DIAMONDS ARE FOREVER
- According to Bain & Company, the global jewelry market will be worth USD 370 bln as of the end of 2024, and is expected to grow by 4.7% annually until 2030, to around USD 500 bln. Diamond jewelry accounts for around 25% of the market, or more than USD 80 bln. Growth of overall welfare, especially in developing countries such as India and China, drives growth of consumption of luxury goods, which includes jewelry. Research shows that Generation Z spends more on luxury goods than their predecessors, and Zoomers are interested in branded goods. In addition, unlike previous generations, Zoomers prefer to make expensive purchases online.
- The Russian Federation is one of the largest suppliers of diamonds to the global market with a share of over 30%. Russia accounts for around 60% of proven global diamond reserves. The country’s integration into the international diamond market, and as a result, the polished diamond market, is high. At the same time, this market is an area of interest for many countries. In this regard, ACRA believes that sanctions against the Russian diamond mining industry imply restrictions and financial losses for other countries as well, including African countries whose budgets largely depend on revenues from diamond sales. If Russian diamonds are banned, then African diamond-producing countries will have to certify every single stone in order to confirm their geographic origin, which ACRA believes in unlikely. Certification will lead to a considerable increase in logistics costs and significant expenses (including increased investment in working capital) both for the African countries themselves and the global diamond industry as a whole.
- In 2023 and 2024, there was a sharp reduction in the volume of diamond purchases by Indian cutters, which had a negative impact on the price of diamonds in the world market. In response, the largest diamond producers revised their production plans downward. These measures will lead to the fact that a deficit may form on the market as early as 2025, and given the decline in production volumes against the backdrop of depleted reserves, this deficit may only worsen in the future. This will certainly contribute to the growth of prices for natural diamonds.
- PJSC “ALROSA” (hereinafter, ALROSA or the Company) is the largest diamond mining company and a global leader in terms of diamond production and reserves. Taking into account the structure of the market and consumption of diamonds, ACRA assesses the financial stability of the Company and its credit quality as high in the medium and long-term.
STRUCTURE OF THE GLOBAL DIAMOND MARKET
Around 65% of supply in the global diamond market is controlled by four companies, the largest producers are ALROSA and De Beers, with a combined share of 60% of global production. This balance of power allows the main players to act in a relatively coordinated manner with regard to the supply of diamonds to the world market, in order to prevent sharp price fluctuations.
In terms of physical and chemical properties, there is no difference between a rough diamond and a polished diamond, since a polished diamond (or brilliant) is essentially a cut diamond. As for cost, depending on the characteristics and size of the brilliant, the price per carat can vary by tens, and in rare cases, hundreds of times. The difference in the characteristics of the rough diamond and diamond jewelry markets is also significant.
Figure 3. The process of changing the value after turning rough diamonds into polished diamond
Sources: Bain & Company, Euromonitor International
The rough diamond market is the most consolidated in the entire diamond-to-brilliant transformation chain. Two thirds of supply is controlled by ALROSA and De Beers. It is at this stage that the initial price of a brilliant is formed, since the predictable sales policy of the main players ensures stability in the supply of diamonds and, as a result, prices. The price of diamonds also factors in current production costs and the prospects for the depletion of current global diamond reserves. This, in ACRA’s opinion, is what the growth in diamond prices reflects, although in terms of supply and demand the market has not undergone structural changes over the past 30 years.
At the cutting and polishing stage, 90% of all mined diamonds are sent to India, which is home to a large industry for turning rough diamonds into polished diamonds. This market segment has a large number of players, low entry barriers and relatively low profitability. Furthermore, Indian cutters bear all the financial risks — both price and credit risks. Most of its participants obtain credit facilities from banks in order to buy rough diamonds (cutters pay mining companies in advance), while the sale of polished diamonds takes place mainly under deferred payments. This scheme creates the risk of a large number of bankruptcies, however, the Indian government tries to support the sector.
The penultimate stage in the chain of turning rough diamonds into brilliants is the production of jewelry from them. This market segment is characterized by a large number of both large and small jewelry companies. The barriers to entry here are somewhat higher than in cutting, and profitability is also low. The last stage is retail sales, with many retailers being jewelry houses whose main asset is a strong unique brand or family of brands, supported by high investments in marketing, as well as the presence of stores at the main points of sale of luxury goods. The profitability of this segment varies from 10% to 30%, in recent years the growth rate of luxury retailers has significantly exceeded the growth rate of the market as a whole.
COMPETITION from synthetic diamonds
Over the past few years, synthetic diamonds have gained some popularity due to their much lower cost compared to natural diamonds. Laboratory-grown diamonds are produced using one of two energy-intensive processes: chemical vapor deposition (CVD), and high pressure and high temperature (HPHT). In the CVD process, a small natural diamond is placed in a special chamber into which heated gases are supplied. As the gases reach a certain temperature, carbon begins to deposit on the natural diamond, layer-by-layer increasing its size and transforming its shape. The HPHT process replicates the natural diamond-forming process. Natural graphite is placed in a special chamber, where a high pressure and high temperature are created to transform graphite into diamond. The only difference compared to the natural process is the growing time — laboratory growing takes several months instead of millions of years. So, why are naturally formed diamonds much more expensive and in high demand despite their similarity in physical and chemical properties to lab-grown diamonds? The answer lies in their uniqueness and exhaustibility. Natural diamond reserves may run out in a few decades — depending on the volume of annual extractions — and it will not be possible to replenish what nature created for millions of years. Thus, we can assume that the uniqueness and exhaustibility of naturally formed diamonds will drive up their value, while prices for laboratory-grown diamonds will continue to fall as their production volumes grow and prime costs decrease. The price dynamics of synthetic diamonds support the above assumption: in four years their price fell by 80% and continues to decline. The difference in the prices of synthetic and naturally formed diamonds (wholesale prices for synthetic diamonds have fallen below USD 200 per carat, while the price of naturally formed diamonds is USD 5,000 per carat) suggests that synthetic diamonds used in jewelry are approaching the price point of costume jewelry.
