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A GJEPCKPMG report
Foreword
The gems and jewellery industry is a fascinating industry in many ways - traditional
on one hand, glamorous on the other. It employs millions worldwide and is a truly
global industry - raw materials in Africa, Australia, Canada, Russia, manufacturing in
China, India, Italy, Turkey and retailing in USA, Europe, Far East, Middle East and
Asia. The industry has however remained insulated from the rest of the economy
due to its traditional nature and as such has drawn little attention from analysts,
financial institutions and professional services firms.
KPMG has been one of the few professional services firms to have worked with
players in all parts of the gems and jewellery value chain. Over the last few years,
we have seen the industry demonstrate a strong desire to change and be a part of
the global momentum for growth. The timing is right for an awakening. Globally,
while the east drives growth and dynamism, the large western markets provide
stability in most industries. Industry level initiatives undertaken now can help the
industry claim its share of the future prosperity.
We share the optimism of the industry for a brighter future and hence joined hands
with GJEPC in studying the industry at a global level - something which has not
been attempted so far. Studies have covered gold, platinum from a commodity
point of view and diamonds have had their fair share of attention from mining to
manufacturing. Regional or country level studies have added to the knowledge
base of the industry. However, there have been few studies of the entire gems
and jewellery industry, at a global level, and with an eye on the future. Given this
need and our long-term association with the industry, we decided to invest in this
study.
Over the last few months, we worked hard - and received whole hearted support
from the industry- to put together this report. We believe this report brings together
- for the first time - all constituents of the industry to take a unified view of jewellery
as a product. We have used quantitative methods to estimate the future size and
structure of the industry and have defined a roadmap for the industry to be able to
retain its right to grow, in a competitive luxury goods market. We are confident that
if the industry implements the recommendations of this study, consumers will
reward the industry with their loyalty and all stakeholders will benefit.
We are grateful to GJEPC for giving us this opportunity and to all stakeholders who
contributed to this study. We sincerely hope that this report will help the industry in
realising its dreams and all other stakeholders to understand the industry better and
consequently share its dream.
Russell Parera
Chief Executive Officer
KPMG, India
Neelesh Hundekari
Director
KPMG, India
Contents
Executive summary
16
24
26
Jewellery fabrication
67
Jewellery retail
75
86
Scenarios
Realistic view of the future
A time for collective action
91
139
152
154
170
Appendices
176
Country profiles
178
Silver
216
Coloured gemstones
219
Executive summary
The gems and jewellery industry is extremely global in nature-given
the geographic dispersion of the value chain - from mining of
gold, diamonds, and platinum in Africa, Canada, Australia, and
Russia to polishing and jewellery manufacturing in India, China,
and Turkey, and retailing in the U.S., European Union, Japan, and
the emerging markets of China and India.
As one of the most traditional industries, it has witnessed
sweeping changes since the beginning of this millennium. Supply
sources have become fragmented, raw material prices have shot
up, and consumers have become more demanding and less loyal
than ever before. Regulators are cautious and consumer activism
is on the rise. These pressures have driven changes that are more
intense and lasting than any witnessed in the previous 50 years.
In the absence of a comprehensive global view of the current and
likely future state of the industry, players indulge in selective future
gazing. Given the leadership role of Gem and Jewellery Export
Promotion Council (GJEPC) of India in the development of the
industry, it was considered appropriate to initiate a study to take stock of the
current challenges and predict a future for the industry. KPMG, a global network
of professional services firms, which has done extensive work in the industry
joined in and over the last six months, teams from both organisations conducted a
study of the global industry.
The study focusess on understanding the current size and scale of the value
chain, identifying trends that will have an impact on the future, predicting the
likely state of the industry by 2015, recommending initiatives, and developing a
roadmap for various players given the expected changes in the environment.
Apart from interviews with major industry leaders to gather insights, the study
used quantitative modelling techniques to estimate changes in the size and structure
of the industry.
The report is limited to the precious jewellery segment of the industry, covering
the entire jewellery value chain and its three main elements diamonds, gold,
and platinum, which constitute 95 per cent of the industry in terms of value.
Silver, coloured gemstones, and palladium have been covered partially.
The size of the global gems and jewellery industry is estimated at 146 billion U.S.
dollars (USD) at retail prices in 2005. The industry has grown at an average
Rest of the
World
23.7%
Compounded Annual Growth Rate (CAGR) of 5.2 per cent since 2000.
Japan
8.3%
CAGR
200
146
160
5.2%
USD billion
118
US
30.8%
Middle East
8.9%
UK
3.1%
136
120
Turkey
2.9%
(2000-2005)
111
India
8.3%
Italy
5.0%
113
China
8.9%
124
Sale of jewellery is concentrated in eight key world markets, which corner more
than three fourth of the worlds sales. The U.S. is the world's largest market for
jewellery and accounted for an estimated 31 per cent of world jewellery sales in
2005. India and China are the emerging centres of jewellery consumption and
have steadily increased their share of the pie to 8.3 per cent and 8.9 per cent,
respectively (2005)
Value addition at the two ends of the value chain is the highest, with intermediate
segments adding relatively lower value (29 per cent in diamond cutting and polishing
and 32 per cent in jewellery manufacturing).
The global gems and jewellery value chain (2005)
0
80
12.7
0.5
40
20
CPD output
4.4
(2.4)
0.7
17.6
Jewellery
fabrication/wholesale
2001
2002
2003
2004
2005
estimated at USD 69 billion); it has grown at a CAGR of 5 per cent over the last
five years. The plain gold jewellery segment is a close second with total retail
sales of USD 60.7 billion in 2005. Over the last five years, this segment has
grown the fastest (at a CAGR of 5.5 per cent), a direct result of the rise in gold
prices (CAGR of close to 13 per cent since 2001).
Market share of various jewellery segments
USD billion
80
100
120
140
160
40.6
20.6
Jewellery retail
67.2
146
Diamond
Jewellery
47.2%
Plain gold
jewellery
41.6%
60
1.7
2000
40
Jewellery retail: Increasing consumer sophistication, dwindling investmentdriven purchases, and competition from other luxury goods are influencing
the quantum and pattern of jewellery consumption in markets across the
world. Stagnation in key jewellery markets and retail organisation in emerging
markets are continuously altering the geographic distribution of jewellery
consumption. Increased consumer consciousness about issues around
origin/source of product' and 'labour conditions in manufacturing countries'
adds to the complexity.
Declining
market share
of large
diamond
marketing
companies
Stagnating demand in
the U.S. the largest
market
Shortening fashion
cycles
Emerging consumption
centres linked with
economic growth
Gemstone
processing
Creation of store
and product
brands
Jewellery design
& fabrication
Gold
mining
Platinum
mining
Shrinking margins
Diamond
mining
Coloured
gemstone
mining
The eight key scenarios that are likely to impact the industry are:
Increasing
rough prices
KPMG used the scenario analysis method for forecasting and modelling the
impact of each of these trends on the future of the industry. Based on trends
distilled from an analysis of current events and expectations of industry experts,
eight scenarios were identified as likely to cause a significant disruption to the
industry equilibrium.
Ore processing
& scrap
recovery
Jewellery
retail
The effect of all the scenarios was estimated by building an economic model and
evaluating sensitivity of industry size and structure to the forces of change first
independently, to each scenario, and later, collectively with assigned probabilities.
Jewellery s
declining value
proposition
Bullion
trading
Recovery of
silver
Based on the collective impact of the eight scenarios identified, projections were
made about the most likely industry end state. What follows are seven key
Intense competition in
the export markets
conclusions about the size, state, and structure of the industry in 2010 and 2015.
Changing retail
channels
Competition from
other luxury items
increasing
Increasing consumer
sophistication
(2000-2005)
230
240
Aggressive marketing to
boost demand
185
200
USD billion
160
146
120
80
40
0
2005
2010
2015
4.6%
Global jewellery sales growth will be sluggish, and will see emergence of
new markets
Global jewellery sales will grow at 4.6 per cent year-on-year to touch USD 185
billion in 2010 and USD 230 billion in 2015. Palladium is expected to establish
itself as an alternative metal for jewellery fabrication, while gold and diamond
jewellery will continue to dominate the market together, accounting for about 82
per cent. Diamond jewellery will be the slowest growing segment at a CAGR of
3.3 per cent.
Growth in the industry will be slow as compared to that expected in other luxury
goods categories such as watches, perfumes, etc. For example, luxury apparel, a
USD 100 billion market today, is expected to grow at 10-15 per cent over the
next seven years1.
Source: Global market review of luxury apparel - forecasts to 2012, Just - Style (2006)
Plain Palladium
Others
jewellery
5%
6%
Plain platinum
jewellery
7%
RoW
28%
India
12%
Diamond
jewellery
41%
Italy
3%
Japan
4%
Turkey
3%
US
26%
Plain gold
jewellery
41%
UK
2%
Middle East
9%
China and India together will emerge as a market equivalent to the U.S.market by
2015. The Middle East will surface as another large market, accounting for close
to 9 per cent of the global jewellery sales in 2015.
Jewellery fabrication will feel the pressure of sluggish demand and will
move to new centres
Global jewellery fabrication output will grow at a CAGR of 5.1 per cent to reach
USD 95 billion by 2015. China and India will be the new centres for the fabrication
of studded jewellery, as the U.S.'s share will decline. Turkey will take over a
significant share of the gold jewellery fabrication market from Italy.
South Africa
5.5%
Namibia
1.5%
Russia
7.1%
US
1.4% Angola
3.2%
Israel
4.7%
Belgium
0.7%
Botswana
5.3%
China
21.3%
Niche polishers
India
49.3%
Figure 9: Projected share of world diamond rough for processing (2015), in value terms
Source: KPMG analysis
A number of distinct business models will emerge along the value chain by 2015
300
Aspirational case
Realistic case
USD billion
By 2015, the industry will witness the emergence of six-seven large conglomerates
with presence across the jewellery value chain. These large conglomerates will
be the industry leaders of tomorrow.
50
billion
200
100
In addition to this, players in each part of the industry vaue chain will evolve into
business models (described in Figure 10) which will enable them to remain
competitive in the changed industry scenario.
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
We have estimated the range of impact to be around USD 50 billion, taking the
industry size to USD 280 billion by 2015. In such a situation, the industry would
be growing at a CAGR of 6.7 per cent, an increment of 2.1 per cent over the
realistic case. At this rate, the industry would be growing faster than the Gross
Domestic Product (GDP) per capita and would be claiming a share of the market
from other luxury goods.
Diamond and plain gold jewellery (product segments) and India and China (markets)
will contribute the bulk of this incremental growth. This additional growth will
also have a salutary impact on other parameters of industry health e.g. inventory
levels (will decrease from 19 per cent to 7.5 per cent).
