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While the diamond sector probably has more uncertainty now than at any other point, participants also probably have a bigger opportunity than ever to shape what the future will look like.

“One thing’s for sure, the way the industry has operated over the last decade is not going to be the way it operates in the next decade.

“It’s going to require quite a lot of close analysis and assessment and strategy to chart the industry into a new era,” Gemdax co-founder and partner Anish Aggarwal emphasised.

Structural issues need to be addressed, alternative business models are under consideration, major contemplation is being devoted to future marketing, eyes are on what will become of De Beers, a trophy South Africa-grown asset now being guided into new ownership, the rough diamond sales model is coming under new evaluation, and midnight oil is being burnt on how more value can be extracted and how more upside can be created.

“There’s been a lack of diamond marketing for the last two decades and what we’re seeing is the aftermath of that,” said Aggarwal, who added that the more diamond marketing and promotion goes down the road of the 4 Cs – the traditional clarity, cut, carat and colour commoditisation – the more natural diamonds could lose out to laboratory-grown diamonds.  

“A number of different scenarios play out and marketing and branding is going to be key for both categories, for natural diamonds and for lab-grown diamonds.

“We do see a degree of substitution, but the rate of substitution in the US has certainly slowed in the last six to 12 months.

“We don’t know yet how China and India will play out. Lab-grown adoption has been relatively slow, and we haven’t seen a great deal of activity among luxury brands looking at lab-grown diamonds. It’s all to play for, for both sectors, and certainly you get the feeling that natural diamonds could still prosper and grow despite the lab-grown threat.”

At present, diamond mining companies seem unable to sell their diamonds without accepting lower prices. When, in your view, is balance likely to return to the diamond sector?

Aggarwal: You have certainly gone straight to the point. I was hoping that we would start with some context, which I’ll try to provide, to begin with, which is that diamond miners extract rough diamonds, which they sell onto the market, and it is true that diamond prices have fallen a significant amount since the beginning of this year and all the way through last year as well. Now, leaving a small amount of industrials market to one side, pretty much all the world’s rough diamonds end up in diamond jewellery, which is a discretionary product. So, what we’re really seeing is that rough diamond demand, which is what miners sell, has fallen because diamond jewellery demand has fallen and this is actually due to a couple of reasons. The first is just good old plain seasonality, which is at this time of year, major markets such as the US and India tend to have weaker demand for many products, and diamond jewellery is no exception. There’s a cyclical aspect to that as well, and demand typically picks up by August, September. But there are other factors at play as well, structural issues, and the first of these is around China. The Chinese economy has actually struggled a great deal post Covid, and that’s affected a bunch of other industries. Some argue, though, it’s affected diamonds more than others, because consumers have still carried on buying gold jewellery and pearls, and that seems to be a developed consumer preference. That’s a structural issue number one. Structural issue number two is the advent of lab-grown diamonds. These are diamonds that can be made in a factory by people using technology. There are various technologies out there, but they are physically the same as the diamonds you would mine, and what we’re seeing is a move away from some consumers buying natural diamonds and buying lab-grown diamonds instead. We’ve seen that particularly in the US, where around 50% of engagement rings in the US now have a lab-grown diamond centre stone. If you take those two structural issues, you could say that they’re actually caused by insufficient marketing by the diamond industry. There’s been a lack of diamond marketing for the last two decades and what we’re seeing is the aftermath of that. When are we going to get back to some sort of equilibrium? It’s hard to tell, because it really requires these structural issues to be addressed. If we ramp up marketing, both at a category level and at a brand level, we could see an uptick in the next 12 to 18 months. That’s going to be really key. Then we would have the upside of better seasonality, maybe China recovering. But marketing is going to be crucial, because diamonds are an entirely discretionary product. Nobody needs them, so marketing, branding, promotion, are going to be key drivers. The second side of getting to an equilibrium is just the supply side. We’re probably at peak production now already. We’ve seen some junior miners struggle with the current prices, and we expect production to contract. Either producers will mine fewer diamonds. Some may close, and that will also balance out demand and supply and hopefully help the rough diamond market to recover.

