It seems that the US has always been the largest consumer market for diamond jewelry, and, for many years, Japan the second largest. It also used to be that Japan was the second largest economy after the US. Those days are gone. Today, China is the ‘Giant in the East,’ and as such, the second largest diamond consumer market. The shift of many exports to a different economy, with a different business and social culture, required a shift in approach. The diamond industry had to learn that new culture, adapt to it, and find ways to grow it.
The economic revolution that took place in China led to the creation of a middle class, the size of which had never been seen before. In addition, a class of very wealthy people sprung up in China, all of whom were hungry for and able to buy luxury items, symbols of their newfound financial blessings. Luxury manufacturers all took note, as did the diamond industry. The diamond industry at the time was still very much operated under the wings of De Beers as the custodian of the industry in charge of generic marketing, and De Beers started promoting diamonds in China in earnest. The main driver was the diamond wedding ring (as opposed to the diamond engagement ring in the US).
The campaign focused on the main cities, starting in Shanghai and Beijing, and quickly became a great success. From those two cities, the central cities that led the nation, the trend spread, first to other tier-one cities, and from there it trickled down to other parts of the country. Demand for diamonds from China started growing, and was focused on top color, VS clarity and better, round diamonds. It was not long before demand in China started to impact availability of certain diamonds in other consumer markets.
The sheer size of this market, and its early consumption stage, forced changes in the global market, such as shortages and price hikes. Items in high demand in China became pricier, which in turn lost favor amongst US retailers. Trends in shape that started in the US were quickly adopted by Chinese consumers, shifting the marketing to China, at the expense of other markets. From the standpoint of the manufacturing sector of the diamond pipeline, China presented a great opportunity, an opportunity that had not existed on the consumer side of the diamond industry for many years: quick growth. All industries are always looking for growth markets. For diamonds, the US was the main market, and it has been a very steady one for many years. Japan, the former second largest market, was shrinking, and did not offer any exciting possibilities. But China was everything everyone was dreaming about, and at a grand scale.
The peak came during the first half of 2011. Chinese diamond jewelry retailers were on a rapid growth path, and started opening new locations at a rate never seen before. Due to the need to create inventories for these new stores, demand for loose diamonds and diamond jewelry skyrocketed, and prices of polished diamonds reached new highs, nearly blocking the ability of other markets to buy the diamonds sought after in China – at the old, longstanding prices. All that came to an end in July 2011, a combination of inventory needs being met and prices becoming too high. Global polished diamond prices declined quickly, and slowly rough diamond prices, which had risen as demand for polished soared, eased over time.
The first phase of the Chinese market’s embracing of diamonds has ended: the trend of diamond wedding rings has been adopted, the initial rush to buy diamonds as a status symbol by the well-off and upper–middle class spread from the largest and wealthiest cities to second and third tier cities, the availability of diamonds through new stores has expanded, and the establishment of brands has succeeded.
The second phase then began. With wider availability of diamond jewelry, and an even larger middle class, diamonds were in demand by a wider audience, and price competition became more intense. Also, because mining of higher-end clarity and color diamonds is limited, and because only so many such goods come out of the ground, Chinese consumers were forced to compromise. SI clarity goods became acceptable, and color ranges expanded a little.
The market continued to grow until the Chinese economy experienced a slowdown that impacted consumer spending, and the enormous growth in demand for diamonds has slowed down. In the past couple of years, the government of China initiated a clampdown on undeclared income, and that in turn further hurt consumer expenditure, especially on luxury goods. This change impacted diamond manufacturers, many of whom had expanded their manufacturing capacity to accommodate this market, in addition to their traditional markets. In early 2016, it was hoped that demand would start to pick up as the Chinese New Year approached, and that interest in diamond jewelry would grow once again. That did not happen. However, the change was not far off.
As in every economic cycle, the decline was followed by a modest improvement, early this year. By March, during the Hong Kong jewelry show, purchases by Mainland China buyers for both loose diamonds and diamond jewelry had grown to the extent that some exhibitors said that it was one of the best shows they participated in. In the past few weeks, manufacturers and wholesalers that supply diamonds to China have reported an ongoing rise in demand in a wide selection of polished goods. As a further indication of the improving Chinese market, more Chinese buyers are seen at rough diamond tenders in Antwerp and elsewhere.
