent bank KBC Group was required tofind anew corporate
parent for ADB bytheend of2014. After adeal with aprospective buyer, Chinas Yinren Group, did not go
through, KBC announced that beginning in2015 it would conduct agradual, orderly wind-down ofdiamondfinancing operations outside Belgium andmerge ADB with its parent company.
In this environment, it is likely that without changes tothe industrys ways ofdoing business, diamantaires face
aperiod ofdeleveraging that could see available levels offinancing fall byasmuch as$3 billion inthemedium
term. Although thedeleveraging could help stabilize themarket byweeding out theweakest players, it could also
reduce secondary trading activity andfurther constrain credit for theSMEs that now play akey role insupporting
theinventory ofpolished diamonds byspreading risk andadding liquidity.

3.3. Perspective on the markets future evolution


According tointerviews with participants indiamond financing, theindustry is considering four approaches
tospur evolution ofits business model, establish anew equilibrium inthefinancing market, andsustain thedia
mond industrys continued growth. Theindustrys immediate priority, beginning in2015, is tomanage theimpending deleveraging phase andcontrol thetransition toanew normal (see Figure 3.3.1).
In theshort term, tosupport lenders confidence inthediamond industrys health andprospects, there are two
possible courses ofaction: increasing thetransparency ofmiddle-market operations andengaging upstream
anddownstream players insupporting themiddle market.
Additionally, theindustry needs tocontinue theevolution ofits operating model bydeveloping new andmore
secure financing products andencouraging new players toenter thefinancing business.
Increasing transparency
Diamond industry companies can increase their transparency intwo ways. They can improve reporting standards,
andthey can enhance their inventory appraisal procedures togive banks more confidence intheir business.
More transparency inreporting can be achieved byadopting International Financial Reporting Standards repor
ting conventions, asDe Beers will require when it selects its next group ofsight holders in2015. Diamantaires

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Figure 3.3.1: Theindustry is considering four approaches to establish anew equilibrium


Evolve the operating model

Manage transition to a new normal

Increase transparency
of middle-market players operations

Develop new and


more secure products

Improve reporting standards

Move to more asset-backed products

Enhance and automate appraisal procedures

Increase use of structured finance

Engage upstream and downstream


players in supporting middle market

Involve new players


in the business

Promote diamond industry

Increase cooperation between banks

Educate investor community

Incentivize usage of credit insurance

Increase supply chain cooperation


Source: Bain analysis

Figure 3.3.2: How one industry player improved its transparency


Appraisal process

Data stored and


extracted by ERP*

Three tests run


by auditors

Inventory value
calculation

Results of audits shared


with banks

External
evaluation
of expert

ERP*

ERP managing
> 0.5bn SKU per year
(linked to diamond
characteristics)

Triangulation
of test results
to estimate
inventory value
as comparison
between cost and
potential realization
value

Comparison between
SKU** value and
internal/
external sales

Comparison between
SKU value and last
23 months sales

Results
of audits

Value of inventory
certified by auditors
(supported with
conducted tests)

*Enterprise resource planningbusiness process management software that allows an organization to automate many back-office functions, including inventory management
**SKUA stock-keeping unit, a unique identifier for each distinct product and service that can be purchased in business
Source: Expert interviews

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can also make themiddle markets structure more transparent byissuing consolidated annual andsemi-annual
reports andsharing maps ofcompanies consolidation structures. Theindustry, especially theleading players,
has already moved some distance inthis direction.
The second key toincreasing transparency inindustry operations is toenhance procedures for appraising inventories, which atpresent are opaque tobanks. Industry players can do so bydisclosing theresults ofperiodic
appraisals, introducing tracking andinventory-management processes based onenterprise resource planning
(ERP) software, andincreasing theinvolvement ofexternal auditors intheappraisal process.
Some players are already embracing themove tofuller disclosure, ahead ofrequests from major producers. One
major diamond-jewelry player, for example, has been onanextensive modernization drive since 2006. Itimplemented anend-to-end ERP system tosupport business processes andtrack inventories asthey moved through
themanufacturing pipeline. It also adopted IFRS reporting andsubjected its annual reports toexternal audits. All
these undertakings contributed toareengineered appraisal process that combines transparency with analytical
support andfacilitates interactions with financing banks, making them aware oftheir counterparts portfolio
quality andobjective risk level (see Figure 3.3.2).
Through such or similar actions, middle-market players can benefit themselves andthelarger industry byincrea
sing thetransparency offinancial figures andmethodologies, boosting lender confidence intheir reporting.
These actions could also serve asastep toward thecorporatization ofsmaller players. Atthesame time, however, investments innew or additional auditors andERP systems could lead toincreasing operating costs, exer
ting pressure onthose players margins.
Engaging upstream anddownstream players
A second way tomanage thetransition tothis new phase involves more-vigorous engagement byupstream anddownstream players insupporting themiddle market. They can do so byincreasing theinvestment communitys knowledge
ofthe diamond industry andby working with banks todevelop new solutions for financing theentire value chain.
Upstream players could organize road shows tointroduce sight holders andstrategic partners tothe investor
andfinancial community andstage educational events tobuild knowledge ofthe industry. Producers could also
consider introducing more flexible terms for thesale ofrough diamonds, including vendor finance (see Figure
3.3.3). Such actions would improve thefinancial communitys knowledge ofthe diamond industry andreduce,
if not remove, one ofthe main obstacles blocking commercial banks access tothis market.
Downstream players could support themiddle market byincreasing banks visibility ofpipeline dynamics
andtheinventory rotations ofcutters andpolishers. This increased transparency, along with thehistorically
close relationships among retailers andtraditional commercial banks, could facilitate thedevelopment ofcredit
policies tailored tothe unique dynamics ofthe diamond value chain. Such credit policies could sustain both key
clients such asjewelry manufacturers andretailers andtheir strategic suppliers along thepipeline. Aswe discussed inChapter 2, this approach makes particular sense for pure-play retailers that need secure long-term
access tojewelry-quality stones through strategic suppliers.
Examples ofsuch support are already appearing. A limited number ofdownstream suppliers are sharing asmuch
asnine months oftheir demand plans with strategic suppliers, improving thebanks visibility oftheir current
andfuture strategic suppliers invoice portfolios.