Relative
scale of
operation
Niche CPD
players
Pure Play
Rough
Traders
Mining
Sourcing
Upstream
Diamond
Processing
Value Chain
Turkey
9%
Regional Jewellery
Chains
Others
5%
US
35%
Middle East
9%
MNC Jewellery
Chains
National Jewellery
Retailers
Niche
Jewellery
Fabricators
Junior Mining
Companies
e-tailers
Plain pla
jewe
1%
China
25%
Downstream
USD 50
billion
Diamond
jewellery
46%
Plain gold
jewellery
43%
India
17%
Jewellery
Retail
jewellery
1%
USD 50
billion
Jewellery
Fabrication
Plain palladium
Others
jewellery
5%
5%
Plain platinum
To realise its potential by 2015, the industry would have to focus on growing
demand for jewellery as a category and strengthening industry-level and
enterprise-level capabilities. These programmes need to be initiated within the
next 12-18 months for its benefits to be realised over the next 10 years.
Strategic
Capabilities
rprise c apab
ente
iliti
ild
es
Bu
Operational
Capabilities
Grow the
jewellery
market
rprise c apab
iliti
ente
es
ild
Bu
Financial
Capabilities
Supporting
Capabilities
Identify new product and consumer segments: Unlike other luxury goods,
the target segments and value proposition of jewellery have remained
relatively unchanged. We believe it is time for the industry to think creatively
and target new customer segments and address newer needs. This
extension is an absolute necessity for guarding against stagnating sales.
10
11
12
The changes that the industry is likely to face in the coming years should be
looked upon both as challenges and opportunities. Over the next few years,
players that develop multiple capabilities to manage growth will flourish.
Big brother (presence across the value chain): Players with presence
across various segments of the value chain will function as a portfolio
of businesses, allowing them end - to - end visibility of the supply
chain, providing natural risk mitigation, and access to global talent.
13
Way forward
So far the industry has grown due to the intrinsic attraction of its product, the
sporadic marketing push by some incumbents, and the entrepreneurial skills of
individuals. However, the threat posed by luxury goods, changing consumer
habits, industry's opaque and transactional mode of operation, and various socioeconomic and political forces are fast changing the environment the industry
operates in. Growth of the industry (and of individual players) is dependent on
their successful reinvention of the category, substantial infusion of capital and
talent, and adaptability to change.
14
The report also examines new entrants like jewellery made from synthetic
diamonds and palladium; however, the coverage is limited to the impact they
have on these three segments. The report does not cover other jewellery
sub-segments such as pearls, semi-precious stones, and fashion jewellery made
from non-precious stones and metals, given their relative infant status in the
overall industry. However, these sectors are now taking off and could become
significant contributors to overall size and growth in the future. The industry has
been divided into four key jewellery sub-segments whose combined retail sales
have been estimated at USD 146 billion in 2005.
However of this report, detailed analysis has been limited to three key jewellery
sub-segments diamond, gold and platinum, which together account for 95 per
cent of the global retail sales of jewellery in value terms.
Sourcing of precious stones and metals: This stage covers the upstream
end of the value chain, i.e., the mining, extraction, and processing of precious
stones and metals.
18
19
The industry today operates at a global level and involves high levels of
interdependencies between countries at various stages in the value chain.
There is no single country that has substantial presence across all the stages of
the gems and jewellery value chain. The industrys fortunes are, therefore,
impacted by global as well as local economic conditions in key markets and
sourcing destinations.
20
21
Industry Players
Associations
Trade
Analysts
Industry
Others
Diamond
Gold
Synthetic stones
Belgium
UK
US
22
Italy
Israel
Dubai India
Botswana
Sources of precious
stones and metals
Refining/ recovery of metals and processing of stones
Metals produced from the earth and processed (ore dressing) at the mines are
typically of 85-90 per cent purity. The ore is further purified at the refining stage
where methods such as electrolysis are employed to remove impurities. At the
refining stage, 99.99 per cent purity is achieved. After this, the metal is then cast
into bars or coins which are then traded at various exchanges across the world.
Diamond and coloured gemstones processing typically involves cutting the rough
stone (splitting or cleaving) into various shapes, polishing, and shaping the stones
to maximise its visual appeal and showcase its intrinsic clarity and brilliance.
The gems and jewellery value chain begins at the point at which precious stones
and metals are excavated from the earth for further refining and processing. At
the supply stage, each sub-segment of the industry is distinct; in other words,
each sub-segment of the industry (diamonds, gold, and platinum) is unique as far
as the profile of producer countries and players is concerned.
Given the fact that precious stones and precious metals are rare, supply is usually
constrained and hence, supply conditions play a significant role in influencing
prices and consequently, demand.
While similarities exist between the sourcing and processing of metals and
precious stones at a high level, their distinct physical properties neccesitates a
different process flow at the micro level. Therefore, while a precious like a
diamond has to pass through multiple stages before it can be use in jewellery
fabrication, the journey of precious metal is much simpler. In addition, the
demand-supply dynamics behind each of the constituents vary on thier own,
therefore influencing the force of each one of them independently. Keeping the
above in mind, this section has been organised such that the distinguishing
features and critical trends for each constituent are captured. Further in this
chapter we have scrutinised the historical demand and supply trends for gold and
platinum. However, we begin with a look at the most complicated and at the
same time interesting part of the sourcing chain - the sourcing of diamonds.
The supply stage of the jewellery value chain can be further divided into two
segments:
Mining
Globally, mining as an industry has been pivotal to the growth and development
of various civilizations. Gold, diamonds and platinum group elements (PGE) are
the most sought after commodities globally.
Mining takes place in every continent (excluding Antarctica, due to a prevention
treaty). USA, Canada, Australia, Russia, China and Southern Africa dominate the
global mining industry in terms of output and mining and exploration methods
and technology.
Mining operations for most precious metals and gemstones are typically very
capital-intensive operations and also carry a higher financial risk.
26
27
Diamond ore once mined, must be processed to extract diamond rough from it.
World rough diamond production
(2000 - 2005)
14
74%
increase 11.8
12
USD billion
Jewellery fabrication: The cut and polished diamond finally reaches the jewellery
fabricator, who then sets these in precious base metals along with other
gemstones as required and creates studded jewellery.
6
4
2
Diamond mining
0
2000 2001 2002 2003 2004 2005
180
Jewellery retail
28
120
156
144
140
Million carats
Jewellery fabrication
171
31%
increase
160
Sources of precious stones and metals
Processing and polished trading: The rough is then sent for cutting and polishing
to centres across the world, where rough is converted into polished diamonds
that can be set in jewellery.
9.3
10
8
12.7
131
110
117
100
80
60
40
20
0
2000 2001 2002 2003 2004 2005
29
The structure of the diamond mining industry has changed several times over the
last 400 years due to the emergence of new mines and the depletion in production
or quality of older mines. In fact, through much of their history, diamonds were
procured primarily from alluvial sources in India and in the early part of the 17th
century from Brazil.
The beginning of modern diamond mining started several years later in the late
19th century, when South Africas gargantuan diamond reserves were discovered.
The discovery changed the rare-gem status of the diamond, by increasing overall
affordability. The discovery of diamondiferous deposits, changed the fortunes of
these African countries, then plagued by poverty, famine, and war. This also
marked the beginning of the era of mining diamonds from Kimberlitic pipes.
South Africa remained the key supplier of rough diamonds for many years, until
the time large diamond reserves were found in Russia in the mid-1900s. About
50 years later, the industry landscape changed yet again with the discovery of
large diamond deposits in the north-western regions of North America.
Although diamond mining occurs across the globe in over 25 countries, major
part of the supply comes from only a handful of countries namely, Russia,
Canada, Botswana, Congo and South Africa, Australia, and Angola. These countries
account for over 88 per cent of the worlds production in terms of value and 96
per cent of the world produce in terms of volume (2005) as shown in Figure 22.
Production in most of these countries involves Kimberlite or pipe-mining
operations.
14
10
1.5
RoW
1.6
South Africa
Angola
12%
South Africa
9%
Australia
4%
South Africa
13%
RoW
4%
Angola
4%
Australia
17%
0.84
6
1.11
0.8
Canada
7%
Figure 22: Share of diamond rough, in value terms (USD bn) and volume terms (mn carats)
Source: Diamond Facts - Diamond Industry Reports North Western Territories, Canada, De
Beers website (www.debeersgroup.com), Annual reports of various mining and rough sourcing
companies, KPMG analysis
Canada
1.4
Botswana
0.58
0.45
2.12
0.36
0.73
1.5
2000
2005
Botswana
19%
Russia
17%
Canada
11%
Russia
22%
Russia
2.2
1.59
Botswana
25%
30
USD Billion
Today, India and Brazil have virtually moved off the diamond mining map, while
seven key countries located in various corners of the world have emerged as the
Big Seven in diamond mining as shown in Figures 22 and 23.
3.2
Australia
Angola
0.5
31
The objective of the Kimberley Process is to prevent conflict diamonds from entering the legitimate diamond trade. The
international certification scheme has been based on various national certification schemes and internationally agreed
minimum standards for certificate of origin. It has two objectives:
Cut down the flow of rough diamonds to rebel groups, in identified nations who are using the same to fund war and
conflict against legitimate governments.
Protect the legitimate trade of diamonds, which is a key driver for socio-economic growth in many African countries.
KPCS has introduced a world-wide system to regulate the international shipments of rough diamonds and is
acknowledged by various industry experts, as successful in achieving its objectives.
In the first three years of its introduction, it managed to cover almost 98 per cent of the recorded global production of
rough diamonds. However, the remaining 2 per cent still remains a challenge for the process, because the problem persists
in under-developed regions specially in the alluvial diamond mining areas.
Sierra Leone
Liberia
Democratic Republic
of the Congo
The scheme has also taken charge of regulating and managing various issues related to conflict diamonds. Although it
has not eliminated conflict diamond trade completely, it has played an instrumental role in increasing transparency in
the industry.
Angola
Over the past few years, players have individually and collectively tried to put in place auditable controls to curb the free
flow of these conflict diamonds into mainstream trade. The matter is further complicated by the fact that once a
diamond of dubious antecedents enters the mainstream market, it is virtually impossible for the general trade to
identify its origin with certainty.
The Kimberley Process Certification Scheme (KPCS)
The Kimberley Process Certification Scheme (KPCS), is the most widely adopted system by the industry in its efforts
to control the flow of Conflict Diamonds.
The KPCS is a joint initiative between governments of diamond producer and trader countries, the diamond industry
and social groups and is backed by the United Nations. The process seeks to ensure that on the one hand, there are
adequate safeguards in place to prevent the accidental or deliberate use of conflict diamonds by players and on the
other hand, end-consumers are assured of the antecedents of the diamonds they buy.
32
Sources:
Global Witness, Diamond World
Note:
Industry sources have estimated alluvial mining to account for about 22 per cent of
the overall global diamond mining output
33
Other geographies
Exploration is also taking place across the world in a number of locations such as Russia, Ukraine, Greenland,
Venezuela, Paraguay, Australia, Indonesia, and China.
Major locations for diamond exploration
A number of smaller players have also engaged in prospecting and exploration activities across the world. These players
typically enter into joint ventures with the majors for developing their more promising projects.
Exploration efforts are underway in the following geographies:
Canada
Following the discovery of two large diamond deposits in the North-Western Territories, Canada (today known as
Ekati and Diavik, which put Canada on the diamond production map), has emerged as the most promising destination
for diamond exploration. A number of reports have cited facts and figures to support the above.