What are the implications for the diamond business of Anglo American wanting De Beers to go it alone?

That’s a big question. Anglo American has actually been part of the De Beers story for over a century now, and most of that time was actually in combination with the Oppenheimer family, who were shareholders and ran De Beers. They saw the business through various peaks and troughs, and it was, by and large, done with a very long-term vision in mind. That was probably the defining characteristic of that period. In terms of what we think of the implications for De Beers, I think whatever form the divestment or demerger takes, the key question would be, will the new buyer or the new owner continue to take a long-term view of the industry? That’s really the key question. The industry requires a lot of patience operationally, where you’ve got big diamond mining projects coming up, You’ve got complex projects coming up that are going to take a few years to bear fruit, and you also need quite a lot of patience on the marketing side. You’ve got to build diamond equity over a period of time, and it’s not something you can solve in weeks, months, or even one or two years. It’s something that takes sustained effort. That’s what De Beers has done historically. Until we know what type of demerger or divestment takes place, who the new owner is, it’s hard to tell what the implications are going to be. What I can tell you, in the here and now, is that this situation has created quite a lot of unease in the diamond trading markets, and that’s because there is a concern that whoever the new owner is, the long-term view will not be taken, and there will be a lot more short termism, maximizing short-term profits at the expense of long-term fundamentals. That’s the biggest concern right now. The mitigant to that, and I think this is a really key point, is the role of the government of Botswana, which, I think, has a 15% equity holding in De Beers. Botswana has a high degree of co-dependency on De Beers and diamonds, and they, as a nation, will take a long-term view, and that’s a good thing, because the diamond industry has in the government of Botswana, someone who is bound to have a long-term vision. So, a lot’s up in the air.

What kind of divestment or demerger do you expect to take place?

There’s not a straight answer to that question. I think there are a couple of options. Anglo American has officially said something along the lines of divestment or demerger, and that could mean some sort of listing, potentially as an IPO, or an outright sale. So, I think option one is that Anglo American sells De Beers to a buyer, probably for cash, and there are possible candidates for this type of sale. Right now, people think that potentially a sovereign wealth fund in the Middle East or in Asia could be possible candidates. Others talk about luxury jewellery houses, major luxury players who might seek to create vertical integration. There are also family offices and maybe some of the larger US private equity firms. There are a number of different possible candidates that could buy De Beers, but what we’ve got to remember is that De Beers is a big ticket item, so the universe of individual buyers for De Beers is small, and it may take a consortium. On the other hand, De Beers is a trophy asset. It’s a once-in-a-lifetime opportunity to buy an asset and effectively be a leader in an entire luxury segment. But whoever the buyer is will need to get to grips with probably three types of things that require quite a lot of specific knowledge and capabilities. The first would be around being able to deal effectively and build strong partnerships with producer countries, such as Botswana and, going forward, Namibia as well. Those are complex, multifaceted relationships that require good understanding of governments and what their objectives and priorities would be. The second one involves the operationally complex mining projects coming up. Jwaneng Underground springs to mind in Botswana, which is both expensive and complicated to pull off, so you need to bring operational expertise. Then, you’ve got the market-facing issues as well, growing consumer appeal for diamond jewellery, which would feed into stronger rough diamond prices. Any buyer coming in would need to be able to grapple with those factors. In many ways, a complete buyout is not the most likely possibility. Some sort of listing is a second option, and that could be done in a couple of ways. The most natural way to do that would be just demerging the business, splitting the stock, so shareholders of Anglo get shares of De Beers and get shares of Anglo. That could just be the backstop if they don’t find a buyer or some other way of divestment, or they could go for a fresh IPO and try to find a new book and new buyers and a new market for De Beers. All of those are options. But the key thing is that whoever comes in has to look at diamonds and De Beers as a major opportunity, a business that if you could re-engineer, you could extract more value, create more upside.

