Last week we took a look back in history at the development of the diamond manufacturing industry, specifically how and why diamond cutting developed in centers like Antwerp and Amsterdam. Much changed after Indian mines were depleted and diamonds were predominately sourced from South America and later Southern Africa.
The changes were even more significant after the Second World War. The war ravaged the European cutting factories, which were often run and staffed by Jewish families. While diamond manufacturing continues in Europe until today, it is a fraction of what it was in the past. The vast majority of diamonds are now manufactured outside of Europe, although Antwerp remains an important hub for diamond trading and sales.
In this next chapter in our journey through the manufacturing pipeline, I want to take a look at the demographics of diamond finishing and identify the important cutting centers and the role that these locations play in our industry. By taking a look at these places and the internal and external forces that affect them, we can start to better understand how the polished diamond market works.
According to Tacy’s Diamond Pipeline, the industry produced $22.3 billion worth of polished diamonds in 2014. Although many nations around the world can claim to manufacture diamonds at some level and capacity, 80% of polished diamonds were produced in India and China, with five other nations accounting for most of the rest.
As I have discussed in the past, India has a long and rich history of diamond mining and cutting, going back over 2,000 years. However, diamond mines in India were largely depleted at the onset of the 20th century. Most miners moved on to other industries, but a small number remained in diamond cutting. It was not until the 1960s and 1970s that diamond cutting in India began to regain traction.
At the time, India’s competitive advantage was largely due to its low-wage structure compared to other manufacturing centers in Europe and America. India was able to process small, low-value diamonds that most cutters could not manufacture profitably due to their higher labor costs, and were often not interested in at all. India became important for diamond producers because it gave them an outlet to sell smaller diamonds that previously had little value. Mining companies began selling “Indian” assortments of small, cheap goods that may only have had industrial applications.
The country benefitted from the opening of the Argyle Diamond Mine in Western Australia in 1983, which would become one of the largest diamond-producing mines in history. However, most Argyle diamonds are small and low quality, and therefore difficult to sell to cutters. Entrepreneurs in India took advantage of the situation, and forged a partnership of sorts with mining giant Rio Tinto, Argyles’ operator. This large and steady supply of diamonds was cut in India, and sold in America to a middle class that increasingly desired diamonds at an affordable price point.
Since then, India has developed into an important player in global technology, and this has filtered into diamond manufacturing. Indian firms no longer rely just on low labor costs to prosper, but are at the forefront of technology development for new processing, mapping, and cutting machines. This has helped them develop skills such that they can now compete in the market for larger and more expensive stones.
According to the Indian Mirror, Indian cutters now manufacture approximately 60% of global production by value, 85% of global production by volume, and more than 11 out of every 12 stones in the world. The traditional cutting centers in Europe, America, and the Middle East have had to re-evaluate their business models and many have exited the industry all together.
The industry in India has established itself largely in the state of Gujarat on the West coast of the country. Surat, located on the coast about 200 km north of Mumbai, is the most prominent diamond-cutting center in India. In recent years, the nearby cities of Ahmedabad and Bhavnagar have also built factories, and a strong manufacturing presence. India’s diamond industry got a boost in 2010 with the opening of the Bharat Diamond Bourse [link to http://bdbindia.org], now the world’s largest diamond bourse, covering an area of 20 acres and housing the offices of 2,500 companies.
China is a relative newcomer to the diamond manufacturing industry but it is growing rapidly. 20 years ago, China had no diamond cutting industry. Today, it employs an estimated 60,000 workers. According to Tacy, China produced $3.3 billion worth of polished diamonds in 2014, approximately 15% of global production. China is now the world’s second-largest producer of locally-cut diamonds.
Chinese manufacturers have taken a different approach to sourcing diamonds than some of their counterparts in other countries. Many Chinese firms have partnered with mining companies in Southern Africa to own a portion of the mine operations. These also include retail jewelry sellers, who source rough diamonds directly and have their own polishing infrastructure. This direct ‘mine-to-market’ pathway helps to cut out various layers of profit margin. According to Bain’s 2014 Global Diamond Report, this structure means that Chinese firms can remain competitive despite higher wages and therefore higher manufacturing costs. It also means that most of the diamonds that are cut in China are also sold locally to Chinese buyers, which further reduces costs and the country’s reliance on foreign suppliers.
China’s diamond industry does not yet have the same level of infrastructure as India’s. Specifically, Chinese firms don’t have access to the kind of bank financing that has fostered the growth of Indian firms. This has, perhaps, stymied potential growth. Time will tell if this is a direction in which Chinese banks wish to move. China has been a principal player in the lab-grown diamond market for many years, focused principally on manufacturing diamonds for industrial applications.
Interestingly, China is actually a historical producer of rough diamonds, albeit on a very small scale. Multiple small mining operations have existed in the country, and there is speculation that diamond mining could have some potential in this under-explored region. In fact, the 701 Changma Mine located in the Shandong Province reportedly recovered a 119-carat rough diamond and has produced more than a million carats over its mining life, according to Pan Asia Mining.
Russia has a history in diamond manufacturing dating back to 1961. Rough diamond fields were discovered in Northern Russia in 1955, and the state-owned Kristall Production Corporation was established soon after. Kristall, which continues to operate today, initially cut and polish locally-mined Russian diamonds for sale within the country. They began selling to the international community in 1982.