Different sources estimate that exploration expenditure on diamonds in Canada ranges anywhere between
USD 225 million and USD 300 million of the annual global spends.
Areas witnessing high levels of activity are Nanavut, Saskatchewan, Ontario, and Quebec.
Africa
Africa, is arguably the worlds most diamond rich-continent. It is still considered under explored by a number of
industry experts. Currently, diamond exploration is rampant in Africa mainly in parts of Central, Western, and
Southern Africa.
Madagascar, a key producer of a number of precious and semi-precious coloured gemstones is another highly
sought-after destination for diamond exploration. Earlier blocked out of the international diamond mining map, due
to local political considerations, Madagascar has only recently generated interest on account of the number of alluvial
diamond discoveries, signaling new possibilities. The geological history of the island also links it with Africa and
India, and it is now another key destination for diamond explorers.
Brazil
Brazil was once upon a time a key production centre for diamonds, in an era where diamonds were mainly sought from
alluvial sources. Currently, smaller diamond exploration companies are exploring diamond deposits in various locations
in Brazil, such as Santo Antonio, Serra da Canastra, etc.
India
The Geological Survey of India (GSI) states that India has great potential for diamond deposits. Based on this and on
independent analysis, a number of diamond exploration companies have moved in, making India another target destination
for diamond exploration. GSI is currently conducting a number of surveys to assess the potential for diamond reserves
in Andhra Pradesh, Madhya Pradesh, Orissa, and Maharashtra.
34
Sources:
Diamond Facts 2005 Diamond Industry Report, Northwest Territories Canada Diamonds by Louis Perron Minerals and Metals Sector, Natural Resources Canada Gema and Jewellery Export Promotion Council of India
(GJEPC) MBendi Information Services (www.mbendi.co.za) World Exploration Trends, Metal Economics Group
35
Centralised Distribution
Direct Selling
Designated
customers of
mining/sourcing
companies
Marketing arms of
mining companies
Mines
3
Rough Trading
Brokers
2
3
Open market/
actions/ tenders
Rough traders
Diamond Processing
(Cutting and
polishing) companies
Rough traders play a very significant role in the industry. They buy from
various mining companies or from the government and market it to different
players viz. manufacturers, other dealers, and brokers.
Margins are the lowest, but given the smaller investments required and a
larger number of transactions, they are still viable. Typically, traders provide
flexible commercial terms and work predominantly on credit.
4
4
Brokerage
Brokers
Local in-house
processing
centres (local
beneficiation)
Illegal trade/
black market
Brokers act as commission agents for various dealers and mining companies.
Brokers typically earn a small commission on the sales made.
London, UK
The current industry has four different types of channels where each player add
value in their own distinct manner:
36
Centralised distribution
Direct selling
Rough trading
Brokerage
Antwerp, Belgium
New York, USA
LEGEND
Mining country
Large Trading Centre
Trading zones
37
South Africa
4%
Russia
7%
Belgium
3%
US
4%
China
10%
Israel
15%
Dubai
Antwerp
Antwerp
Russia
Russia
The Dubai rough diamond market is currently estimated to be approximately USD 2 billion.
Coupled with the liberal taxation regime, this centre is likely to emerge as a significant player
in the rough trading landscape.
Antwerp has traditionally been the trading hub for diamonds. As popularity of tenders
increased, this centre was quick to take advantage of this trend. Typically, invitations are given
to select global and local clients to view the goods, after which each lot is sold to the top
bidder. Diamonds originating from multiple locations (Angola, Central African Republic, Congo,
Ghana, Guinea, Ivory Coast, Indonesia, Namibia, Sierra Leone and South Africa) are traded
through this route.
India
57%
World output: USD 19.3 bn
Figure 29: Market share of key diamond processing centres in terms of value (USD billion), 2005
Source: Rio Tinto Industry Report 2003, Diamond Facts 2005 Diamond Industry Report, Northwest
Territories Canada, KPMG analysis, IDEX Pipeline 2005
Tenders have always been a popular means of rough allocation in Russia. Currently, Russian
tenders are open only to Russian companies and they are mainly performance based i.e., based
on the past buying behaviour and consistency of the company.
38
5 Source:
The Source - Dubai Metals and Commodities centre Newsletter 2004, CNN,
Diamond Facts 2005 Diamond Industry Report, Northwest Territories Canada
39
3. Technology: Technology has yet not entirely replaced the human element in
diamond processing. However, employing state-of-the-art laser cutters and
polishing machines is a significant advantage. Developments on this front are
changing the nature of the industry in a big way.
In the recent years, the industry has witnessed a number of changes in its structure
and nature due to the emergence of newer processing centres and the diminishing
output from the older traditional centres. Different diamond-processing countries
vary on the basis of type of stones polished, nature of skills available, level of
technology used, etc. As a result, the value addition6 by different processing
centers also varies.
Armenia
3,500
Thailand
USA
10,000
600
China
110,000
10,000
Russia
Belgium
1,100
Israel
2,000
$100
$100
USD per carat
$80
$80
$70
S. Africa
3,000
India
1,000,000
$60
$40
$40
$40
$20
$30
$25
$20
$17
$10
na
da
Ca
a
d
an
Yo
Ch
in
a
ss
i
Ru
rk
ia
en
ew
N
la
n
a
ric
d
Ar
m
ai
Th
el
Af
Is
ra
ut
h
So
Be
lg
di
iu
m
$0
In
2. Labour costs: Being the largest cost component in diamond processing, the
availability of labour at competitive prices is a critical success factor. Labour
cost is also an indicator of the typical size of stones that are polished in a
country. As the price of a diamond increases disproportionately with increase
in size, only larger stones can absorb the high-labour costs offered by centres
like Israel and Belgium. Other stones are passed on to low-cost cutting
centres like India and China.
40
Value addition is defined as the ratio of the value of total output to the value of total input
41
Mining countries are experiencing increasing political pressure locally, to promote in-house manufacturing of diamonds
in order to maximise the value added within the country, and augment the economic benefits brought by this natural
resource to their country. While Canada and Russia have always had in-house processing units, the trend is most
visible in African mining nations like Botswana and Angola, whose economies are highly dependent on diamond
exports. Given the quantum of rough originating from these countries, it is expected that this trend will have a
significant impact on the nature and structure of the diamond industry.
The African perspective
Beneficiation in South Africa driven by legislation: South Africa, through The Diamond Bill, is pushing for greater
value addition within the country, by proposing that a percentage of production be sold to a state diamond trader. The
exact quantum of rough is to be based on fluctuations in demand from local polishing companies. In 2005, around USD
575 million worth of rough was supplied to local cutting and polishing set-ups.
Botswana a centre of major change: Local beneficiation is also on the rise in Botswana, and a number of large
diamond processing players have established factories in and around Gaborone, a notable one being Antwerp-based
Eurostar, which established a factory in 2004.
The skills issue: Although most mining countries do not possess the requisite skills required for cutting and polishing
diamonds, these can be acquired through extensive training, as can be seen in other non-traditional cutting and polishing
centres like the Far East and Armenia.
Economic viability of cutting smaller stones: The economic viability of processing diamonds in any country is driven
by labour cost; a factor on which most mining countries compare unfavourably, especially since the average labour
costs are three to four times higher than those offered by low-cost cutting centres like India and China. Currently, only
high-value rough, which comprises around 5 per cent of global production is fit to be processed in these relatively
high-cost processing centres.
Social problems like AIDS: In African countries, the penetration of AIDS in the society is a serious problem, since it
raises questions on the long term sustainability of the work force engaged in diamond cutting and polishing.
AIDS penetration rate (15-49 yrs)
Country
AIDS
penetration
South Africa
18.8%
Namibia: The trend in Namibia started as early as 1998 with Namdeb, a joint venture between the government of the
Republic of Namibia and De Beers.
Botwana
24.1%
Nambia
19.6%
Angola and DRC joining the movement: Israeli diamond player LLD has established a diamond-polishing factory in
the Angolan capital Luanda. The unit is expected to cut and polish USD 20 million worth of Angolan rough gems per
month. Given that the amount of rough polished locally is expected to increase, Angolas output is likely to increase
over the next few years.
Angola
3.7%
Sierra Leone
1.6%
3.2%
42
Sources
BBC news online (news.bbc.co.uk) The Economist website (www.economist.com) The Namibian website
(www.namibian.com.na) Solitaire International December 2005 January 2006, Africas Diamonds
Professional Jeweler Magazine, September 2005 Mining Weekly websit e (www.miningweekly.co.za)
Antwerp Facets News Service (AFNS) Diamond Facts 2005 Diamond Industry Report, Northwest Territories
Canada Mining Review Africa, 2005 Gold Avenue website (www.goldavenue.com) Botswana Guardian
website (www.botswanaguardian.co.bw)
Absence of a domestic consumer market: Another factor influencing the sustenance of a domestic industry, is the
absence of a vibrant domestic market. The market for diamond jewellery in African countries is almost negligible.
When compared to the global market, South Africa is the only one that is a significant jewellery market. Even though
there is a very strong demand for high-end, hand-crafted 18-carat yellow and white gold as well as platinum jewellery
pieces, the prospects for diamond jewellery have emerged only lately.
43
Global sales of diamonds at polished wholesale prices (PWP) and diamond jewellery
have been witnessing a steady increase over the past five years with a year on
year growth rate of 6.3 and 5.0 per cent (CAGR 2000-05) respectively.
In 2005, most of the key diamond jewellery consuming markets witnessed a rise
in overall sales of diamond jewellery, a trend attributable to the growing
economies of these markets as well as the successful marketing campaigns
started by key players within the industry.
United States: The United States , which is the largest market for diamonds,
recorded a total sales of USD 31.3 billion. worth of diamond jewellery in 2005
(constituting 45 per cent of the global pie) Given that the average price per
carat of PWP in the United States is significantly less than that of other
consumer market such as Japan, India, Italy and HK, it is estimated that
diamonds form about 25 per cent of the retail value of diamond jewellery.
Japan: Japan is the second largest market for diamond jewellery accounting
for almost 14 per cent share of the market in terms of value. The country is
currently witnessing a 0.5 per cent growth in diamond jewellery sales, after
experiencing a slump in overall jewellery sales for a number of years.
Diamond jewellery constitutes a major portion (77 per cent, in value terms) of
the jewellery industry and is almost five times that of the next category i.e.
metals.
Italy: Italy is the third largest market representing approximately 6 per cent of
the global diamond jewellery sales. In 2005, total diamond jewellery sales
have been estimated at USD 4.3 billion. The diamond jewellery sales have
witnessed a negative growth rate over the last six years. However, the last
four years have shown stagnating diamond jewellery sales in Italy. Diamonds
form about 27 per cent of the retail value of diamond jewellery in Italy.