Do you see a particular role for the Botswana government to play?

Absolutely. Botswana government is a shareholder in De Beers. They are going to have a say in how this demerger and divestment plays out. They’ll be looking for like-minded partners and shareholders who share a long-term vision. There are also opportunities to think out of the box, that I’m sure government of Botswana will be on top of, issues like the opportunity that if there is a listing, for instance, that there’s a secondary listing in Botswana itself to try to kickstart and catalyse the investor landscape in Southern Africa. So there are a couple of elements that Botswana would certainly be involved in.

Do you foresee the way the diamond sector sells its diamonds changing in view of the De Beers deal with the Botswana government and Botswana’s stake in Antwerp diamond processing?

That’s a somewhat complex question. Right now we understand that De Beers and the government of Botswana are in the final stages of negotiating a marketing agreement. A preliminary understanding of that is that the key element that will change compared to previous agreements is that fewer Botswana diamonds will flow through De Beers, and more will flow through the State diamond trader known as Okavango Diamond Company. What we expect is De Beers to see less of those Botswana-mined diamonds going through its marketing channels. Parallel to that, we’ve seen that the government of Botswana has an intention to take an equity holding in a company called HB Antwerp, which offers an alternative sales model for rough diamonds. If we look at this question about how will things evolve, it’s fair to say that De Beers has historically favoured what it calls a sightholder business model, where it sells to about 70-odd currently core customers that are handpicked. It sells at regular intervals, 10 times a year, at prices that De Beers determines. We think that’s going to evolve in three different ways. The first is, we think, that they’ll reduce the number of sightholders they sell to. They’ve got fewer diamonds to sell in the first place, so that will automatically lead to an organic reduction in the number of companies they sell to. The second aspect will be that maybe within that they want to consolidate supply into fewer hands, fewer sightholders, so that each individual sightholder has got a bit more market influence over the product they sell. The second type of change we might see is that De Beers is going to work in joint venture or partnership with its sightholders, working more closely together with them. Maybe they’ll process diamonds together jointly and sell a finished, polished diamond. Maybe they’ll do joint marketing together with their customers, and we’ve seen some of that. In the last few weeks, De Beers has announced that it is cooperating with Signet, a big US retailer, to do joint marketing for natural diamonds in the US. They’ve announced a cooperation agreement with Chow Tai  Fook in China, again to promote natural diamonds. The third way that the selling model might evolve, is that De Beers may well go into processing rough diamonds itself. Instead of selling rough diamonds, it may well sell finished, polished diamonds to markets. Maybe it will go to brands directly, either its own or others, and say that we have a product which has got guaranteed provenance, that is De Beers through and through, and try to build some equity around that as well. That’s something that we see as a possibility. De Beers has said it’s a possibility as well. To some extent, you could argue that at least some of this has been catalysed with what HB Antwerp is doing. HP Antwerp’s offering provides the opportunity rather than buying rough diamonds and getting the cash for that, for miners to participate in the sales of the finished, polished diamond. That’s an alternative business model, and we think the developments at De Beers and at HB Antwerp are going to encourage miners of all shapes and sizes to look at their rough diamond selling model.

How much negative impact are laboratory-grown diamonds having on mined diamonds?