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Figure 3.3.3:

Both upstream anddownstream players should engage toincrease support along

thevalue chain

Examples of supply chain cooperation (downstream)


Example from diamond industry

Example from luxury industry

Cutters and
polishers

Banks

Downstream
communicates 6to 9-month demand
forecast to key suppliers
in mid-market

Downstream
player

Manufacturer

Demand plan is shared


with bank to increase
transparency on
pipeline and inventory
dynamics

Banks

Downstream
communicates
longer-term demand
plan and list of requisite
of key suppliers

Downstream
player

Bank develops
dedicated credit policy
for the industry
following negotiations
with downstream
player

Supplier applies for


credit according to the
framework of the
credit policy

Bank finances cutters


and polishers on
a more transparent
set of information

Source: Expert interviews

In thebroader luxury industry, we see advanced examples oftriangular cooperation among downstream players (luxury-goods manufacturers or retailers), middle-market suppliers, andapartner bank. Bygiving thelender anunobstructed view ofthe production pipeline through preferred access toproduction information, including requirements for strategic suppliers, lists ofstrategic suppliers, anddemand plans, thelender can develop
adedicated credit policy for theentire chain. Insome cases, this can result inthelenders overriding thecredit
rating ofasupplier andupgrading it based onthestronger credit rating ofthe ultimate manufacturer or retailer.
The actions just described are necessary preconditions for theevolution ofthe diamond-financing businesss
operations. Aswe mentioned before, thetwo main levers for achieving this goal are thedevelopment ofnew
andmore secure financing products andimproving credit access for new players.
Developing new andmore secure products
The development ofnew products should aim toreduce thecredit risk embedded inthecurrent model ofdia
mond financing andenhance lenders comfort with collateral structures. Within theindustry, two directions
are already under consideration. One ofthem isashift toan asset-backed approach from thecurrent finan
cing mode, which differs little from aborrowing base financing but isnotdirectly secured byany assets.
Intheshort andmedium terms, this shift can be implemented using amodel similar tothe one described
in Figure 3.3.3 andapplied bysome ofthe most advanced players. According tothis model, banks focus
onloans secured directly (for example, through pledge) bycash-flow-generating assets. Such anapproach
would not only reduce such risks asloss given defaults but also shift thecredit analysis from company financial ratios toasset quality.

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Another direction istaking further steps todeveloping more sophisticated product portfolios andlower credit
risks include increasing thepenetration ofstructured finance products, such asthe creation ofspecial-purpose
vehicles. These vehicles typically contain diamond loans andenable banks totransfer part oftheir credit risk
andminimize theloans impact onRWA. They also provide other institutional investors, such asasset managers,
theopportunity todiversify their portfolios byinvesting inshort-term products that offer yields comparable to,
ifnot better than, those onother short-term instruments.
Involving new players inthemarket
There are several options tofacilitate theparticipation ofnew players such astraditional commercial banks
inthediamond-financing market. Two ofthe most compelling are toencourage increased cooperation among traditional diamond banks andcommercial banks andtoreduce credit risk bydeveloping credit insurance products.
Indias diamond-lending consortia provide one example ofincreased cooperation among traditional andcorporate banks. Widespread introduction ofthis system could enable lenders todistribute risk more broadly among
themselves andtorationalize credit analysis efforts. Such amove could give newcomers todiamond lending
thetime they need tolearn thebusiness before stepping up asindependent players.
Credit insurance products can also be used toincrease collaboration. These products facilitate thecollection
ofaccounts receivable through insurance onthecredit andsometimes also support thecredit collection process. Insurance issued infavor ofadiamond player reduces portfolio risk, thus enabling thebank tooffer better loan conditions.
Alternatively, bydirectly insuring its portfolio, abank might be able toreduce RWA andthus its capital requirements, although inthepast some supervisors have balked ataccepting this approach. Themain constraints
onthefurther penetration ofcredit insurance are thecost ofthe product, which can be material when issued
infavor ofasmaller company, andtheminimum ticket available for financing, which would require thedevelopment ofsolutions topool receivables from multiple players, apractice known asreceivables pooling.
Judging from theincreased number ofnew players inthediamond-financing market, some commercial banks
have already taken notice ofthe industrys efforts. InDubai, afew commercial banks, including Emirates NBD,
Mashreq Bank, andNational Bank ofFujairah, recently entered thediamond-financing market. They usually
operate inpartnership with thetraditional diamond banks, but industry observers expect that their direct exposure could increase over time. InIndia, YES BANK andIndusInd Bank have introduced tailored solutions for
gem andjewelry manufacturers andexporters. Themove represents astep up from participation inconsortia
tomore independent roles. InAfrica, Barclays recently provided credit for theestablishment ofcutting andpolishing centers inBotswana, joining agroup ofSouth African commercial banks already active inthearea.
InSoutheast Asia, local banks are expected toincrease their exposure tothe industry, given theinterest ofSingapore inplaying amore prominent role inthediamond market.
At present, limited transparency andlack ofunderstanding ofthe dynamics ofthe middle market ofthe diamond
value chain make it difficult for commercial banks toserve theindustry; insome cases, these factors lead them
tooverprice theindustrys risk. Full transparency andsterilization ofcredit risk, however, could enable commercial lenders toplay amore prominent role inthemarket. More playersand more-diversified playerswould

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Figure 3.3.4: Theaccess ofnew players would bring additional liquidity andpotentially better
financing conditions

Lack of transparency is limiting


access of traditional banks

Once higher transparency is unlocked, best borrowers


could access better financing conditions

spread over LIBOR, bps

Via enhanced
reporting and
appraisal
standards

Diamond banks
spread

Risk
provisions
(due to limited
visibility)

Traditional bank
spread
(today)

Increase in
transparency

Improvements due to evolution


in the operating model

Lower
concentration
risk

More secure
products
(LGD*)

Cost
of funding

Potential
future
spread

Note: LGD = Loss Given Default


Source: Expert interviews; Bain analysis

reduce banks funding costs andconcentration risk, which inturn would enable them tooffer more competitive
rates andlower theconcentration risk ofall participating banks (see Figure 3.3.4). Many industry experts
estimate that wider participation bycommercial banks indiamond financing would benefit theentire industry
byproviding increased access toliquidity onpotentially better terms than those that prevail atpresent.
Overall, thediamond industry has apositive outlook, with asound long-term demand growth forecast andagrowing level ofintegration andcorporatization among its players. For all stakeholders tocapture theopportunities
generated bysuch growth, theindustry must encourage closer cooperation among diamantaires, banks, andother
players along thediamond value chain. Theindustry should also improve thequality ofits collaterals, which could
increase theuse ofasset-backed products. Only bycooperating can they implement anew andmore sustainable
operating model.

3.4. Key takeaways


The term diamond financing refers tobank financing ofthekey business needs ofthemiddle-market players.

Three major products have evolved tomeet theindustrys financing needs: receivables financing, financing
ofdiamond purchases, andmortgages or term loans tosupport capital expenditures onmachinery.

Over thepast decade, theindustrys outstanding debt has more than doubled. Itisestimated atabout $16
billion in2013, including $1 billion insecuritizations. Receivables financing accounts for more than 65%
ofthe market. India alone accounts for more than 40% oflending, andBelgium, specifically Antwerp,
isthesecond-largest market.