Fo
r ce
Slow dem and growth,
so
f ch
shrinking m argins
an g
Globalization, reduced
e
need for intermediaries
Structural changes in
CPD segment
Difficulty in
Value proposition:
obtaining finance
Diversified sourcing
Diminishing strength of
the value proposition
RoW
16%
China India
2% 6%Italy
5%
Japan
9%
Turkey
2%
Time
Figure 33: Factors eroding the basic value proposition offered by polished trades
Source: KPMG analysis
However, recent trends experienced by the Industry in the new millennium have
posed a threat to the value proposition that polished traders have offered in the
past.
The advent of globalisation, and with it improved access to players across the
world, has meant that the need for intermediaries to match demand and supply
has reduced. The same can now be achieved through global diamond bourses,
and partnerships with suppliers in different countries. A slow growth in demand
for diamond jewellery have aggravated the situation further with polished traders
fighting for trade volume. The ongoing and impending change in the structure of
CPD segment consolidation is likely to put even more pressure on the
polished traders as suppliers gain size and look to build independent relationships
with buyers, bypassing the polished traders in the process. The inability to access
finance, which is likely to continue in future also, has prevented the polished
traders from expanding and acquiring size, which is critical in a trading environment.
44
Middle East
12%
US
46%
UK
2%
45
Sale of cut and polished diamonds in PWP terms grows with the increase in retail
sales of Diamond Jewellery
CAGR
100
90
80
Rough
Production
& Mine
Sales
Rough
Sales to
cutting
centres
Net rough
available for
local
production
Value of polished
from local
production
Value of diamond
content in retail
sales
Retail sales of
diamond jewellery
(2000-2005)
Dia m o nd J e we lle ry
P WP
0%
20%
40%
60%
80%
100%
USD billion
70
60
50
40
54.0
56.7
59.5
62.5
65.7
68.9
5%
Factors that determines the value of a diamond at various stages in the value chain
Grade Gem quality/ Near Gem/
Industrial
30
10
Cut
Ore
20
13.0
14.0
14.8
15.2
17.3
17.6
2000
2001
2002
2003
2004
2005
6.3%
Figure 35: World Diamond sale in PWP terms and retail sale of Diamond Jewellery
Source: Diamond Facts Report taken from Tacy Diamond intelligence briefs
Polished
Diamond
Colour
Clarity
Carat
Rough
The journey of the diamond is often encapsulated in the Diamond Pipeline. The diamond pipeline is a simple and
popular way of representing the increase in the value (in terms of value-add and margins) of a diamond as it passes
through various stages in the diamond value chain, from mining to retail. The value of a diamond increases exponentially
as it passes through the various stages. The largest value addition is at the retail end, where the value of a polished
diamond increases by 392 per cent (on an average).
46
47
Rising prices of
rough
Consistent
availability of
required rough
Mining
Sourcing
Shrinking
margins
Low demand
growth in key
markets
Overcapacity
and competition
Rough
trade
Polished
trade
Processing
Jewellery
fabrication
Jewellery
retail
140
CAGR
9.1%
130
133.2
121.6
120
103.7
100
90
100.9
95.5
Inventory build
up
Figure 37: Factors causing consolidation; high pressure zones in the diamond value chain
Source: KPMG analysis
110
102.7
103.0
95.9
The future for polished trading is under significant threat. Pure-play polished
traders operate on gross margins as low as 4 to 7 per cent and provide value
to jewellery manufacturers by quick turnaround of assortment needs as well
as providing consistent assortments. The trade is highly sensitive to fluctuations
in margins, inventory lock-up, and receivable build-up, because of which the
risk is the highest for this segment of the value chain. In addition, there is an
increasing trend towards disintermediation due to greater association of retailers
and diamond manufacturers for long-term programmes, allowing manufacturers
to plan in advance rendering the pure-play polished trader redundant.
6. Problem of conflict diamonds persists
While the KPCS has been largely successful in putting a lid on the illicit trade
of conflict diamonds, several sources in the industry indicate that the
scheme is not foolproof, and some stones of dubious antecedents enter the
legitimate trade. Estimates of illegal diamond trade, from various monitoring
bodies, range between 1 and 3 per cent of the world diamond output.
102.4
99.7
80
70
60
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
48
49
Tonnes
4200
4150
4100
4050
4000
3950
3900
3850
3800
3750
3700
3650
4,153
4,036
3,975
3,887
3,846
2001
50
2002
2003
2004
2005
Central
Bank Sales
16.3%
Scrap
Recovery
21.3%
Mining
62.4%
51
Gold supply from secondary sources central bank sales and scrap recovery
Production of gold from primary sources has doubled over the last 20 to 25
years. In 2005, world gold mining output stood at 2,519 tonnes. This figure is
moderately lower than the 2,591 tonnes of gold mined in 2000; however, it is
significantly higher than the 1,311 tonnes mined in 1980. Total historical production
has been estimated to be close to 155,500 tonnes (till the end of 2005).
Bank Sales: One of the key factors influencing the supply of gold is the freedom
Gold mining is split quite evenly among the seven large producers with South
Africa leading the way with 12 per cent of world output (in volume terms) in
2005, followed closely by the U.S. and Australia, each with 10 per cent. The
share of South Africa and the United States has decreased over time due to a
number of shafts closing out or reducing outputs.
Gold mining output has shown a downward trend over the last few years. With
mining companies not investing in new mines, production is likely to follow this
trend in the near future. This is seen as one of the factors contributing to the rise
in the price of gold.
Share of gold mining output in volume terms (2005)
of banks to sell gold in the open market, which is constrained by the Central
Bank Gold Agreement (CBGA)8. However, this has not deterred banks from taking
advantage of the upswing in gold prices. Since December 2000, central banks
have put in about 2,061 tonnes of gold in the market. Over 50 per cent of such
sales were effected by Switzerland, pumping in about 1,162 tonnes of gold in the
six-year period (annual average 232 tonnes). Other noticeable net selling banks
were the central banks of UK, Portugal, Netherlands, France, Austria, South
Africa, and Spain. Interestingly, banks from the rest of the world were small net
buyers of gold bullion during the same period.
Central bank net sales contributed to the world gold supply
RoW
2621
2600
United States
10%
RoW
37%
2591
2588
2592
51
South Africa
58
75
France
168
Netherlands
195
Portugal
200
2550
Indonesia
7%
Peru
8%
Russia
7%
Tonnes
2470
2450
200
400
600
Tonnes
800
1000
1200
1400
Figure 43: Central bank net gold sales between Dec 2000 and Dec 2005 in volume terms
Source: GFMS Gold Survey, 2006
2400
2350
2000
2001
2002
2003
2004
2005
Scrap sales: Gold is virtually indestructible; so, unless it has been lost, all the
gold ever mined still exists in some form. It is also easily recoverable from most
of its uses and capable of being melted down, re-refined and re-used. It follows
that the supply of recycled gold, or scrap, is an important part of the dynamics of
the gold market. In the last five years, scrap has contributed to about 21 per cent
of the overall gold supply to the world.
52
1162
Switzerland
2500
-200
China
9%
202
UK
2519
Australia
10%
Spain
Austria
2650
South Africa
12%
(48)
Note:
The new Central Bank Gold Agreement (CBGA), 2004, signed by the European Central Bank and 14 other central banks
limits the annual sale of gold by the signatories to 500 tonnes per year, and the overall sale over the five-year period of
the agreement to 2,500 tonnes.
53
Scrap is defined as gold that has been sourced from old fabricated products, and
refined back into bars. It does not include jewellery that has simply been traded
in and resold without being re-refined, or resold investment bars and coins. Most
recycled gold originates from jewellery. Smaller amounts come from recuperated
electronics components and, at times, from investment bars and coins.
Volume
3,500
3196
3,000
45
Value
3001
2753
2613
2477
2,500
40
2712
35
30
2,000
25
1,500
20
1000
900
USD billion
Gold scrap recovery accounted for 21 per cent of total gold supply in 2005
15
800
1,000
700
500
Tonnes
10
5
600
500
939
835
400
2000
834
200
100
0
2001
2002
2003
2004
2003
2004
2005
Figure 46: Gold used for jewellery fabrication, tonnes, 2000 - 2005.
Source: GFMS Gold Survey, 2006
609
2000
2002
841
708
300
2001
2005
During the course of the study, KPMG analysed various factors likely to impact
gold prices. This was supplemented by meetings with gold analysts and other
industry sources. All of which seem to indicate that gold will continue on its current
bull run in the near future.
Gold price on the rise -again
700
54
500
400
300
200
100
Other fabrication
14%
2006
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
Net producer
hedging
3%
1967
0
Bar hoarding
7%
1965
600
USD per Oz
The primary use of gold is jewellery fabrication. It accounted for more than
67 per cent of total gold demand (volume terms) in 2005. Although the actual
volume of gold consumed for jewellery fabrication has reduced from 3,196
tonnes in 2000 to 2,712 tonnes in 2005, the meteoric rise in gold prices has
ensured that the value of gold consumed has increased by more than 35 per cent.
Implied net
investment
9%
Jewellery fabrication
67%
55
Western Shoreline
Homelands Severe
groundwater depletion
and damage to sacred
lands
Issyk-kul,
Kyrgyzstan
-
Maqrinduque,
Philippines
200 milliontonnes of
mine waste dumped in
ocean over 16 years
Western Papua,
Indonesia
Choropampa, Peru
400 people poisoned by
mercury spill in 2000
Esquel , Argentina
Tarkwa,
Ghana
, Ghana
More than 30,000
displaced by mining
between 1990 and 1998
Overwhelming local
opposition to proposed
gold mine near
Patagonian town and
natural areas
Mining company is
implicated in human
rights violation
Papua New Guinea
200,000tonnes of mine
waste dumped daily in
local rivers
Figure 48: Key problems identified under the No Dirty Gold campaign
Source: No Dirty Gold Campaign website (www.nodirtygold.org)
56
Source:
No Dirty Gold Campaign website (www.nodirtygold.org)
The last few years have witnesses several changes and trends that have tilted
Platinum supply by source
8000
CAGR
7000
530
6000
565
645
690
770
(2000-2005)
470
000 Oz
5000
10.4%
4000
3000
5,290
5,860
5,970
6,200
6,490
4.6%
1000
0
2001
Mine supply
2002
2003
2004
Russia
13%
South Africa
78%
North America
5%
Others
4%
Volume
Value
2
1
0
2000
2001
2
Rising platinum prices have caused the value
of platinum mined to increase at a 1CAGR of
15.6 per cent from 2000 to 2005.
0
2002
2003
2004
2005
Figure 51: Growth in platinum supply from primary sources in both value and volume terms
Source: Platinum 2006 - Johnson Matthey
6,630
2000
2000
Million Oz
Platinum, the most commonly occurring PGM, yet 30-35 times rarer than gold,
has for long been an integral part of the gems and jewellery basket. Given that
the metal is almost indispensable in the industrial sector (particularly in the auto
catalyst industry) and is a valuable raw material for the medical sector (especially
in the development of cancer drugs), only a portion (38 per cent) of platinum is
utilized for jewellery (as in 2005).
USD billion
2005
Scrap recovery
58
59
However, the supply market for platinum may remain tight until at least 2007, as
there is little potential for significant new production outside South Africa till
then. Hence, the price of platinum is expected to remain strong.