According to Tacy, Russia produced $0.7 billion worth of polished diamonds in 2014, or 3.1% of global production. This is a more than a 35% decline from 2013. The industry’s cost competitiveness has benefitted from the recent devaluation of the Russian ruble, which began in early 2014 and continues today. But this has made it significantly more expensive to buy diamonds in Russia with local currency. This, coupled with high lending rates and double- digit inflation, has seen the already-small Russian diamond consumption market grind to a standstill.
The sector in Russia remains fragile, thanks to the current economic climate. According to Moscow-based news site Rough & Polished, local manufacturers have sharply reduced their purchases from local mining groups and are at risk of failure without government intervention.
The Israeli diamond industry traces its roots back to the 1930s, as Jewish families running businesses in cities such as Antwerp and Amsterdam fled the growing anti-Semitism in Europe. They established businesses in Tel Aviv and a trade organization, and improved their manufacturing skills by constantly developing new technologies. 1968 was a pivotal year, with the inauguration of the ‘Shimshon’ building that would house all necessary industry infrastructures and help to solidify the Israeli Diamond Exchange.
Polished diamond exports grew to as much as $3.4 billion and made Israel the world’s largest supplier of polished diamonds for much of the 1980s and 1990s, according to the Israel Diamond Institute. However, Israel’s share of diamond manufacturing has declined in recent years, most notably since the financial crisis of 2008, and has fallen below $1 billion annually. Israel’s primary market for diamond exports is the United States, which saw a loss of demand for diamond jewelry during its recession in 2008/2009. Israeli manufacturers scrambled to find outlets to sell their diamonds outside of the US, but these markets were largely saturated and Israeli firms struggled to adjust.
With the relaxation of global trade barriers in the 1990s, manufacturers in low-wage countries began to attract diamond-manufacturing business out of Israel. The global development of technology has also hurt the country. Israeli diamond firms have historically been at the forefront of technology development for the industry. Advances in diamond planning machines and software allowed them to develop a leadership position in the manufacturing of large, high-value diamonds in particular, a role that they have arguably maintained until today. However, the playing field is now more level, and other countries, notably India, are much more competitive in cutting large diamonds.
Botswana is several years into an ambitious government strategy to transform the capital city of Gaborone into a diamond trading and manufacturing hub. Through the government’s partnership with diamond miner De Beers, both foreign and domestic companies were encouraged to establish cutting factories in Gaborone with the lure of a reliable supply of diamonds. The government also established Okavango Diamond Company, which was to sell diamonds in the local market to the highest bidder.
However, many companies have failed to turn a profit manufacturing diamonds in Botswana. As a case in point, Teemane Manufacturing Co., which was the first cutting factory established in Botswana over 20 years ago, announced in February 2015 that it was ceasing operations and laying off all of its 320 workers. Other large companies have reduced staff or closed operations outright. At its peak, Botswana employed more than 3,700 diamond cutters, according to Bloomberg.
South Africa was once a thriving diamond manufacturing center where local cutters had government-endorsed access to South African rough diamond production. In recent years, however, much of the country’s manufacturing capacity has flowed to India as South African firms failed to adapt to changes in the industry. According to Ernest Blom, President of the World Federation of Diamond Bourses, the South African diamond cutting and polishing industry is in distress. The industry has gone from 4,500 polishers to under 600 in the past 20 years.
America has historically been a specialist diamond-manufacturing nation with a focus on mostly very high-value, large stones. Since the US is and has for decades been the world’s largest market for diamond jewelry, it made sense to establish manufacturing capacity in the country. The cutting industry there is almost exclusively located within Manhattan’s diamond district, and many of the operating firms are subsidiaries of Israeli companies.
The New York cutting industry has dwindled in recent years, in part due to the growing sophistication of cutters in other nations, higher wages and production costs, and the fact that US-based companies have consolidated and frequently now have factories in other locations and readily available outlets to purchase diamonds outside the country. According to Tacy, diamond manufacturing in the US was worth $0.2 billion in 2014, representing less than 1% of the global market.
Like America, Belgium has lost much of its flourishing cutting capacity to other nations for many of the same reasons. Belgian firms struggle to remain competitive due to high wages and challenging tax policies. Today, Belgian cutters tend to focus only on high-value stones that have sufficient profit margins to cover the higher expenses. Antwerp continues to be a very important hub for trading and sales of both rough and polished diamonds. For Belgian manufacturers, this means that there are always traders with diamonds that need to be cut, and much of the manufacturing is done on a contract basis.
Namibia has quietly developed a sizeable polishing industry, driven by beneficiation efforts from the government. A condition for purchasing rough diamonds in Namibia is that they be supplied to the resident polishing market to be cut and polished locally, similar to the older sight system in Botswana. Namibian cutters even went so far as to develop their own national diamond cut, the Namibian Sun, a derivative of the traditional round brilliant cut.
In recent years, new countries have entered the manufacturing space and some have shown early success. Countries like Thailand and Laos have the potential to serve the growing Asian diamond market with lower wages than nearby China. Time will tell if they can develop their capacity and skills to compete with the current powerhouses of the industry in a meaningful way but the early signs are positive.
In the past decade, India’s and China’s manufacturing industries have flourished, often at the expense of countries like Israel, South Africa, Botswana, and even niche players like Belgium, Canada, and the US. This poses both risks and opportunities to the industry, which I will discuss in more detail in future articles. While the midstream manufacturing industry is in the midst of a challenging time, the ingenuity of firms around the world will continue to ebb and flow as the industry seeks to make corrections for the future.
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.