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Historically, alimited number offinancial institutions served thediamond market. They include diamond
banks such asABN AMRO Bank andADB, aswell asStandard Chartered, which recently emerged asone
ofthe leaders bymarket share; more than 50 Indian banks, among which State Bank ofIndia holds thehighest
share; andIsraeli banks, which have reduced their role since 2008.

Since thecrisis, several challenges tothe industry have emerged:

Industry leverage has increased significantly, largely asaresult ofincreased borrowing bycutters
andpolishers andmanufacturers inIndia.

Increasing stone certification has improved market transparency andboosted consumer confidence.
Atthesame time, however, long waiting periods for certification have stretched thesupply chain.
Inparallel, theincreasing bargaining power ofretailers has produced unfavorable payment conditions
for their suppliers, such asjewelry manufacturers.

The margins ofmiddle-market players have come under pressure.

The industrys credit risk has risen asthe ratio ofnonperforming loans toassets has swelled from less
than 1% tothe 410% range.

Tighter bank regulation, especially intheform ofBasel III, has taken adisproportionate toll oncorporate banking andSMEs.

The banking industry, especially inEurope andtheUS, has undergone abroad restructuring andinsome
case deleveraging, especially intheSME segment oftheir portfolios.

These challenges are spurring leading lenders toadopt more-conservative credit policies, pushing
thediamond-financing industry todeleverage.

There are four potential actions for theindustry toconsider toestablish anew equilibrium andcontribute
tothe evolution ofthe operating model for diamond financing:

In theshort term, it is crucial toincrease transparency ofcompany operations for middle-market players, by, for example, improving reporting standards andenhancing andautomating inventory appraisal
procedures.

Also intheshort term, upstream anddownstream players can take steps tosupport themiddle market.
Upstream players can organize road shows andother educational events; downstream players can coordinate triangular cooperation among retailers or manufacturers, their banks, andtheir strategic suppliers.

In themedium term, new andmore secure productsincluding structured finance andtraditional trade
finance structurescould be introduced.

In themedium term, traditional commercial banks could be encouraged toenter themarket through
closer cooperation with diamond banks.

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The access ofnew players tothe market would benefit both diamantaires, which would have access toawider
range offinancing opportunities, andbanks, which would be better able todiversify their risk exposure.

The outlook for thediamond industry overall is positive. For all stakeholders tocapture theopportunities
created bysuch growth, banks anddiamantaires must cooperate more closely anddevelop more-secure
products.

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4. Updated global supply anddemand model


The diamond market continues tosurprise observers with its ability torebound from short-term ups anddowns.
Barring major shocks inthecoming few years, supply anddemand are projected togrow atdifferent rates
between now and2018. Intheperiod from 2019 through 2024, rough-diamond supply is projected todecrease,
asexisting mining assets are depleted andoverall production slows because oflimited additional capacity.
Demand, however, is projected tomaintain arobust growth rate, thanks tostrong fundamentals such asexpanding wealth andagrowing middle class indeveloped anddeveloping countries alike. Inaddition, growth indemand could intensify even further if consumers inLatin America, Africa, andRussia andAsian countries other
than Japan andChina show increased interest indiamond engagement andwedding jewelry andif they significantly increase theshare ofdiamonds intheir jewelry purchases.

4.1. Global rough-diamond demand forecast: Methodology


The demand forecast for rough diamonds hinges onconsumer demand for diamond jewelry. Our forecast therefore factors indata ontheforces that historically have shaped demand for diamond jewelry. These forces include
GDP growth, thesize andgrowth ofthe middle class, anddiamonds shareespecially diamond engagement
rings shareoftheoverall jewelry market.
We then identified theindicators that, inour view, best explain thedifferences inconsumption ofdiamond je
welry ineach region. We forecast demand based onthose indicators, factoring inthehistorical correlation bet
ween theindicators andfinal demand (see Figures 4.1.1 and4.1.2).
The link between demand andpersonal income
In developed regions such asEurope andtheUS, where diamond markets have matured, andin thegrowth area
ofthe Persian Gulf, akey driver ofdiamond consumption is disposable income. Aspersonal wealth grows, consumers insuch markets tend totake their diamond purchasing tothe next levelbuying, for example, additional jewelry or jewelry with bigger or higher-quality stones.
To forecast diamond demand inthese regions, we analyzed GDP anddisposable income projections for each
region (see Figure 4.1.3). Theanalysis also considered shifts inconsumer preferences that could affect cultural practices related toengagement andmarriage, aswell asdiamond jewelrys share ingift giving andpersonal consumption. We also examined economic development patterns todefine potential high- andlow-consumption scenarios inthese regions.
In China andIndia, demographics are changing quickly, andpersonal preferences regarding diamond jewelry
are still taking shape. Toforecast demand inChina andIndia, we examined trends including urbanization
andmiddle-class andoverall economic growth, along with theimpact ofretailers andindustry associations marketing campaigns andretailers further expansion into less urbanized areas, including small cities aswell asrural
communities.
As themiddle class expands inthedeveloping world, retailers will seize theopportunity toserve these consu
mers bysetting up new stores andonline shopping channels (see Figure 4.1.4). Brick-and-mortar andon-

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Figure 4.1.1: Our diamond demand forecast isbased onconsumption drivers andtheir outlook for
thenext ten years
1

Historical trend
review of diamond
jewelry

2
Identification of key
demand drivers
for diamond jewelry

Gather and analyze data on diamond jewelry consumption history by region


Analyze historical correlation between diamond jewelry consumption and selected macroeconomic factors
(disposable income, real GDP, middle-class indicators, urban population) as well as cultural and traditional shifts
Use research on consumer preferences in major diamond markets to support and explain market statistics
Identify the indicators that best correlate to diamond jewelry demand in each key region to analyze
the evolution of demand there

Identify forecast values of key demand drivers up to 2024 for three scenariosbase, high,
and lowthat incorporate different assumptions about changes in consumer preferences

3
Demand drivers
forecasts
4
Forecast of diamond
jewelry demand
by geography
5

Forecast diamond jewelry demand in value terms in key regions based on historical correlations
with identified drivers
Evaluate consumption in other regions

Convert forecast of diamond jewelry demand into value of demand for polished diamonds
Incorporate 2013 ratio of diamond content in diamond jewelry to analyze demand for polished diamonds

Conversion into
polished-diamond
demand in value
6
Conversion into roughdiamond demand
in value terms

Convert forecast of polished-diamond demand into value of demand for rough diamonds
Demand for rough diamonds is derived using 2013 ratio of polished diamonds to total
rough-diamond production

Source: Bain analysis

Figure 4.1.2: Economic andsocial factors will drive diamond demand


Drivers

Effect on diamond demand

1
Macroeconomics

Gross domestic product (GDP)


Personal disposable income
(PDI)

