Rocks on a roll

Global market for cheaper diamonds heats up as China's middle class rapidly buys into the flawed beauty of a range of less-expensive stones

PUBLISHED : Friday, 03 May, 2013, 12:00am
UPDATED : Friday, 03 May, 2013, 4:22am

China's burgeoning middle class is buying diamonds so quickly that the price of mass-market stones is rising faster around the world than for top-quality jewels affordable only to the super-rich.

Prices for a one carat internally flawless "top white" diamond have gained about 7 per cent in two years, while a stone of similar size and colour with slight imperfections jumped 24 per cent, according to consultant

"The Chinese consumer's fascination with luxury goods has grown dramatically, along with their pockets," said Angelito Tan, founding partner of Robert, Tan & Gao, a consulting firm on luxury market strategy with offices in Shanghai and Beijing.

The price jump in more flawed diamonds benefits producers such as Russia's Alrosa, the world's biggest by volume with 30 per cent of output in 2011, and De Beers, the largest by revenue. Chow Tai Fook Jewellery Group, a retailer with a US$13.5 billion market value, said its average selling price dropped in the last six months as it sold more pieces.

Even as shoppers go down market in China, the world's second-largest diamond buyer since 2011, the gap to top-flight stones is still large: a flawless one carat "top white" round diamond would cost about US$28,800, according to online retailer Blue Nile, while a benchmark middle-market SI1-category diamond of the same size and colour would cost about US$7,200.

China's market was initially fuelled by a rich elite pursuing the best diamonds available. As the economy grew, a new wave of buyers emerged, opening the market to lower-quality stones that form the bedrock of US and European demand.

"The cultural taboo of having to buy the finest diamond is broken," said Anish Aggarwal, a partner at industry consulting firm Gemdax in Belgium. "Really high quality was the sacred thing. You needed to buy fine diamonds, there was a snob effect. That has just disappeared."

About 30 per cent of Chinese sales last year were SI diamonds, the favoured clarity of the American consumer, up from 5 per cent about five years ago, according to producer De Beers.

China was now an SI market that was increasingly similar to the US, said Aggarwal. "Five years ago, that would have been unthinkable. The whole landscape in how diamonds are sold to consumers in China has changed."

China surpassed Japan in 2011 to become the biggest diamond consuming nation behind the US. Retail sales of diamond jewellery jumped 18 per cent to US$9.2 billion in 2011. Sales in India gained 17 per cent. Buyers in those two countries accounted for about 20 per cent of global diamond demand in 2011 and that will rise to 28 per cent in 2016 as the market grows to US$31 billion from US$23 billion, according to Anglo American, owner of De Beers.

While Chinese buyers have lowered their threshold, they have not dropped to the lowest quality used in jewellery, sometimes called Wal-Mart diamonds because US buyers find them largely in the superstore. "The gap is narrowing," said Stephen Lussier, executive director at De Beers. "The Chinese are moving into those mid-range goods."

The broadest category of mass-market diamonds, known in the trade as "commercial", has advanced 31 per cent in the past three years compared with a 6.3 per cent gain for the best gems, according to Mixed diamonds, the lowest grade used in jewellery, have gained 22 per cent.

Diamonds are ranked by the four C's: clarity, cut, colour and carat weight. In terms of clarity, the highest quality diamonds are classed as flawless or internally flawless. Below that grade, the industry grades stones by their inclusions or blemishes: there are very, very small included, very slight included, slightly included, or SI, and included, or I, stones.

About 230 million people moved to Chinese cities between 2000 and 2011, the greatest urbanisation in history, according to the Chinese Academy of Social Sciences. These city dwellers' average disposable income rose 13 per cent last year to 2,047 yuan (HK$2,556) a month, according to the statistics bureau.

Sales of discretionary goods in China will grow by a compounded annual rate of 13 per cent between 2010 and 2020, as shoppers in the world's largest economy after the US become richer, McKinsey & Co said in a report in March last year.

Rising demand will put pressure on stretched supplies. Diamond producers have struggled to find new large mines to replace ageing assets. Production at many of the biggest mines is falling as supplies of more accessible diamonds near the surface are depleted. De Beers's Orapa mine in Botswana began output in 1971, while its Jwaneng project, the world's largest diamond mine by production value, and Rio Tinto Group's Argyle started in 1982. The last major mine to enter production was Rio's Diavik in 2003. Global diamond production slid 8.5 per cent between 2005 and 2008 to 161.1 million carats. Rough diamond prices gained about 12 per cent in the first quarter after falling 16 per cent last year, the first annual decline since 2008.

The use of diamonds may expand at double the pace of supply up to 2020 because of China and India, according to consulting firm Bain & Co. Bain forecasts supplies will not return to pre-financial crisis levels until 2017.