We’ve clearly seen a big impact of lab-grown diamonds on natural diamonds. We’ve seen some substitution where consumers have bought lab-grown diamonds instead of natural diamonds. We’ve seen that, especially in the US market, and particularly in the engagement ring market, where consumers have bought engagement rings with a lab-grown centre stone instead of a natural one, to the point that one in two engagement rings sold in the US has a lab-grown centre stone. They’re in addition to natural diamonds. It’s not the case that lab-grown diamonds will always substitute natural. Lab-grown diamonds have some issues of their own right now. We’re seeing production costs fall. We’re seeing them being offered more and more cheaply to consumers, at a significant discount to natural diamonds, and arguably, they’re now being positioned as a different product, completely, to natural diamonds. You can buy a pair of lab-grown diamond earrings for about $70, which in no way competes with natural diamonds at this stage. The question is, what happens next and a number of different scenarios could play out, because at the end of the day, lab-grown diamonds and natural diamonds are physically and optically identical. They’re chemically the same, only the method of origin is different. What happens next is going to affect the way the industry plays out. The more desire is created around origin and differentiated origins, the more natural diamonds will have a stronger story to tell. The more diamond marketing and promotion goes down the road of 4 C’s and commoditisation, the more natural diamonds could lose out to lab-grown diamonds.  A number of different scenarios play out and marketing and branding is going to be key for both categories – for natural diamonds and for lab-grown diamonds. We do see a degree of substitution, but the rate of substitution in the US has certainly slowed in the last six to 12 months. We don’t know yet how China and India will play out. Lab-grown adoption has been relatively slow, and we haven’t seen a great deal of activity among luxury brands looking at lab-grown diamonds. It’s all to play for, for both sectors, and certainly you get the feeling that natural diamonds could still prosper and grow despite the lab-grown threat.

Do you see any scope for rationalisation and consolidation in the mining Industry?

The biggest area where you could see consolidation and rationalisation is arguably with the junior mining companies, who have really struggled over the last few years. They had a bump during Covid, but have since struggled. They’re struggling on two fronts. Declining prices are hurting many of their projects, which are not as profitable as some of the bigger mines, and the other aspect is that many of these projects are transitioning to more expensive underground options. The opportunity, I guess, would be to try to buy these mines. You could probably buy many, or most of the world’s junior diamond mining companies for a few hundred million dollars, which is not a great deal of money, but I guess, you would also end up with quite a lot of debt on your balance sheet. It’s not quite as cheap as it looks, but the opportunity would be to buy these and to create some sort of synergy value. The areas in which you might create value are twofold. The first is to see if you’ve got some operational synergy out there. If you can bring scale, operational efficiency, by working with more mines, that’s a plus. If you can bring more technology to the table, that’s a big plus as well. That’s the kind of operational synergy you might bring to the table. Another type of synergy would actually be in sales and marketing your output, the rough diamonds you’re producing, and selling on. Now, the challenge that many junior mining companies have today is that they’re entirely what I’d call price takers. They sell at a prevailing market price. They’re not price makers. They don’t try to influence the price at which they can sell their diamonds, unlike some of the larger mining companies. The opportunity would be to try to consolidate supply, have a bit more placement power and try to build a story, a narrative and origin around your production. We’ve seen a couple of miners do that already. Burgundy has tried to do that with some of its production. But to have real impact, we think scale is a real advantage, and that’s the kind of synergy value that is an opportunity. But it’s a tricky process to get a group of junior mining companies together and for them to all agree to sell and for you to bring that scale, but it is certainly an opportunity.

Finally, what should be the biggest takeaway?

The biggest takeaway is uncertainty. We’ve probably got more uncertainty today than at any other point in the diamond industry, at least for several decades. There are major aspects coming up. We’ve got markets facing uncertainty in the form of how will China recover? What will be the impact of lab-grown diamonds? We’ve got operational uncertainty around, how will some of these bigger mining projects be executed successfully and profitably? We’ve got the even bigger uncertainty over the ownership of De Beers and how that will play out. At the moment, there is such a big amount of uncertainty, it’s hard to devise strategies when you’re in the diamond trade. But change always brings opportunity, and this is not going to be any different. What we’re seeing is that whoever you are today, whether you’re a major mining company, whether you’re a company looking to enter the diamond space in terms of finance, whether you’re a producer company, whether you’re a retailer, whether you’re diamantaire, someone who operates in the trading market, you have probably a bigger chance to shape what the future industry will look like than you had in the last few decades. There are going to be opportunities. But one thing’s for sure, the way the industry has operated over the last decade is not going to be the way it operates in the next decade, and that change is inevitable. It’s going to require quite a lot of close analysis and assessment and strategy to chart the industry into a new era.