Economic momentum will drive wealth


Wealth drives demand for diamond jewelry

Size of middle class


Population growth

Growth of middle class will expand the number


of potential buyers of diamond jewelry:
Diamond jewelry is much more prevalent
in affluent segments
Affluent segments tend to buy more expensive
diamond jewelry

Diamond jewelry penetration


(of total amount of jewelry)
Diamond engagement ring
penetration
Womens preferences

Adoption of Western traditions in Southeast Asia


and emerging markets, such as diamond engagement
rings and diamonds as gifts for St. Valentines Day,
anniversaries, and other celebrations

Supply footprint

Increase in supply footprint stimulates demand by offering


a range of choices and additional marketing
Highest growth achieved in online discounter segments
Leading jewelry chains in India and China are
expanding nationwide

2
Social factors

3
Country-specific
preferences
4
Trade

Source: Bain analysis

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Figure 4.1.3: Real GDP projections underlie thediamond demand forecast


Total GDP by region,$ trillions (real 2005 prices)
60

42

44

43

48

47

46

51

50

54

52

56

55

CAGR
(20132024)
4%

2%

40
1%
6%
6%
20

3%

2013

2014F

2015F

2016F
US

2017F
China

2018F

2019F

India

2020F

Japan

Europe

2021F

2022F

2023F

2024F

Persian Gulf

Source: EIU; Bain analysis

Figure 4.1.4: Anexpanding middle class inChina andIndia will boost demand fordiamond jewelry
Middle class in China and India, millions of households

CAGR
(20132024)

Forecast

300

282

8.4%
250
216
200
156

150
116

109

100

78
44

50
10
0

2000

2007

53

39

23

2013

2016F
China

2020F

2024F

India

% total, China

11

26

34

44

56

% total, India

10

15

19

27

35

Note: The middle class in India includes households with an annual disposable income of more than $10,000; the middle class in China (including Hong Kong)
includes households with an annual disposable income exceeding $15,000
Source: Euromonitor; Bain analysis

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line stores will require enough inventory tooffer abroader choice ofdiamonds toconsumers. Once they have
opened their new stores, retailers will prime thediamond-purchasing pump bylaunching marketing andadver
tising campaigns.

4.2. Global rough-diamond demand forecast: Base scenario


Growth inline with historic trends
We expect demand for rough diamonds over thenext decade togrow inline with historical trends, influenced
bythespeed ofeconomic recovery inEurope andtheUS from themost recent global downturn, Chinas andIndias ability tosustain high-single-digit GDP growth andexpansion oftheir middle class, anincrease inprivate
consumption, andcontinued adoption ofWestern cultural traditions indeveloping markets.
Marketing campaigns byjewelry retailers, industry associations, andother value-chain players can play amajor
role insupporting thediamond markets growth story. Aswe discussed inprevious chapters, players are already
teaming up topromote diamonds.
In thebase scenario, we have incorporated forecasts for key regions around theworld. Drawing onthose forecasts,
we expect rough-diamond demand togrow by2024 atanaverage annual rate of45% (see Figure 4.2.1).

Figure 4.2.1: Rough-diamond demand will be fueled bymarkets intheUS, China, andIndia
Rough-diamond demand, 20102024, base scenario, 2013 prices, $ billions

CAGR
(20132024)

Forecast

35

45%

30
Other
Persian Gulf
Europe
Japan

20

India + China
10
US

2010 2011

2013

2015F

2017F

2019F

2021F

2023F 2024F

Note: Rough-diamond demand has been converted from polished-diamond demand using historical ratio of rough-diamond production to polished diamonds
Source: Euromonitor; IDEX, Tacy Ltd. and Chaim Even-Zohar; publication analysis; Bain analysis

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Demand forecasts for key regions


China, India, andtheUS will account for themajority ofgrowth indiamond jewelry consumption inthenext
ten years.
US
In theshort term, diamond consumption intheUS is expected tocontinue its current rebound trend ofthe past
few years, before gradually converging with its historical long-term growth rate inline with GDP anddisposable
income growth. We anticipate no major shifts incultural norms regarding engagement andwedding jewelry.
Personal disposable income growth through 2024 is forecasted atabout 2.6%; thepopulation isexpected togrow
moderately atabout 0.7% per year through 2024.
China
In China, thediamond jewelry market is expected tosustain strong growth, owing tocontinued expansion
ofthemiddle class, arising urban population, andincreases inpersonal wealth. Diamond demand is projected
tomore than double by2024, thanks tocontinued robust GDP growth, which further supports middle-class
growth. Thenumber ofmiddle-class Chinese households is expected toincrease by2.5times inthenext ten
years. Middle-class households claim arelatively small percentage oftotal households (about 26%), but thelatest
analysis suggests that that percentage could reach up to56% in2024.
In China, GDP andpersonal disposable income (PDI) growth will determine middle-class growth. PDI is projected tosee aCAGR of6-7% through 2024. Meanwhile, urban population growth is expected togrow atacompound annual rate ofabout 2% over thesame period.
India
Indias story is similar toChinas. Following thestabilization ofthe currency situation inIndia, thediamond
jewelry market there is expected torevert tohigh-single-digit growth. Economic growth is expected topick up
again, andIndias middle class is expected togrow 2.8times by2024, driving demand for diamond jewelry.
Middle-class households constitute only about 15% oftotal households, asthey have over thelast three years. But
our analysis suggests that thenumber could rise to35% in2024.
In India, middle-class growth will follow workforce growth andincreased labor-force participation asthe nation
switches from anatural toan organized economy andmore ofthe population joins thelabor force. TheIndian
luxury-goods market has not yet achieved its full potential, presenting significant upside for growth indiamond
demand powered byGDP growth andimprovement inconsumer welfare. Thepenetration rate ofdiamond je
welry is expected toincrease aswellrelative togold productsowing toincreased interest inthegiving ofdia
mond rings asanengagement ritual.