Production output of key mining countries
mainly in three geographical locations, which produce 96 per cent of the total
world output of platinum.
However, as an outcome of
highly volatile prices, the
demand for platinum in
jewellery fabrication is
decreasing.
During 2000-05, the demand for platinum in the industrial segment seemed to be
stable. However, the demand for auto catalysts over the same period grew by
12.4 per cent (CAGR, 2000-2005) driven by the increase in the number of cars
produced utilising modern technology and catalytic converters using platinum.
Global demand for platinum jewellery on the other hand decreased sharply. This
can be attributed to extremely high and volatile prices, competition from other
precious metals, and a consequential dip in demand from China.
Changing platinum usage
South Africa: South Africa is the leading producer of platinum, accounting for 78
per cent of the total production. The countrys platinum production has been
increasing at CAGR of 6.1 per cent from 2000 to 2005.
6150
7175
7470
23%
19%
23%
100%
Industrial applications
90%
Jewellery
80%
Russia: Russia accounts for about 13 per cent of the global production of platinum.
Russias platinum production has been decreasing at a CAGR of 4.1 per cent
from 2000 to 2005.
North America: North America accounts for around 5 per cent of the global
production of platinum, and this has remained constant over the last five years.
Autocatalysts
70%
60%
46%
35%
26%
31%
46%
51%
2000
2003
2005
50%
40%
30%
20%
10%
0%
800
846
700
8
7
6.8
7.2
7.0
7.2
7.5
USD per Oz
691
600
500
544
400
529
540
2001
2002
300
6.2
200
100
Million Oz
2000
2004
2005
3
2
1
0
2000
2001
2002
2003
60
2003
2004
2005
Over the last few years, platinum demand has exceeded the platinum supply
from mining and scrap recovery. The residual demand is met through above
ground movement of stocks (either through intra-industry trade or releasing of
stocks by financial institutions/investors. The magnitude of residual demand is
indicative of the pressure on finding new below-ground platinum and
consequently on the price of platinum.
61
The gap stood at 390,000 ounces in 2000 and reached a peak of 500,000 ounces
in 2002. Since then it has steadily decreased to 70,000 ounces in 2005, which is
reflected in the way platinum price has moved over the last few years.
While the supply of platinum is constrained by the discovery of metal underground
and the available processing capacity, the demand from some of the segments,
like auto-catalyst, and sub-segments like platinum bridal jewellery is inelastic.
With growth projected in the sale of diesel cars and stricter emission norms
across the globe, the demand from auto-catalyst segment is expected to be
strong. Similarly, in the jewellery segment, platinum still holds the elite tag
among other metals and even with rising prices the demand for bridal jewellery
is unlikely to disappear overnight.
Therefore, even though the demand for platinum in overall jewellery fabrication is
expected to ease off in future, an upward pressure on Platinum price is expected
to continue.
8580
7800
11%
South Africa
7320
31%
Russia
6450
7000
6000
000 Oz
3%
8390
North
America
5250
Others
5000
4000
3000
2000
1000
55%
0
2000
2001
2002
2003
2004
2005
Apart from China, palladium jewellery has had mixed responses in key markets.
North America: Palladium jewellery also gained demand in North America, although in a modest way.
The global gems and jewellery industry, so far, has mixed views about the future of palladium in jewellery markets.
Some segments of the industry talk about the metals position as an alternative to platinum (given its rising prices), and
some look at it more as a threat to rhodium-plated white gold.
10
62
Source:
Platinum 2006, Johnson Matthey, Stillwater Palladium (www.palladiumcoins.com),
China Daily (agencies via Xinhua, www.chinadaily.com.cn), LBMA - The Alchemist,
interview with Mr. Frank McAllister
63
1430
1,400
1,200
North America
1,000
800
Japan
930
Europe
1200
P a lla dium
1000
Price - USD/oz
'000 Oz
1,600
Go ld
600
400
200
600
400
P la tinum
800
255
240
270
2000
260
2001
2002
2003
2004
2005
200
0
2001
2002
2003
2004
2005
Advantage palladium
The main competitive advantage palladium has over other precious metals is that of price. For instance, in 2005, palladium
was priced at USD 201.47 per oz (Prices converted as daily rates USD/oz.), while platinum and gold prices stood at
USD 997.02 per oz (Prices converted as daily rates USD/oz.) and USD 444.45 (London AM Fix, Annual Average
USD/oz), respectively. When the price difference is combined with the fact that palladium is about half the density of
platinum (12 g/cm3 vs. 21 g/cm3), which means that more jewellery can be made from palladium per dollar invested in
the metal, there is an obvious preference by the trade for palladium.
The chances of palladium emerging as a credible substitute for white gold is relatively higher, given that the price of the
metal is also favourably poised.
Demand for gold, platinum and palladium in China11
Increase in demand for
palladium jewellery wit nessed
alongside a dip in demand for
platinum jewellery
P a lla dium De m a nd
Palladium demand
P Platinum
la tinum De
m a nd
demand
Gold
demand
Go
ld De
m a nd
3000
1800
1600
2500
1400
2000
1200
1000
1500
800
1000
600
400
Volume - Tones
Palladium also possesses qualities that make it fit for jewellery fabrication. It has a natural white colour, reducing the
need for additional polishing. Its light weight makes it comfortable for the consumer to use on a daily basis. Palladium
does not oxidise at room temperature and does not require frequent polishing.
While the industry acknowledges the advent of palladium jewellery, the jury is still out on the possibility of palladium
jewellery cannibalising the market share for platinum. Most industry experts believe that palladium cannot replace the
essential value proposition of platinum in key markets that of being a highly coveted, rare, and expensive precious
metal.
Volume - Mn Oz
2000
500
200
0
2000
2001
2002
2003
2004
2005
11
64
Note:
Data pertaining to Rest of World, excluding Europe, Japan and North America, China
being the largest consumer in the set.
65
Jewellery fabrication
IN FOCUS: The industry and the anti-money laundering legislation12
Industry has been tainted with allegations for a long time
The global diamond industry has for long been accused of involvement with crime such as money laundering, illegal
trade, and human exploitation. It is well known that diamonds at times have fueled civil war, for example, during the
Liberian civil war, diamonds were used to purchase arms and fund the conflict. The nature of the industry product is
such that it naturally lends itself to illicit trade diamonds are a highly fungible, concentrated form of wealth, and the
global diamond industry is historically insular and self-regulating. The illicit diamond trade exploits these factors. In
addition, the manner in which business is conducted (an outcome of the fact that the industry is an old, traditional and
unconventional industry) creates opportunity for crime to thrive.
To combat money laundering, legislations have been introduced at a global level. Besides, many countries have also
initiated action to regulate trade.
Financial Action Task Force (FATF): The mandate of the FATF is to curb money laundering through legislation. The
organization aids the development and promotion of national and international anti-money laundering policies. The
FATF has issued eight special recommendations on terrorist financing, outlining what governments should do to
combat terrorist financing.
US Patriot Act: The law is intended to prevent terrorist acts in the U.S., and is relevant to the jewellery industry in
its provisions to curb money laundering. It has introduced several mandates for various stakeholders of the global
gems and jewellery industry to name a few:
Belgium Money Laundering Law: This law prohibits the receipt of cash in any trade transaction exceeding Euro
15,000. It was amended in January 2004 to include traders in diamond within its purview and places specific
obligations on the diamond trade with regard to client and transaction information. As a response, Antwerp diamond
companies have had to appoint compliance officers and set internal rules to ensure the continued conduct of
business in a legal manner.
Notwithstanding changes in
demand patterns, preferences
and business models, the
global jewellery fabrication
industry has grown more
than 30 per cent over the last
five years, in value terms to
reach USD 79 billion in
2005 (6.5 per cent,
CAGR 2000-05).
Precious plain metal jewellery Primary value is derived from the base metal
gold, platinum, silver, etc.
The jewellery fabrication industry has developed across the world and over time
has resulted in specific geographies specialising in different forms of jewellery.
Each country therefore, has a distinct identity based on design specialisation,
choice of fabrication material, use of technology, method of production (hand
made versus machine made), quality, finish of the final product, etc.
Growth in global jewellery fabrication
90
79
80
73
USD billion
70
60
59
57
60
63
50
40
30
20
10
0
2000
2001
2002
2003
2004
2005
Figure 60: Growth in global jewellery fabrication (2000 to 2005), value USD billion
Source: KPMG analysis
12
66
Source
Diamond Intelligence Briefs, Tacy Ltd.
Diamond facts - Diamond Industry Reports - North Western Territories Canada
67
Jewellery production has seen a steady rise over the last few years, and our
estimates indicate that the total value of jewellery fabricated touched USD 79
billion in 2005.
India is the biggest fabrication centre in terms of volume of gold used for
jewellery fabrication. In 2005, it converted over 630 tonnes of gold into jewellery.
China, Italy, and Turkey are the other fabrication centres with substantial usage
of gold for jewellery fabrication.
Italy, which consumed over 500 tonnes of gold for jewellery fabrication in the
year 2000, has seen a steady decline in jewellery fabrication. In 2005, the Italian
industry is estimated to have converted less than 300 tonnes of gold into
jewellery. During the same period, the demand for gold for jewellery fabrication
from Turkey and China registered a strong positive trend, indicating a distinct
shift in manufacturing.
As a result of emerging technology, competitive labour costs, and changes in
regulation, a number of traditional manufacturing centres have been losing out to
newer players, thus changing the jewellery manufacturing landscape.
Product profile
profile
Country
Italy
Italy
ITALY
INDIA
THAILAND
US
CHINA
/HK
Emerging centres
Diamond
jewellery
Gemstone
jewellery
labour
(number,
skills and
costs)
Superi
Superior
Easy
availability
or
Technology
design
skills
of raw material
design
skills
China
Hong Kong
United
States
Turkey
Differentiated
Technology
positioning or
brand
India
Average
workman's
wages per
month (USD)
Mediu m
USD 1,000
Low
USD 200
India
China
Thailand
HK
High
USD 2,500
Turkey
Italy
U.S.
As with other parts of the gems and jewellery value chain, the jewellery
fabrication industry too is passing through a consolidation phase. Historically,
this has been a highly fragmented sector. The consolidation is the result of the
following efforts to capture a greater share of the value:
Forward integration: Large diamantaires have started setting up jewellery
manufacturing units influenced, in some cases, by powerful compelling
programmes.
Backward integration: Upstream movement of retailers either through in-house
or outsourced manufacturing.
68
Large
High
domestic
domestic
demand
market
Thailand
Traditional centres
Plain
jewellery
Comparative analysis
Comparative
analysis of
of strengths and weaknesses
13
Note
Data pertaining to average workman's wages per month
69
Another advantage to the manufacturer is the flexibility to quickly churn out new
designs in smaller batches to keep up with highly volatile design trends.
Jewellery fabrication has also seen the emergence of volume producers who
use industrial production techniques to maximise efficiency as opposed to
techniques used by traditional artisans.
One of the main concerns of any jewellery manufacturer is to give the consumer
the product he/ she wants, while ensuring that costs are under control and
the business is sustainable and profitable.