Figure 6. Price and prime cost of synthetic diamonds, USD/carat
Sources: Bain & Company, Euromonitor International
current situation in the industry
In 2024, the global diamond market experienced an ambiguous situation — diamond prices fell by more than 10%. Prices for natural diamonds have fallen by more than 30% from the peak recorded in spring of 2022 and now they correspond to the level that prevailed in the pre-pandemic period of 2019–2020. On the one hand, the volume of the global jewelry market reached approximately USD 370 bln in 2024, and it is expected to grow at an average annual rate of 4.7% in 2024–2030, reaching almost USD 0.5 tln by the end of the period. On the other hand, net diamond imports to India plunged in 2024 since local diamond cutters accumulated excess diamond reserves in 2020–2022. At the beginning of 2023, the surplus was estimated at more than USD 5 bln and amounted to about 45 mln carats, which is twice the needs of diamond cutters. Previously, the average annual volume of diamond imports to India was about 120–125 mln carats; this year it may not exceed 120 mln carats. In response to the declining demand from Indian diamond cutters, diamond mining companies are pursuing a price-over-volume strategy, which implies that diamonds are supplied only when there is real demand while a certain price flexibility is maintained. In line with this strategy, De Beers has revised its production forecast for 2024 from 29 mln carats to 26 mln carats. ALROSA has announced the suspension of production at less profitable fields. These measures by the world’s largest diamond suppliers may result in a market shortage as early as 2025, and the shortage could worsen over time due to declining production volumes amid depletion of reserves. This will certainly contribute to higher prices for natural diamonds.
The following factors will drive prices for gem-quality diamonds:
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Growing demand. In 2010–2024, the global demand for diamond jewelry grew by 30%, from USD 65 bln to USD 83 bln. According to Bain & Company’s estimates, the global jewelry market will reach USD 370 bln by the end of 2024, and by 2030, its annual growth is expected to be 4.7%, reaching about USD 500 bln. ACRA believes that the global diamond jewelry market will grow by a comparable amount.
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Lower volume of global diamond production. In 2010–2024, annual diamond production decreased from 125 mln carats to 115 mln carats. This downward trend is expected to continue due to the depletion of existing deposits amid an insignificant volume of new deposits expected to be commissioned after the 2020s.
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Historically, diamond sales have represented 18–20% of the diamond jewelry market, which corresponds to annual consumption of diamonds at USD 15.8 bln. Diamond production is forecasted at 110 mln carats next year, of which 75% are gem-quality diamonds, and the remainder are industrial-grade diamonds.
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Thus, the production of gem-quality diamonds will not exceed 83 mln carats from 2025.
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Therefore, taking into account the estimated sales volume of USD 15.8 bln and the forecasted production volume of 83 mln carats, the average selling price of diamonds is projected to be USD 191 per carat, implying a potential 50% price growth from the 2024 level of USD 125 per carat.
sanctions restrictions in the industry
In the period from December 2023 to January 2024, the EU, Switzerland, the United Kingdom, the United States, Japan and Canada banned the import of gem-quality diamonds mined in Russia, as well as polished diamonds and diamond jewelry of Russian origin. On March 1, 2024, the import of rough diamonds and polished diamonds made from Russian diamonds outside Russia was prohibited if their weight exceeds one carat. On September 1, 2024, the import of gem-quality diamonds, polished diamonds and jewelry with polished diamonds weighing more than 0.5 carats and made from Russian diamonds outside Russia was prohibited. Moreover, a diamond traceability program was announced to be introduced across customs borders in order to exclude the technical possibility of such imports.
Figure 7. Countries with the largest proven diamond reserves
Sources: Bain & Company, Euromonitor International
Russia is the largest supplier of diamonds to the global market, holding a share of over 30%, and possessing about 60% of the world’s proven diamond reserves. The country has historically been highly integrated into the global jewelry market. Global jewelry consumption growth prospects are positive: the market capacity is projected to increase by at least USD 100 bln by the end of the decade, driven by growing consumption in emerging economies and BRICS countries, leading to a shift in the geography of consumption toward these regions. In this regard, the restrictions imposed on the Russian diamond industry, particularly on ALROSA, have an impact on many other countries, including African states whose budgets are heavily reliant on the diamond industry. These restrictions are economically unjustified and ACRA believes that they are unlikely to alter the fundamental economic principles of supply and demand. Given the market structure and diamond consumption trends, the Agency assesses ALROSA’s ability to maintain medium- and long-term operational and financial stability of its business as high.