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Figure 4.3.1: Global rough-diamond demand invalue terms isexpected togrow atacompound annual
rate of3.54% to6.57%

Rough-diamond demand, 20102024, 2013 prices, $ billions

CAGR
(20132024)
Forecast

40

High

6.57.0%

Base

45%

30

Low

3.54.0%

20

10
2010

2011

2013

2015F

2017F

2019F

2021F

2023F

2024F

Source: Euromonitor; IDEX, Tacy Ltd. and Chaim Even-Zohar; publication analysis; Bain analysis

Figure 4.3.2: Rough-diamond demand drivers include growth ofhigh-net-worth individuals (HNWIs)
and theluxury-goods market

Worldwide hard luxury goods


market evolution, Euro

Global HNWI population by wealth bands, people

CAGR
4%

CAGR
46%
$3 million +

CAGR
6%

CAGR
4%

CAGR
3%
2013

$1.5 million
3 million

$1 million
1.5 million

2016F

2013

Note: HNWIs include those with a net worth of more than $1 million
Source: Datamonitor; publication analysis; Bain & Company Luxury Goods Worldwide Market Study, spring 2014

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4.3. Global rough-diamond demand forecast: Two alternative scenarios


Our demand forecast includes two alternative scenarios that result inhigher or lower diamond demand (see
Figure 4.3.1). Both scenarios also take into consideration theprojected growth inhigh-net-worth individuals
(HNWIs) andthedevelopment ofthe overall luxury-goods market (see Figure 4.3.2).
The higher-demand projection for rough diamonds assumes stronger GDP growth indeveloped countries, which
inturn drives up total private consumption anddiamond spending. InChina andIndia, this scenario assumes higher
rates ofgrowth inthenumber ofmiddle-class families andfaster adoption ofWestern culture than inthepast.
The lower-growth scenario inverts those assumptions andanticipates slowing global GDP growth andarelapse
into global recession. Under that scenario, developed economies would stagnate andgrowth rates inChina
andIndia would decline, though they would remain higher than growth rates indeveloped economies.

4.4. Global rough-diamond supply forecast: Methodology


We have revised our 2014 annual supply forecast onthebasis ofthe updated plans ofmining companies andreports
ontheprogress ofseveral mining projects. Asin2013, we drew our base forecast for theglobal rough-diamond supply
from ananalysis ofcurrent andhistorical production levels atexisting mines, combined with publicly announced plans
andanticipated production atevery new mine expected tocome online from 2014 through 2024 (see Figure 4.4.1).

Figure 4.4.1: Thesupply methodology includes analysis ofindividual mines and diamond-producing countries
1

Data gathering
and historical
trend analysis

2
Production forecast
for the major players

Gather and update historical rough-diamond production data in volume terms by region and major mines
for 20052013 from Kimberley Process statistics, company reports, publication analysis, and expert interviews

Analyze stated production plans and latest public announcements of top mines and major players
(ALROSA, De Beers, Rio Tinto, Dominion Diamond, Petra Diamonds, and Gem Diamonds),
which represent approximately 70% of production in 2013
Conduct extensive expert interviews to verify the information and support forecast production levels

Analyze the remaining production level (approximately 30% of total production in 2013)
per country based on Kimberley Process statistics

3
Production forecast for
all the remaining mines
4
Production forecast
for the new mines
5
Conversion of production
forecast by volume
into value

Forecast steady production rates at historical levels; make adjustments for special cases
(such as Zimbabwe and Angola) based on expert interviews
Analyze in detail published feasibility studies as well as companies announced production plans
for the forecasted period
Conduct extensive expert interviews to verify the information and support forecasted production levels
Gather average price per carat data on a mine/producer/country level (depending on detail level
of volume forecast)
Convert forecast of rough-diamond supply in volume into rough-diamond supply in value using 2013 average
prices to account for difference in diamond quality between mines

Source: Bain analysis

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For each major mine andproducer (which collectively accounted for 70% ofglobal rough-diamond production
in2013), we looked atoperating companies production plans. We also analyzed theadditional production from
other minesroughly 30%on acountry-by-country basis. For new mines, we forecast production byconsulting published feasibility studies andproduction targets. Although we relied primarily onthepublicly disclosed
plans ofproducers andmine operators, we also drew onexpert opinion when updated company plans were not
available or when amajority ofexperts judged aplan tobe overly optimistic. Several considerations can influence
that judgment, including technical or financial difficulties anduncertainties associated with theengineering
challenges inherent inmoving from surface tounderground extraction.
In addition, aswe do every year, we allowed for uncertainty regarding theoutput ofseveral mines andproducing
countries byconstructing two alternative additional scenarios, which we label theStable Production Scenario
andtheIncreased Production Scenario. Each scenario draws ontechnical experts opinions andmarket research
toenvisage potential variations inexpected future production.

4.5. Global rough-diamond supply forecast: Base scenario


Our base supply scenario calls for moderate growth inthesupply ofrough diamonds. It assumes that new mines
now under development will add 20 million carats tothe supply andtakes into account aslight depletion ofexis
ting diamond resources andabsence ofsignificant new discoveries ofdiamond deposits inrecent years. Theresulting forecast calls for rough-diamond production toreach 163 million carats in2019, below theprecrisis production of177 million carats in2005, which dropped to163 carats by2008.
New mines coming online
Thebase scenario draws from analysis ofcompanies published plans regarding their current andfuture production levels. Inaddition toexisting mines, 14 new mines are expected tobegin production or ramp up tofull capa
city by2024 (see Figure 4.5.1).
The largest mine expected tocome online is theGahcho Ku mine inCanadas Northwest Territories. Developed
byMountain Province Diamonds andDe Beers, Gahcho Ku is projected toproduce up to5million to6million
carats annually through 2020. ALROSAs development ofthe Karpinsky-1 pipe attheLomonosov diamond field
isexpected toyield about 3million carats annually. Rio Tintos Bunder mine incentral India isprojected toyield
roughly 3million carats annually when it comes fully online in2020 or2021.
With theexception ofRussias Grib mine andCanadas Renard mines, which are projected toproduce 44.5million and1.5 million carats per year, respectively, other new mines under development are relatively small; each
isprojected toproduce 1 million or fewer carats annually. Most ofthe new mines have encountered technical challenges andhave had difficulty attracting financing inthecurrent uncertain macroeconomic environment.
The 14 new mines could collectively generate about 20 million carats inannual production by2024amodest
amount relative tocurrent global rough-diamond production. Because it takes seven toten years todevelop
amine, even if major new deposits were discovered within thenext few years, there would not be enough time
tobring them tofull production bytheend ofthe forecast period.

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Figure 4.5.1: New mines are expected to add up to 20 million carats each year through 2024
Forecasted rough-diamond production of new mines, millions of carats, base scenario
Forecast
25

20
Bunder (Rio Tinto)
Star - Orion South (Shore Gold)
Mothae (Lucara )
Renard (Stornoway)
Gahcho Ku (Mountain
Province Diamonds/De Beers)
Karpinsky-1 (ALROSA)
Grib (LUKOIL)
Ghaghoo (Gem Diamonds)
Jericho (Shear Diamonds)
Koidu (Koidu Holdings)
Lace ( DiamondCorp)
Liqhobong (Firestone Diamonds)
Kao (Namakwa Diamonds)
Karowe, ex AK6 (Lucara)

