It is axiomatic that as developing countries become increasingly wealthy, the demand for goods of all types changes. Where demand was initially strong for top goods due to demand from the very wealthy, so demand for mid-market products rises as the number of people entering the middle class increases.
So it is in the diamond jewelry business, too. China’s continuously growing middle class is buying diamonds in such quantities that prices of commercial, or mainstream, goods, are rising faster as a result around the world than for top-quality gems that fall in the disposable income category income of the super-rich.
A good example is to look at the price of a one-carat IF diamond which has risen by approximately 7 percent in the past two years, according to PolishedPrices.com data. Meanwhile, a diamond of comparable size and color but with slight inclusions rose 24 percent over the same period.
Former Israel Diamond Exchange President Shmuel Schnitzer said that the taste of Chinese consumers regarding diamonds has altered as income has risen. "There are noticeable differences," he said. "We have seen the same phenomenon in the major markets overs the years, including Japan and India, so this is not new as a trend. The difference is in the size of the move because in China there has been an extraordinary and rapid rise in wealth over the past 25 years, and over the last decade in particular."
The rise in prices for lower-quality diamonds is good for diamond producers, such as Russia's s Alrosa, now the largest producer by volume of rough diamonds, accounting for more than a quarter of global output, and also for De Beers, the largest producer in volume terms. Alrosa's sales in 2012 were around $4.5 billion, while those of De Beers came in at just over $6 billion.
That is because the overwhelming majority of their output is of the type of goods that are in demand in China, and other countries.
The Chinese market was initially driven by the new super-wealthy pursuing the best diamonds available. As the economy expanded, a new class of consumers has developed, creating a demand in the market for lower-quality stones that are traditionally the most in-demand items in the U.S. and European markets.
One indication of the rise in the number of buyers for less expensive goods comes from China's Chow Tai Fook Jewellery Group which has hundreds of stores in Mainland China. The retailer, which has a stock market valuation in excess of $13 billion, reported that its average selling price fell in the last half year while it sold more items. Clearly, some Chinese shoppers are going down market, while many other consumers are coming into the market but only buying diamond jewelry that they can afford. Since 2011, China has been the world’s second-largest diamond consumer, as it overtook Japan.
Some analysts believe there was a taboo within Chinese culture regarding having to buy the finest diamonds. Where very high-quality was previously regarded as being vital with the purchase of fine-make diamonds due to a type of snob effect, that phenomenon appears to have ended.
But that change is having a global effect, and to some degree putting potential buyers in other parts of the world out of the market or forcing them to go downmarket in order to be able to afford diamond jewelry. One example if this is the fact that around 30 percent of Chinese sales in 2012 were SI clarity diamonds. But that is the clarity of stones favored by the American consumer. There has been a 5 percent increase over the past half decade, says De Beers. Not a vast increase and not sudden either, but enough to have an effect right now, and setting the start of a trend for the years to come.
At the end of the last decade that change would have been regarded as unlikely in the extreme. After all, how could China in so short a period of time have a large consumer market for the type of goods popular in the world's biggest economy and largest diamond jewelry market. It also reflects the changing manner in which diamonds are sold to consumers. Chinese retail sales of diamond jewelry jumped 18 percent to $9.2 billion in 2011.
Looking more widely at the Asian market, consumers in China and India accounted for about 20 percent of global diamond demand in 2011 – a figure that is forecast to rise to 28 percent within the next two years, with the market growing to $31 billion from $23 billion, according to estimates by Anglo American which owns 85% of De Beers.
Stephen Lussier, executive director at De Beers, and in charge of the company's branded diamond program, Forevermark, agrees the gap between China and the US in the type of diamonds they purchase is narrowing. Chinese buyers have reduced their threshold, but have not dropped to the lowest quality used in jewelry, sometimes called in the United States Wal-Mart diamonds “Chinese buyers are moving into the mid-range market, that is becoming clear,” Lussier commented.
The broadest category of mass-market diamonds, known as commercial goods, has risen 31 percent in the past three years compared with a 6.3 percent gain for top-end gems, PolishedPrices.com data shows. Menawhile, mixed diamonds, the lowest grade used in jewelry, have gained 22 percent.
The change in Chinese consumers' demand for diamonds has been brought about as a result of the greatest urbanization mankind has ever known – with an estimated 230 million people moving to Chinese cities between 2000 and 2011. That urbanization raised the disposable income in the pockets of millions of people by more than 10 percent last year alone to approximately $330 a month, according to the country's statistics bureau.
Consulting giant McKinsey & Co. believes sales of discretionary goods in China will grow by a compounded annual rate of 13 percent between 2010 and 2020, as consumers in the world’s second-largest economy become richer.
But increasing demand is placing pressure on supplies that are already in great demand. Diamond producers have not managed to find new large mines to replace aging operations. Production at many of the biggest mines is falling as supplies of more accessible diamonds near the surface are depleted.
Diamond usage may rise at double the pace of supply through 2020 because of China and India, according to consulting firm Bain & Co. Bain forecasts that supplies won’t return to pre-financial crisis levels until 2017.
As the Chinese market broadens and consumers look for a wider range of goods, that increases demand for more varieties in the variety of diamonds mined. While each mine is different, fine diamonds account for a small percentage of production, so increased sales of lower-quality stones provide the biggest rise to revenue.
“For De Beers, the bullseye of our production is in those medium colors and clarities,” said Lussier. “It’s useful now that we have two markets capable of consuming them. That’s where the significant majority of our value lies. It’ll be the minority of stones, but the majority of value.”
As demand rises for low-end stones, prices soar and the cost gap between them and the next price point closes. This can encourage shoppers to step up to the next level of quality -- until the price gap widens again.
“Traditionally, it was quality, and in particular clarity, that was the most important consideration, now it’s much more of a mixed bag,” said Gemdax’s Anish Aggarwal. “People have latched on to the fact that when you buy a lower quality diamond there is not always a big difference in appearance. There is however, a big difference in price.”