However, competition and slow growth in the industry have eroded margins.
The average consumer demands quality, finish, and innovative designs but at
reasonable prices.
Consumers
Changing
fashion
Channels
Competition
This has resulted in fewer customers with greater bargaining power. The need to satisfy and manage customer
needs has become a key requirement for all jewellery
manufacturers.
Consumer need
Innovative designs
conforming to the
latest trends
Superior quality and
finish
manufacturing,
minimise waste
Provide the latest
Desirable product at
reasonable prices
Solutions provided by
technology (indicative)
CAD/CAM and computer-
integrated machinery
Wax-casting machinery
Implications for
Implications
for jewellery
jewellery
fabrication centres
fabrication
centres
Laser-production technology
machines
Figure 64: Linkages between consumer needs and technological developments in the industry
Source: KPMG research, Solitaire International
Figure 65: Current trends in the industry and its impact on jewellery fabrication centres
Source: KPMG research
70
71
Austria
UK
Cyprus
India
Czech
Netherlands
Republic
Norway
Denmark
Portugal
Finland
Singapore
France
Spain
Hong Kong
Sweden
Ireland
Switzerland
Malaysia
Uzbekistan
Abu Dhabi
Dubai
Saudi Arabia
South Africa
Canada
Germany
Italy
Taiwan
Thailand
United States
72
73
Jewellery retail
IN FOCUS: Changes in the U.S. GSP likely to impact players like India, Turkey and Thailand14
The U.S. Generalised System of Preferences (GSP), a programme designed to promote economic growth in the
developing world, provides preferential duty-free entry for more than 4,650 products from 144 designated beneficiary
countries and territories. The GSP programme was instituted on January 1, 1976, and authorised under the Trade Act of
1974 for a 10-year period which is reviewed periodically.
The U.S. plans to withdraw GSP for 13 countries - Argentina, Brazil, Croatia, India, Indonesia, Kazakhstan, the
Philippines, Romania, Russia, South Africa, Thailand, Turkey and Venezuela. Among these, India, Indonesia, Brazil, and
Thailand account for 70 per cent of the GSP benefits. Jewellery and electrical appliances are among the most active
export sectors currently enjoying GSP benefits. Beneficiary players in the jewellery space are India, Turkey, Thailand,
Peru, Brazil, Argentina, and Malaysia with India being the biggest player.
For example, jewellery exports from India were worth USD 4 billion in 2005, more than 30 per cent of which were to
the U.S. The withdrawal of the GSP will raise the import tariff into the U.S. market from 0 to 6.5 per cent. This would
have an impact on costs, and could reduce cost effectiveness especially for the lower end, mass market jewellery, thus
negatively impacting the Indian, Thai, and Turkish gems and jewellery industry. Players in the gems and jewellery space
with significant exports to the U.S. need to factor this into their business plan.
This could lead to the following outcomes:
Jewellery could get traded through other locations like HongKong which are not covered
China may attract new jewellery investments compare to India and Turkey.
Global retail sales of jewellery are estimated to have grown at a steady CAGR of
5.2 per cent, over the last five years, to reach USD 146 billion in 2005.
The market was marked by intense competition between diamond and plain gold
jewellery for a share of the consumers wallet. While gold regained its share
from a low of 37 per cent in 2001 to 42 per cent in 2005, diamond increased its
penetration in traditional gold markets but suffered because of platinum
jewellery.
Plain platinum jewellery managed a high of 7.3 per cent of the total market share
in 2003, but since then slipped back to close to 6 per cent.
World jewellery sales grew at a steady pace
CAGR
200
(2000-2005)
Others
Plain platinum jewellery
160
136
USD billion
Diamond jewellery
120
80
5.2%
146
113
111
5.4
7.3
5.3
7.1
118
5.6
8.0
124
5.9
9.1
6.5
9.5
54.0
7.3
9.0
6.4%
4.4%
60.7
5.5%
46.4
41.5
44.4
46.3
54.0
56.7
59.5
62.5
65.7
68.9
2000
2001
2002
2003
2004
2005
40
5%
Figure 67: Growth in global jewellery retail sales (USD billion 2000 -2005)
Source: KPMG analysis
74
14
Source:
United Nations Conference on Trade and Developement (UNCTD), Diamond World
75
The U.S. continues to be the worlds largest market for jewellery and accounted
for 31 per cent of all jewellery sales in 2005. Japan, another key jewellery market
of yesteryears, has seen a steady decline from 10 per cent in 2000 to 8 per cent
in 2005. During the same period China has steadily increased its share in the
market, and today accounts for 9 per cent of global jewellery sales, in value
terms.
The Indian consumers increasing penchant for diamond jewellery and the rekindling
of her affair with plain gold jewellery meant that its share in the world
market went up to 8 per cent from a low of 5.5 per cent in 2002.
Eight key markets accounted for the majority of global jewellery sales
Rest of the
World
23.7%
China
8.9%
Strength of jewellery tradition in the country: India, China, and Turkey are the traditional jewellery markets
where jewellery buying for investment and adornment has a long history. This is reflected in the consistently higher
JAF values for these markets.
Consumer sophistication: Demand for any product is dependent on what needs it fulfills for a consumer. Varying
degrees of consumer sophistication but similar value proposition of jewellery across markets implies that sales in
markets must vary depending on the number of consumers in that particular need state.
Extent of market organisation: Organised retailing and manufacturing bring with it the power of branding,
marketing, R&D, and analysis of consumer needs. Therefore, relative organisation of the market compared to other
luxury goods will influence jewellerys share of consumers wallet.
India
8.3%
Italy
5.0%
Japan
8.3%
Turkey
2.9%
US
30.8%
Analysis of JAF values for eight key markets clearly showed its movement in a narrow band (as shown in Figure 69),
and at the same time accounted for differences in jewellery consumption in various markets. This has led us to believe
that JAF could be used as a suitable surrogate measure for a countrys affinity for jewellery. Subsequent analysis
revealed that JAF for a country is driven by three key drivers:
UK
3.1%
JAF for a country is unlikely to change dramatically from one year to the next. However, over the long term, as these
countries develop, and consumer preferences change (more for developing economies), the JAF value will also change,
implying that assessment of future JAF values could directly determine future jewellery consumption in each market.
We also believe that JAF could function as an early warning system for markets-at-risk because of structural changes
impacting them.
JAF values are stable in the short run
Middle East
8.9%
18
16
India
14
12
10
Turkey
Given that spending on jewellery is discretionary in nature, it can be intuitively assumed that a persons spend on jewellery
must be related to his/ her income. With a rise in income, one can expect spending on luxury goods, including jewellery,
to increase.
= (Jewellery sales per capita, current year)/(GDP per capita, current year)
76
Italy
U.S.
World
Japan
2
0
2000
Several analysts have pointed to the possible correlations between GDP growth and jewellery sales. Our subsequent
analysis of per capita jewellery sales and GDP for key global markets showed that for individual countries, they did
move together in a narrow band in the medium term.
Based on this analysis, we defined a factor to capture this relationship, and calculated what we call Jewellery Affinity
Factor (JAF). For each country, JAF for a particular year was defined as:
China
U.K.
2001
2002
2003
2004
2005
Jewellery sales to foreign tourists, which should ideally be captured as re-exports, are captured as jewellery sales to locals.
A greater portion of the disposable income of consumers in the Middle East is spent on jewellery as compared to
markets like India.
77
Diamond jewellery
World diamond jewellery sales in 2005 were estimated at USD 69 billion. The
market for diamond jewellery has registered a year-on-year growth of 5 per cent
over the last five years. Contrast this with the global luxury goods market, where
the U.S. alone accounts for USD 400 billion and the global market is expected to
grow in excess of 15 per cent annually. Growth in diamond jewellery is
attributable to two factors:
Demand for plain gold jewellery in value terms has taken off since 2001 when
the global retail sales stood at USD 41.5 billion. In 2005, the total retail sales of
plain gold jewellery were estimated to be USD 60.7 billion. This meteoric rise in
the sales of plain gold jewellery is directly linked to the rise in gold prices, which
have grown at a CAGR of close to 13 per cent since 2001. Therefore, even
though the total gold consumed as plain gold jewellery (volume) decreased, sales
have notched a positive growth in value terms.
Plain gold jewellery sales have grown on the back of gold prices
Plain Gold Jewellery
80
CAGR
56.7
59.5
400
363
60
5%
310
USD billion
54.0
68.9
500
279
273
300
40
54.1
54.0
40
46.6
46.4
20
41.7
41.5
44.6
44.4
60.7
200
USD per Oz
60
65.7
444
409
(2000-2005)
80
62.5
Gold Price
46.4
46.3
100
20
0
0
C hina
2%
RoW
16%
2000
India
Ita ly
2%
6%
J a pa n
14%
Turke y
1%
M iddle Ea s t
11%
US
45%
UK
3%
2001
2002
2003
2004
2005
Figure 70: Global diamond jewellery sales, 2000 2006, USD billion
Source: KPMG analysis
The U.S. constitutes the largest market for diamond jewellery (45 per cent in
terms of value) and clocked an estimated USD 31 billion in diamond jewellery
sales. Japans consumption of diamond jewellery has dropped sharply following
the countrys economic condition. Today, Japan constitutes 14 per cent of the
global sales of diamond jewellery.
The most impressive growth has been recorded in Asia with India and China
leading the way. India, which has mainly been a plain gold consuming nation,
reported a remarkable growth in sale of diamond jewellery (estimated at
USD 1.51 billion) in 2005. According to our estimates, this market is likely to
grow to USD 1.65 billion in 2006. Demand for diamond jewellery has been seen
to rise in the Middle East as well.
Italy
4%
2001
2002
2003
2004
2005
Figure 72: Global plain gold jewellery retail sales, USD billion
Source: KPMG analysis
Even though the demand for plain gold jewellery is supported by consumption in
developing economies, its share of the total jewellery market is increasingly
under threat from studded jewellery. Alternate forms of gold like white gold too
are under threat from other precious metals like platinum and palladium.
The U.S. and India continue to be the largest markets for plain gold jewellery (by
value) consuming over USD 10.8 and USD 10 billion worth of jewellery, respectively
in 2005.
Japan
1%
U.K.
4%
India
17%
Turkey Middle east Middle East
9%
5%
8%
78
0
2000
However, in volume terms, India is by far the largest consumer of gold in the
form of plain gold jewellery. This apparent contradiction is on account of two factors:
79
After growing at a good pace, plain platinum jewellery sales have stabilised over
the last few years. This sudden dampening of the growth in platinum jewellery
sales is a direct result of the increase in the price of platinum (pricing the
jewellery out of range for some consumers) and the reluctance of retailers and
wholesalers to carry inventory due to the higher cost.
Platinum prices have skyrocketed over the last few years and have grown at a
CAGR of 10.4 per cent for the 2000-05 period. In December 2005, prices rose to
USD 1,012 per oz, the highest in almost 25 years.
Plain platinum jewellery sales have tapered off in the last few years
10
9.1
9.5
9.0
8.0
USD billion
7.3
7.1
UK
US 1%
7%
0
2000
2001
2002
2003
2004
Japans share of the world market has declined in the recent past. It is estimated
that it now accounts for only 13 per cent of global sales.