15

10

0
2012

2013

2014F

2015F

2016F

2017F

2018F

2019F

2020F

2021F

2022F

2023F

2024F

Source: Company data; expert interviews; publication analysis

Global supply assumptions


Taking all these factors into account, thebase scenario calls for theglobal supply ofrough diamonds togrow
byacompound annual growth rate intherange 3.54.0% during the20132019 period andthen todecline
by1.5% to2.0% from 2019 through 2024 (see Figure 4.5.2). This long-term supply decline will derive from
theaging ofexisting mines combined with ashift ofproduction tounderground mining.
Our 2014 supply forecast calls for slower growth insupply than did the2013 forecast. This years forecast
reflects changes inproducers plans aswell asfinancial andoperational difficulties experienced bysome
mines. Actual 2013 output was 6.3million carats lower than forecast inour 2013 projections. According
toKimberley Process statistics, theDemocratic Republic ofthe Congo reported 5.8million fewer carats than
theprevious year. Zimbabwe fell short of2013 expectations by1.7million carats. Angola reported areduction
of0.9million carats.
Partially compensating for thelower output from African mines, therevised forecast for Debswanas (joint-venture between De Beers andtheGovernment ofBotswana) Orapa mine inBotswana calls for 2million more
carats produced per year through 2023 than thecompany forecast in2013. Our revised forecast also anticipates
that Rio Tintos Argyle mine inWestern Australia will produce 2million more carats per year through 2020
because ofrevised assumptions regarding themines output after theshift tounderground operations.
Finally, aswe noted earlier inthis report, not all carats are created equal. Diamonds from Zimbabwe andtheDemo
cratic Republic ofthe Congo tend tobe oflower quality than equal-weight diamonds from other regions. Toaccount for variations indiamond quality, we used each mines average price per carat toproject future supply
indollar terms (see Figure 4.5.3).

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Figure 4.5.2: World production ofdiamonds isexpected toreach approximately 150million carats
by2024

Rough-diamond supply, millions of carats, 20082024, base scenario

CAGR

Forecast

180

(20132024) (20132019) (20192024)


0.51.5%

3.54.0%

-2.0 -1.5%

150
New mines
120

Other mines
Smaller players

90

Rio Tinto
60

De Beers

30
ALROSA
0
Total,
millions of carats

2009

2011

2013

2015F

2017F

2019F

2021F

120

123

130

142

152

163

159

2023F 2024F
158

149

Note: Smaller players are Dominion Diamond, BHP Billiton for 20082012, Petra Diamonds, and Catoca; other mines include all the remaining production
in Angola, Australia, Canada, Democratic Republic of the Congo, Russia, South Africa, Zimbabwe, and other minor producing countries
Source: Company data; publication analysis; Kimberley Process; expert interviews; Bain analysis

Figure 4.5.3: Thevalue ofproduction isprojected togrow faster than volume because ofaslightly better
price mix

Rough-diamond supply, $ billions, 20082024, base scenario, 2013 level prices


CAGR

Forecast

(20132024)

20

0.52.0%
New mines
Other mines

15

Smaller players
Rio Tinto
10
De Beers
5
ALROSA
0
Total
production,
$ billions

2009

2011

2013

2015F

2017F

2019F

2021F

13

14

15

16

18

20

19

Note: Smaller players are Dominion Diamond, BHP Billiton for 20082012, Petra Diamonds, and Catoca
Source: Company data; publication analysis; Kimberley Process; expert interviews; Bain analysis

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2023F 2024F
19

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The Global Diamond Report 2014 | Bain &Company, Inc.

4.6. Global rough-diamond supply forecast: Two alternative scenarios


We constructed two alternative supply scenarios toallow for thepossibilities that production will grow
atagreater orlesser rate than that assumed inthebase supply scenario (see Figure 4.6.1). Asinour 2013
report, these alternative scenarios take into account thefeasibility ofadditional supply insome African countries aswell asthepotential for thelargest mines andproducers tofall short oftheir stated production targets.
Both scenarios factor inpotential developments within theindustry aswell asexternal factors that could
disrupt mining activities.
The Production Increase Scenario envisions additional production increases based onexpert interviews andopi
nions. This scenario calls for production togrow ata2.03.0% compound annual rate from 2013 through 2024,
compared with 0.51.5% inthebase scenario.
The Stable Production Scenario is based onmore conservative assumptions, most notably thepossibility that
some major mines will achieve their full potential more slowly than assumed inthebase scenario. According
tothis scenario, aweak economic environment andtechnical complications will cause some mines toproduce less than projected under thebase scenario. This scenario assumes that production will remain flat until
2019 andthen decline by2.53.5% from 2019 through 2024. Overall, under this scenario production will
decline by1.02.0% from 2013 through 2024, rather than increase 0.51.5% over thesame period, asthebase
scenario predicts.

Figure 4.6.1: Global rough-diamond supply involume terms isexpected to grow atarate intherange
by- 2.0% to3.0% per year

Rough-diamond supply, millions of carats, 20082024

CAGR
(20132024) (20132019) (20192024)

Forecast
200

175

Production
increase

2.03.0%

5.56.5%

- 2.0 -1.0%

150

Base
production

0.51.5%

3.54.0%

- 2.0 -1.5%

125
Stable
production
100

2009

2011

2013

2015F

2017F

2019F

2021F

Source: Company data; publication analysis; Kimberley Process; expert interviews; Bain analysis

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2023F 2024F

-2.0 -1.0% - 0.5 0.5% - 3.5 - 2.5%

The Global Diamond Report 2014 | Bain &Company, Inc.

Figure 4.7.1: Thegap between supply anddemand isexpected towiden starting in2019, according
toourbase scenario

Rough-diamond supply and demand, $ billions, 20092024, 2013 prices

CAGR
(20132024)

Forecast
30

20

10

2009

2011

2013

2015F

2017F

2019F

2021F

2023F

High
demand

6.57.0%

Base demand

4.05.0%

Low demand

3.54.0%

Production
increase

2.03.5%

Base
production

0.52.0%

Stable
production

- 2.0 - 0.5%

2024F

Note: Rough-diamond demand has been converted from polished-diamond demand using historical ratio of rough-diamond production to polished diamonds
Source: Euromonitor; IDEX, Tacy Ltd. and Chaim Even-Zohar; Kimberley Process; publication analysis; expert interviews; Bain analysis

4.7. Global rough-diamond supply-demand balance, 20142024


Bain & Companys 2014 forecast projects that from 2014 through 2018, thedemand growth rate will exceed
that ofsupply. Starting in2019, we expect thedifference between thegrowth rates towiden byup to6percentage points. Demand is projected tocontinue its long-term growth trajectory, supported bytheoutlook for strong
market andeconomic fundamentals, andsupply is projected inline with thereduction inglobal production
levels. This trend, if sustained, suggests along-term positive outlook for thediamond industry
(see Figure 4.7.1).