All of this is good news for the diamond industry as a whole, especially in the short-term. As noted above, the Chinese consumer diamond market is relatively young. We have only just passed the initial introduction stage, and are now in the expansion stage. In a young market, consumers buy diamond jewelry because it is a bon ton, supported by retailers’ heavy marketing efforts. Chinese consumers are in many ways buying diamonds today like Americans bought diamonds in the 70s, 80s and 90s, when buying a large diamond engagement ring was the “right thing to do,” and when purchasing a diamond meant looking at what others bought, so one could buy the same or better. We are seeing a very similar trend in China today. Chinese consumers are not buying like American millennials.
This, of course, is not a bad thing at all. On the contrary, it provides us with a great opportunity. If today’s Chinese market buys diamonds like the Americans did 20 years ago, can we expect the Chinese market to become in the not-far-off future similar to the current US market? Today, the US diamond jewelry market is dominated by a drive to reduce prices to the point that retailers, as well as manufacturers, are seeing their margins eroding. In addition, the US market is characterized by a large focus on a very specific band of goods: GHI colors, SI1-I2 clarities, 0.05-1.49 carats. There is demand for the full range of diamonds in the US, but the majority of goods sold in that market is in this range. This means that the largest market in the world is not consuming the full range of goods coming out of the ground at an equal rate. Another issue is that when the US market slows, a whole range of goods are all at once in low demand. Finally, in recent years we have seen consumers lose interest in diamond jewelry. They want something else.
This heavy dependency on the American market begs for additional markets to pick up demand when the US market weakens. Additional large markets also mean that goods not in demand in one market may be in demand in another, creating demand for the full range of rough diamond production. Again, this is good. However, what worries me is that the Chinese market may evolve the same way the US market did, resulting in heavy emphasis on price, consumer trends that turn away from the “must have” diamonds for bridal, and a rising focus on a narrow band of diamond goods that leaves a certain range of other diamonds less desirable. So, while today China compensates for the stagnant US market with its very focused demand, Chinese consumer taste and demand for diamonds may stabilize, become very focused in terms of the color/clarity/size combination, and the diamond may lose its appeal as a must-have item.
This is why the renewed demand from China is a good thing for the short-term, but we must also think about the long-term. What will we do when we reach the point when the Chinese market becomes another kind of US market? How will we drive growth at that point? Instead of waiting until we get to that point and react to it too late, let’s start thinking about it today. One of the things that characterizes the Chinese consumer is the desire to get the right item at the right price. This is a call for transparency, and transparency is precisely, in my opinion, what we need to provide consumers. Not when we discover that demand has already fallen, and that consumers are looking elsewhere, but now, before that happens. We can and should provide the Chinese market with deep and serious education on diamonds. Supply them with every possible detail on the components of price for diamonds. Explain that 4Cs are just the start, and help them understand the comments on a gem lab report and the diamond’s irregularities. This will instill a level of confidence in the Chinese consumer, and will maintain their desire for diamonds as it evolves. We must take into account that cultural change is inevitable, and may impact interest in diamonds.
Many of the recent buyers of record-breaking diamonds came from China. These buyers understand already that diamonds are not just components in jewelry, that diamonds are rare, have a resale value, and are in fact assets with wealth preservation potential. The Chinese market is an important market for the introduction of transaction-based price lists where anyone can have access, apply irregularity discounts or premiums as needed, and find the current price of any polished diamond. This is a market where providing information on diamonds and showing historic price trends can help potential buyers make a well-informed decision about buying a diamond, and improve confidence in such a purchase. If the diamond industry adopts such an approach, than not only will we be ahead of the curve in China, we will provide the diamond industry an opportunity to widen the possible number of diamond buyers, create a larger number of diamond transactions as consumers make their trades, and add an additional venue for diamonds to decrease our dependency on a single channel. That is the kind of future I envision for us.
The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.
Diamond industrialist Ehud Arye Laniado is a man passionate about diamonds. From his early 20s in Africa and later in Belgium honing his expertise in forecasting the value of polished diamonds by examining rough diamonds by hand, till today four decades later, as chairman of his international diamond businesses spanning mining, exploration, rough and polished diamond valuation, trading, manufacturing, retail and consultancy services, Laniado has mastered both the miniscule details of evaluating and pricing individual rough diamonds and the entire structure of the diamond industry. Today, his global operations are at the forefront of the industry, recognised in diamond capitals from Mumbai to Tel Aviv and Hong Kong to New York.