China
75%
80
For consumers
Access to reputed regional and national retailers, domestic and international brands, and a variety of popular
products in one place.
Majority of retailers with establishments in a gold souk adhere to international hallmarking and certification
standards, assuring quality products to consumers. Several gold souks even have internal criteria (related to product
quality) for selecting retailers.
Overall retail experience of an international standard shopping mall with modern amenities.
State-of-the-art infrastructure and amenities meeting international standards, strategic/ close proximity to major
consumer shopping hubs.
Tighter security than traditional jewellery trading zones. High conversion rate as opposed to that obtained in a
non-specialty commercial trading place.
Aggressive marketing to attract consumers on an ongoing basis as well as during special seasons. For example, the
Dubai Gold Souk is actively promoted during the Dubai Shopping Festival and Dubai Summer Surprises.
An avenue for networking with other players in the industry. Tighter security than traditional jewellery trading zones.
2005
China is the worlds largest consuming market for plain platinum jewellery. It
accounts for more than 75 per cent of the world-wide sales of platinum jewellery.
Japan
13%
A common market place or souk for the trade of jewellery promises a range of benefits to both retailers and
consumers.
For retailers
Row
4%
Largely promoted by World Gold Council (WGC), this format is now also being replicated in other nations, India being
the most notable example with the development of the Gold Souk, Gurgaon, in 2004.
Dedicated souks for various products and commodities (literally meaning market place or bazaar) have always been
a part of Arabic culture. Today, the Middle East has a number of souks dedicated to gems and jewellery such as the
Gold Souk in Deira, Dubai, housing over 300 jewellers, the innumerable gold souks of Kuwait and the Gold City in Bahrain.
15
Source:
www.goldsouks.com, KPMG interviews
81
82
What the consumer wants: Branding becomes a must when one takes a closer look at what influences consumer
decisions to purchase jewellery
Fashion statement: A brand in many ways makes a statement about the person who chooses it. The consumer
identifies with the brand personality.
Assured quality: Branding assures a certain level of quality, (through certifications and/ or guarantees) playing the
role of an extinguisher of the increasing consumer skepticism.
16Antwerp
83
This has been observed in diamonds where leading upstream players have been a dominant force behind the branding
movement in the diamond jewellery segment; These companies which work previously just dominant suppliers of
rough diamonds, have now assumed responsibility for promoting diamond products in key consumer markets. Their
strategy encourages diamond CPD companies to spend on marketing and branding initiatives in their respective markets,
driving diamond jewellery sales upwards.
Industry bodies promoting precious metals, such as the World Gold Council (WGC) and Platinum Guild International
(PGI), have also played pivotal roles in the branding movement, by undertaking or supporting international jewellery
brands and campaigns.
In the last few years, WGC has aggressively promoted gold jewellery demand in various markets by launching global
as well as region-specific promotion campaigns, most notable ones being the Speak Gold campaign in the U.S. and
the K-gold campaign in the Far East.
PGI too has launched a world-wide platinum-branding initiative, with the help of brand consultants Interbrand, with a
brand line Pure-Rare-Eternal and a logo emphasising the metals intrinsic values, while maintaining a modern
contemporary image.
Per cent
penetration
Per cent
of world
users
Per cent
growth
2000- 2005
2.6
2.3
423.9
Asia
10.4
36.5
232.8
Europe
36.4
28.2
179.8
84
Africa
Middle East
9.6
1.7
454.2
North America
68.6
21.8
110.4
Latin America
14.7
7.8
358.5
Australia/Oceania
52.6
1.7
134.6
Internet penetration
Jewellery certification
Impact on consumer confidence branding fulfills the necessary function of demystifying the process of
purchasing jewellery including quality parameters to watch out for.
Impact on retail margins-given that the added value of brands in other luxury goods categories (such as watches
and perfumes) ranges between a whopping 70-90 per cent, the jewellery industry has a lot to catch up.
Competitive prices
Increasing awareness and interest in the minds of consumers towards jewellery as a whole.
Preventing commoditisation branding could guard against the erosion of the cardinal value proposition of
jewellery its linkages with traditional values and emotional expression.
We dding o r e nga ge m e nt
gifts
1%
Annive rs a ry gift
Othe r
2%
4%
Gift fo r s o m e o ne
32%
S e lf purc ha s e
61%
17
Internet retailer website, diamond views website, Idex online, Datamonitor e-retail 2006 report, Financial Times
85
Local beneficiation in
African countries
Shrinking margins
Stagnating demand in
the U.S. the largest
market
Shortening fashion
cycles
Emerging consumption
centres linked with
economic growth
Diamond
mining
Increasing
rough prices
Declining
market share
of large
diamond
marketing
companies
Gemstone
processing
Coloured
gemstone
mining
Creation of store
and product
brands
Jewellery design
& fabrication
Gold
mining
Platinum
mining
Ore processing
& scrap
recovery
Jewellery
retail
Recovery of
silver
Technological
developments reducing
labour and skill intensity
Intense competition in
the export markets
Changing retail
channels
Competition from
other luxury items
increasing
Increasing consumer
sophistication
Aggressive marketing to
boost demand
Each scenario has been built by grouping events that are likely to occur
simultaneously, based on our assessment of the key driving forces behind them.
KPMG has identified eight scenarios that individually have the potential to alter
the face of the industry in the next decade. The analysis of each scenario
includes combining our industry knowledge with anecdotal evidence from
industry sources, followed by qualitative assessment and quantitative modelling
using industry data.
88
The factors that will drive the conversion of the scenario into reality have
been examined
In reality, these scenarios are unlikely to operate in isolation; they are likely to
interact with other industry trends giving rise to various outcomes. However, in
order to facillitate analysis of influencing factors as well as emergent outcomes,
each scenario has been analysed individually.
Subsequently, all the scenarios have been assumed to act simultaneously, and
the impact on the industry has been identified by predicting the shape and size of
the industry till 2015.
These trends are interdependent, combining to give various possible scenarios
Jewellery s
declining value
proposition
Bullion
trading
Changes impacting one segment of the gems and jewellery value chain are likely
to have a ripple effect across the industry, impacting players and segments
across the board. KPMG has identified several changes that are sweeping
through the value chain some with limited independent impact, but significant
when combined with other changes, and some strong enough to have
substantial impact on their own. Most of these trends are interconnected, and
often the intensity of impact increases as they feed off each other.
For instance, Local beneficiation in South Africa is a trend that has the potential
to change the industry on its own, with substantial social, economic, and political
impact on players across nations, and therefore, it has been analysed as an
independent scenario. On the other hand, a continuing increase in diamond rough
prices will put pressure on the diamond cutting and polishing players as their
inventory stocks pile up, and they are unable to pass on the price increase to the
jewellery fabricator. At the same time, it will also affect fabrication players, by
pushing the risk on to and increasing their cost of stock. This, combined with
intense competition in the export markets, and the resultant downward pressure
on polished diamond prices is likely to force consolidation in the industry. These
multiple trends across the value chain have, therefore, been combined under the
Consolidation in the industry scenario.
The decreasing market share of large diamond marketing companies and the
emergence of new mines and mining companies were interpreted and analysed
as decreasing dominance of centralised sourcing, while volatile platinum prices
and competition from other luxury goods were seen as the emergence of
substitutes in the market. The gold price bull run, excessive reliance on the U.S.
market, new substitutes fighting for consumers share of the wallet, and jewellery
losing its investment value were all ultimately seen as a part of jewellery losing attraction.
89
Scenario 1
Local beneficiation intensifies
The emergence of new centres - in retail, jewellery fabrication, cutting and
polishing of diamonds is expected to alter the geographic spread of this
industry again. While the emergence of new consumption centres is likely to
positively impact global jewellery sales, the emergence of new fabrication
centres is likely to have an economic and social impact on all nations involved.
As consumers in emerging markets like China and India become more
sophisticated, it is expected that jewellery retailing would become more
organised. Consumer demand for quality, hallmarking and certification would
gain importance, and one can expect greater penetration of branded goods with
new store and jewellery brands in these markets pushing up sales. Emergence
of alternative retail channels like the Internet, will also have a positive impact
on global jewellery sales.
These trends are interdependent and combine to give various possible scenarios
TRENDS IN SOURCING
TRENDS IN FABRICATION
Shrinking margins
TRENDS IN RETAIL
Dominance of centralised
distribution decreases
Technological developments
changing nature of industry to be
less labour skill-dependent
Figure 79: Various trends combine to give rise to distinct outcomes or scenarios
Source: KPMG analysis
90
1
Improvements in technology for
production of synthetic diamonds
African countries are likely to see increasing political pressure to ensure more of
the countrys rough is polished within their respective borders. New cut and
polished diamond (CPD) centres will emerge as more sourcing companies are
expected to promote local beneficiation in return for discounted or preferential
access to rough from mining nations. However, we believe that local
beneficiation will be restricted to high-end rough, which will be able to absorb the
relatively high per labour costs within the boundaries of the producer nation.
Smaller stones are still expected to be polished in low-cost cutting centres like
India and China, and it is expected that both these nations will take proactive
steps in establishing direct links with mining countries bypassing sourcing
companies and rough traders in order to defend their local industry from
shortages of rough diamonds.
Beneficiation is not expected to take off in Canada and Russia mainly due to the
higher cost of labour and relative insignificance of the diamond processing
industry to the economy in these countries.
The case for local beneficiation
SCENARIOS
Emergence of gold-backed
investment funds
Today, African countries produce over 60 per cent of the worlds rough in terms
of value and over 50 per cent in terms of volume. This dominance in the industry
gives these countries considerable bargaining power. Historically, these countries
were colonies of western nations, and as a result their natural reserves were
exploited mainly by foreign companies, and the benefits rarely passed on to the
local population. However, post independence with increasing political stability
and peace on the civil front, the scenario has changed dramatically and these
nations are now exerting political clout on various industries controlled by foreign
companies to promote local beneficiation and socio-economic development.
Unlike the economies of Russia, Canada, and Australia (the three diamondproducing majors outside the African continent) a majority of the African
diamond-producing countries are heavily dependent on their diamond exports,
which contribute a significant proportion to their GDP. Therefore, even a marginal
increase in their share of the global diamond pipeline is likely to have a significant
positive economic impact for these countries. By polishing the stones locally,
African economies will be able to corner the incremental margin associated with
diamond cutting and polishing.
The short and long-term social impact of beneficiation on African countries is also
difficult to ignore. The unemployment rate in South Africa was as high as 26 per
cent in 2005. In other diamond-producing nations, this is even higher, and
therefore, local beneficiation holds the promise of stable employment for the
people of these nations.
91
African
countries
4%
RoW
39%
Beneficiation is not expected to take off in Canada and Russia mainly due to the
higher cost of labour and relative insignificance of the diamond processing
industry to the economy in these countries.