4.8. Risks anddisruptive factors


We expect that factors analyzed inour 2013 forecast will continue toinfluence theglobal rough-diamond supplydemand balance over thecoming decade. Some ofthe risks examined inlast years report, such asuncertainty
intheeconomic outlook, have materialized. Nevertheless, we see strong fundamentals inplace ineach market
that could spur robust demand growth.
As inprevious years, we believe that theodds ofdifferent risks anddisruptions materializing will vary, aswill
their potential impacts. Indeveloping their analyses andstrategic plans, industry players andpotential investors
should therefore give serious consideration tosuch factors andcarefully consider theimpact ofdifferent scenarios ontheir plans.
First, uncertainty could still define themacroeconomic outlook. This year, we saw recovery intheUS economy
andslight improvement intheEuropean economies. However, thenature ofeconomic stagnation inEurope ap-

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pears tobe shifting from cyclical tostructural. Moreover, theAsian countries, led byChina andIndia, need
todemonstrate theexpected GDP andmiddle-class growth andprove that such growth will continue totranslate
into higher demand for diamonds.
A second factor that merits consideration is thepotential development ofasignificant investment market fordia
monds. Materialization ofsuch amarket would enhance overall demand. If demand exceeds supply even more
than expected, demand for diamonds will rise; consequently, diamond prices will rise aswell. Still, we believe
that theinvestment market for diamonds remains inanearly stage ofdevelopment, although thespace conti
nues tointerest potential investors.
Third, synthetic diamonds could negatively affect diamond demand. Asdiscussed inChapter2, there isnoevi
dence yet that, intheshort run, synthetic diamonds will replace natural diamonds for use injewelry. Ontheother
hand, undisclosed synthetic stones could penetrate thesupply pipeline despite industry players best efforts. Left
unmanaged, such penetration could undermine consumers trust innatural diamonds.
Fourth, asignificant increase inrecycling ofdiamond jewelry could shape perceptions among consumers that
they do not need tobuy new polished diamonds. That could drive down demand for rough diamonds. Inthelong
run, this effect can be mitigated if agrowing market for recycled diamonds spurs investment demand byadding
liquidity tothe market.
We believe that developments related tosynthetic diamonds anddiamond jewelry recycling present arelatively
low risk for industry players andcan be properly managed bytheindustry.

4.9. Key takeaways


Global long-term rough-diamond demand is expected tocontinue its robust growth at45% per year from
2013 through 2024, driven bystrong fundamental economics such asoverall wealth andmiddle-class growth
indeveloping countries.

China, India, andtheUS will continue todrive diamond consumption andwill account for thelions share
ofnew demand for diamond jewelry.

The global supply volume ofrough diamonds is expected togrow byacompound annual rate of3.8% until
2019 andthen decline by1.8% from 2019 through 2024. This long-term decline insupply will stem from
theaging ofexisting mines andthelimited number ofnew projects coming online. Global long-term
rough-diamond supply value is expected togrow atanannual rate of0.52% until 2024.

Bain & Companys 2014 forecast projects that from 2014 through 2018, thedemand growth rate isexpected
toexceed that ofsupply. Starting in2019, we expect, thedifference between thegrowth rates willwiden byup
to6 percentage points. Demand is projected tocontinue its long-term growth trajectory, supported bytheoutlook for strong market andeconomic fundamentals, andsupply is projected inline with thereduction
inglobal production levels.

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Several factors could disrupt thediamond supply-demand balance. Inparticular, uncertainties about
Europes economic recovery, increased political instability inAsian countries, andslowing economic growth
inChina andIndia could erode demand for diamonds. Companies crafting long-term strategic plans should
carefully consider not only thebase scenario offered here but also theProduction Increase Scenario
andtheStable Production Scenario.

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Conclusion
In thepreceding pages, we have taken adetailed andcomprehensive look atthestate ofthe global diamond market in2013. We have analyzed thekey challenges facing theindustry, closely examined diamond financing,
andpresented theten-year outlook for supply anddemand. Through this undertaking, we have arrived atseveral
key conclusions:

Despite thepositive market in2013, there isincreasing uncertainty inthemacroeconomic landscape.


In2013, thediamond industry showed steady growth of24% across every link inthevalue chain, powered
mainly bydemand intheUS andChina. India andChina solidified their roles asleading centers for cutting andpolishing andjewelry manufacturing, respectively. Meanwhile, concentration intheproduction
segment ofthe value chain intensified, with thetop five players accounting for 70% ofvolume and85%
ofrevenues. Their profitability also grew. Theuncertainties facing theindustry center onthemacro
economic environment, with two key questions standing out: Will China andtheUS sustain their robust
GDP growth, andwill revived GDP growth inIndia translate into higher demand for diamonds?

The industry is exploring new ways tosustain thedemand for diamonds injewelry andasinvestments.
Demand for diamond jewelry is still themain engine ofdiamond demand, accounting for 95% ofthetotal.
Historically sustained byDe Beers generic marketing, jewelry marketing shifted toretailer-supported
branded advertising beginning in2000. Recent developments include closer cooperation among produ
cers andretailers onspecific types ofstones andasharper focus onemerging markets. Investment
demand remains atalower level, accounting for about 5% oftotal demand, despite diamonds attractiveness asaninvestment because oftheir low volatility andstable returns. Themain constraints ondiamond investing include thedifficulty ofappraising their value, thelack ofprice transparency, andlimited
market liquidity. Theindustry issupporting multiple initiatives aimed atfostering thelong-term growth
ofinvestment demand.

Retailers andjewelry manufacturers are increasing integration andcooperation with middle-market andupstream players tosecure access togem-quality stones. Because diamond demand is expected tooutpace
supply, securing long-term access toan assortment ofstones will be critical for major retailers. Tosecure
access, retailers are exploring long-term contractual agreements andinvestments inupstream ormid
stream players.

Synthetic diamonds represent anopportunity for their technological andindustrial applications; injewelry,
they can coexist with natural gems but can undermine consumer confidence if undisclosed. Synthetics create
new opportunities inhigh-tech andindustrial applications, with demand expected togrow 7% year-on-year
through 2020. Moreover, they can coexist with natural stones asjewelry inputs. There isno indication that
consumer preferences are shifting from natural diamonds tosynthetics, but synthetics can erode customer
confidence if sold undisclosed. Thetwo major industry initiatives aimed atmitigating this risk are theincreased use ofsynthetics detection technologies andmore frequent certification.

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The Global Diamond Report 2014 | Bain &Company, Inc.

The diamond-financing business needs toadjust its operating model. Financing provided bydiamond banks
has played avital role insustaining theindustrys growth during thepast decade. Inthepast few years, however, middle-market players have struggled togain access toliquidity, owing toconditions arising inboth
thediamond andthebanking industries. A new operating model for diamond financing isneeded, built
onfour pillars: transparency ofindustry operations, involvement ofup- anddownstream players tosupport
themiddle market, development ofnew andmore secure financing products, andattraction ofnew banking
players tothe industry.

The long-term projection is for demand growth tosurpass supply growth. We expect thedifference between
thedemand andthesupply growth rates tobe positive from 2014 through 2018 andtowiden byup to6percentage points starting in2019. Demand is projected tocontinue its long-term growth trajectory, supported
bytheoutlook for strong market andeconomic fundamentals, andsupply isprojected todevelop inline with
thereduction inglobal production levels.

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Glossary
Alluvial depositmaterial that has been removed from theprimary source (a kimberlite) bynatural erosion
andeventually deposited inriverbeds, along shorelines, inglaciers, or ontheocean floor
Asset-backed financeaspecialized method ofproviding structured working-capital financing through term
loans secured byaccounts receivable, inventory, machinery, equipment, and/or real estate
Asset conversion cyclethenumber ofdays it takes topurchase raw materials, convert them into finished goods,
sell thefinished product toacustomer, andreceive payment from thecustomer or account debtor
Basel IIIaglobal, voluntary regulatory standard for bank capital adequacy, stress testing, andmarket
liquidity risk intended tostrengthen bank capital requirements byincreasing bank liquidity anddecreasing
bank leverage
Beneficiationtheestablishment or relocation ofdiamond value-added activities indiamond-producing countries
CAGRcompound annual growth rate; ayear-on-year growth rate over aspecified period oftime
Caratameasure ofweight andone ofthefour main diamond characteristics along with color, cut, andclarity;
1carat= 200mg
Concentration risktherisk posed toafinancial institution byone or more exposures that could produce losses
large enough tothreaten theinstitutions ability tocontinue operating
Conflict diamondsmined rough diamonds used tofund rebel andrevolutionary activities against legitimate
andinternationally recognized governments
Consortium lendinglending inwhich two or more banks come together tofinance acustomer
Cost offundstheaverage interest rate paid byafinancial institutions for thefunds it collects torun its business
Credit insurancean insurance andrisk-management product offered byprivate insurance companies
andgovernmental export credit agencies tobusiness entities wishing toprotect theiraccounts receivable from
loss due tocredit risks
Developed countriescountries that have highly developed economies, advanced technological infrastructure,
andhigh per-capita income, including thecountries oftheEU, Japan, andtheUS
Developing countriescountries with lower living standards andalow Human Development Index, including
China andIndia
Diamantaireamiddle-market player; gem-quality diamond manufacturer, producer, or trader

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Diamond certificationaprocess entailing anunbiased examination byaprofessional toauthenticate adiamonds attributes


Diamond contentpercentage ofdiamond value inoverall diamond-jewelry value
Diamond pipelineavalue chain that runs from rough-diamond producers todealers todiamond cutters
andpolishers tojewelry manufacturers toretail stores andfinally toconsumers
Downstreamthefinal link inthediamond value chain, which includes jewelry retailing andend customers
Economically recoverable depositsdiamond deposits that are technologically andeconomically feasible
toextract
ERPenterprise resource planning; business process management software that automates many back-office
functions
ETFexchange-traded fund; asecurity that tracks anindex, commodity, or basket ofassets like anindex fund but
trades like astock onanexchange
Gem-quality diamondsdiamonds used for jewelry manufacturing
Gross spreadthedifference between theaverage yield that afinancial institution receives from loans andthereference market rate applied tothat loan; analogous toamark-up ontherisk-free market rate
Hard luxuryLuxury products, chiefly high-end jewelry andwatches
HSE riskshealth, safety, andenvironmental risks
IFRSInternational Financial Reporting Standards, which are accounting standards for ensuring that company
accounts are understandable andcomparable across international boundaries
Industrial diamondsdiamonds used for nonjewelry purposes inmanufacturing processes invarious industries, including construction andhigh tech
Kimberley ProcessKP; acertification scheme aimed atpreventing thesale ofconflict diamonds
LGDloss given default; theamount offunds lost byabank or other financial institution when aborrower
defaults onaloan
Long-term contractacontract for supply ofrough or polished diamonds over apredetermined period oftime
(normally two tothree years)
Marine miningdiamond extraction method used for deposits located intheseabed
Middle marketthesecond link inthediamond value chain, which includes secondary sales ofrough diamonds,
cutting andpolishing, primary andsecondary sales ofpolished diamonds, andjewelry manufacturing

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NPLnonperforming loans; loans that are indefault or predefault


Net spreadthedifference between theaverage yield that afinancial institution receives from loans andother
interest-accruing activities andtheaverage rate it pays ondeposits andborrowings; analogous tothegross margin ofnonfinancial companies andalso known asinterest rate spread
Open-pit miningextraction method used for diamond deposits found deep intheEarth
Personal disposable incomePDI; theamount ofmoney that households have available for spending andsaving
after paying income taxes
Recycled diamondsdiamonds already bought once that go back into jewelry manufacturing
RWArisk-weighted assets; abanks assets or off-balance-sheet exposures, weighted according torisk; used
todetermine thecapital requirement for afinancial institution
Securitizationthepooling ofvarious types ofcontractual debt andselling ofthe consolidated debt asbonds,
pass-through securities, or collateralized mortgage obligations (CMOs) tovarious investors
Short-term contract/onetime agreementaonetime purchase ofrough or polished diamonds
Sight/trading sessionanevent during which customers can inspect andbuy diamonds from thesessions producer or organizer
SMEsmall andmedium-size enterprise
Solvency ratioakey metric for assessing anenterprises ability tomeet its debt andother obligations; indicates
whether acompanys cash flow is sufficient tomeet its short- andlong-term liabilities
SPVspecial-purpose vehicle; alegal entity, often alimited company or apartnership, created tofulfill narrow,
specific, or temporary objectives; typically used todistance companies from financial risk
Structured financeafinance sector created tohelp transfer risk using complex legal andcorporate entities
Syndicated loanaloan offered byagroup oflenders (asyndicate) that work together toprovide funds for
asingle borrower
Upstreamthefirst link inthediamond value chain; it includes rough-diamond exploration, production,
sorting, valuation, andsales

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Key contacts for thereport


This report was prepared byOlya Linde andRoberto De Meo from Bain &Company, together with Ari Epstein
andStephane Fischler from AWDC.

Stephane Fischler
President, AWDC

Yury Spektorov
Partner,
Bain & Company

Ari Epstein
Chief Executive Officer, AWDC

Olya Linde
Partner,
Bain & Company

Roberto De Meo
Principal,
Bain & Company

The authors were supported by a global team, including Yury Glazkov, Anton Khabursky, Boris Kaminsky, Anton
Matalygin, Masha Shiroyan, and Bains Mining and Luxury Goods practices. Donald Woodrow contributed
theimage forthecover page ofthereport.

Media contacts:
Dan Pinkney
Bain & Company
Phone: +1 646 562 8102
Email: dan.pinkney@bain.com
Margaux Donckier
AWDC
Phone: +32 47 832 4797
Email: margaux.donckier@awdc.eu

Page 78

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