African
Countries
61%
RoW 96%
Figure 80: Africas share of diamond mining, by value and volume (2005)
Source: IDEX 2005 pipeline, KPMG analysis
Unemployment
Rate
26.6%
23.8% (2004)
Namibia
13%
35% (1998)
Angola
12%
50% approximately
Not available
7%*
Not available
opportunities for the local populace. CPD centres in these countries will have a
20,000
2011-2015
2006-2010
15,000
8,910
10,000
4,773
10,709
5,000
To
a
ric
So
ut
Af
ib
N
am
ta
1,840
ia
o
ng
a
Bo
1,393
214
322
1,963
Co
1,308
5,128
1,221
1,457
An
African countries are likely to see increasing political pressure to ensure more of
the countrys rough is polished within their respective borders. New cut and
polished diamond (CPD) centres will emerge as more sourcing companies are
expected to promote local beneficiation in return for discounted or preferential
access to rough from mining nations. However, we believe that local
beneficiation will be restricted to high-end rough, which will be able to absorb the
relatively high per labour costs within the boundaries of the producer nation.
an
Figure 81: Minings contribution to GDP and unemployment rate in African countries
Source: OECD, IMF, DFID, EITI, CIA World Fact Book,KPMG research
ts
20%*
la
Sierra Leone
go
South Africa
Botswana
Contribution
to GDP
6.5%*
37.6%
18
Our analysis indicates that close to 10 per cent of the worlds rough, by value,
will be polished in African countries by 2015, as an outcome of local
beneficiation. Given the relatively higher labour cost (between USD 30 and 50 per
carat) in African countries, mining companies would allocate only gem quality
rough to these CPD centres (polishing near gem quality rough is unlikely to be
economical in the African countries). The best quality rough, however, is still
expected to go to Israel, Belgium, and the U.S. As shown in Figure 82, around
9,000 new jobs can be created in African countries in 2006-10, while another
11,000 could be added in 2011-15. China and India will still be the centres for
processing the cheaper quality rough.
No. of jobs
Country
Country
Smaller stones are still expected to be polished in low-cost cutting centres like
India and China, and it is expected that both these nations will take proactive
steps in establishing direct links with mining countries bypassing sourcing
companies and rough traders in order to defend their local industry from
shortages of rough diamonds.
92
18
Note:
The figures marked with * show the total mining sector contribution to GDP.
93
While the African countries are expected to get some of the best quality rough,
their relative inexperience would imply that they will not be able to command a
high premium for the quality of cut. Also, their labour costs are expected to be
significantly higher than India and China. Taking this into consideration, it is
expected that only Angola, Namibia, and South Africa are likely to be profitable in
the short run. Congo is unlikely to be a profitable CPD centre as it is expected
that the quality of its rough will not be sufficiently high to cover its processing
costs.
As discussed earlier, our analysis indicates that around 9,000 and 11,000
incremental jobs are likely to be created on account of local beneficiation.
This is based on the assumption that not more than half of all the gem-quality
rough produced in these nations will be available for local CPD centres.
Key assumptions for estimating employment
generation and profitability assessment
However, even with 5 per cent of the worlds rough available for polishing,
Botswana is likely to generate only slightly more than 10,000 new jobs by 2015.
With a current population of 1.6 million and a current labour force of close to
300,000, the impact of these incremental jobs will be minimal. The impact will be
even lesser in Angola and South Africa, which will only be able to provide
employment to 2,700 and 3,200 new employees, respectively.
This analysis does not take into account the expected profitability of CPD centres
in these countries. The profitability of any CPD centre is a function of quality of
cut, quality of rough, and labour cost.
18000
200
Profit = value of rough available * value addition % wage costs inventory costs
100
Quality of cut
Productivity,
cost per carat
USD Mn
Quality of rough
16665
China
16000
India
12775
14000
12000
11303
9503
10000
10569
8625
Employment capability
8000
6000
4000
2000
0
2005
Angola
-100
Namibia
-200
2005
2015
Botswana
Congo
Share of global
polished output
2010
South Africa
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
94
95
Scenario 2
Dominance of centralised
distribution decreases
For India, this number will drop from over 11,000 today to 9,500 by 2010 and
close to 8,600 per million carats by 2015. Figure 84, shows the expected
changes in employment capabilities of these two markets over the years.
With close to 1 million people currently employed in this sector, it is estimated
that India may experience a loss of up to 200,000 jobs by 2015. China will also
experience this drop, as its employment capability will decrease from over
16,000 to 10,500 per million carat.
Key outcomes
The economic impact of local beneficiation is likely to be over-shadowed by the social impact the initiative will have on
countries on either side of the fence. Here is a summary of the key outcomes of this scenario:
9.4 per cent of the worlds rough diamonds are likely to be processed locally by mining countries.
Angola, Namibia, South Africa, and Botswana will emerge as profitable cutting and polishing centres. Congo will be
an unprofitable cutting and polishing centre.
Close to 20,000 jobs are expected to be created in African countries because of beneficiation.
Local beneficiation will have a greater negative impact on China than on India.
Processing costs in India and China will rise, and as a result margins will reduce.
India and China will experience job losses in the diamond cutting and polishing industry.
World average margin in CPD is expected to go down as workers in new countries take time to acquire skills.
We believe that it is likely that local beneficiation will continue and gather steam over the next few years.
The fragmentation of supply
Likelihood of occurrence
Low
Mediu m
High
The last 20 years have seen the emergence of several diamond mining giants. At
the same time, large rough traders have established their presence across the
value chain. The discovery of two large deposits in Canada has reduced the
market share of South African countries, and more importantly lowered the
number of mines under the control of some of the traditional rough sellers.
Canada has become the most sought after destination for diamond exploration,
accounting for 50 per cent of the global exploration budgets, pointing towards
greater fragmentation of diamond rough supply in the future.
With the fragmentation of rough diamond supply sources, the ability of a group of
companies to control the price of diamonds has weakened - making the hoarding
of diamonds more expensive, thus forcing companies to deplete stockpiles.
Governments today are increasingly forming direct links with processing centres.
At the same time, a host of mining countries are looking at promoting and
building in-house cutting and polishing facilities, thus bypassing trading
companies.
96
97
With multiple supply sources coming up, and more and more mining companies
taking it upon themselves to sell their own rough, one can expect the traditional
dominance of centralised distribution to decline in the future.
The natural choice of the industry would be firstly to go by the prices set by
current rough selling companies, having no established standard for the same,
and taking those forward, to build logical indices.
Our analysis indicates that rough trading will become attractive. However, the
impact of this scenario needs to be analysed in the context of consolidation that
is likely at the demand side as well.
120%
DTC
Others
% market share
100%
80%
34%
32%
32%
42%
45%
52%
52%
53%
60%
USD 13.2
bn.
100%
1.5%
USD 16.6
bn.
10.1%
40%
66%
68%
68%
58%
59%
57%
55%
20%
48%
47%
0%
56.6%
45.5%
37%
Direct selling
Centralised distribution
40%
6.2%
7.7%
8%
20%
35.8%
36.3%
38%
2005
2010
2015
As a result of this change in channel split, rough prices are expected to fall, as
the margins in the trading and auction route are significantly lower than those in
centralised distribution.
It is also expected that as the industry becomes increasingly demand-driven
rather than supply-controlled, the need for independent objective indices for the
pricing of rough diamonds would emerge.
Trade
USD billion
There are likely to be more instances of companies which start off as a junior
and then sell its diamonds through its own network instead of opting for the preestablished sales network of one of the big players.
Non-Trade
0%
98
18%
80%
48%
60%
USD 20.1
bn.
2.0
0.14
Non-Trade
0.11
Direct selling
Centralised distribution
Trade
0.03
1.5
1.84
1.54
1.0
1.34
0.5
0.33
0.40
0.49
2005
2010
2015
0.0
99
Scenario 3
Diamond value chain
consolidates
Key outcomes
With the emergence of new mining companies, and the discovery of new mines, the foundations for a change in the
industry are already in place. KPMG believes that the likelihood of the occurrence of this scenario is high and would lead
to the following key outcomes:
The share of centralised distribution (by value) will reduce to around 45 per cent by 2010 and 37 per cent by 2015.
The rough sellings industry will become more susceptible to market forces as more mining companies go for the
tender/auction route.
Overall margin in rough selling will shrink as more trade is carried out through low-margin sales channels like traders,
brokers, and direct company sales.
The need to maximise value in the era of decreasing margins and a need to
increase ones span of influence drives consolidation in the diamond
industry
Diamond rough prices have shown significant appreciation over the last few
years. During the same period, polished diamond prices have not exhibited a
similar kind of growth. This has squeezed the margins in the intermediate stages
of the diamond pipeline, where players already operate on thin margins and have
a limited ability to absorb a rise in raw material prices or a drop in product selling
prices. For the purpose of analysing this scenario, it has been assumed that
rough prices will not fall sharply over the next couple of years.
Overcapacity is likely to increase in diamond cutting and polishing, as new
factories come up in China and factories in India continue to operate. Intense
competition will lower the price of polished diamonds even further.
Likelihood of occurrence
Low
Mediu m
High
Working on wafer-thin margins, high rough prices, bloated inventory levels, and
in a tough financing environment, smaller players are likely to find it unprofitable
to operate. Cutting and polishing centres are likely to experience the maximum
pressure to reduce debt levels, clear inventory, lower their labour costs, reduce
their cost of capital, and consequently, improve their margins.
Under all these pressures, the industry will enter a consolidation phase and
instances of both vertical and horizontal integration are likely to be seen.
Consolidation has already started
The global gems and jewellery industry has already shown signs of consolidation
as the industry value chain is slowly collapsing into fewer segments and industry
players are merging, integrating, or even exiting the industry due to diminishing
margins and rising industry debt levels. Consolidation and integration in the
industry is of two types one is more of a proactive effort taken by large giants
to maximise their span of influence and enhance value addition by clubbing two
or more consecutive stages in the value chain, the other is more remedial in
nature, where the main driver is shrinking margins, which have reduced the
economic viability of the business.
Low demand growth at the retail end and rising prices of rough from the supply
end have in the last few years caused ripples across the value chain. Most of
which seem to impact the diamond polishing stage where it is estimated that
inventory worth USD 3.6 billion has built up over the last few years. Rising
industry debt levels (estimated to be approximately USD 10 billion) and
subsequent difficulty in obtaining financial support can be seen as precursors to
an impending shake-out.
100
101
A number of primary and secondary factors are influencing consolidation across the industry value chain
Difficulty in
obtaining capital
Rising prices of
rough
Mining
Difficulty in
sourcing rough
Sourcing
Shrinking
margins
Over-capacity
and competition
Rough trade
Low demand
growth
Polished
trade
Processing
Jewellery
manufacture
Jewellery
retail
Inventory build
up
Figure 88: Factors causing consolidation; high-pressure zones in the diamond value chain
Source: KPMG research
Reducing margins, piling up of inventories, and rising debt levels are forcing
smaller players to consolidate or exit. This trend will be most evident in the
diamond processing and jewellery fabrication sub segments.
4%
3%
3%
3%
2%
2%
2%
2%
Arcelor
Nippon
The evidence of consolidation across the value chain is already visible, forwardlooking players have realised the benefit of straddling the chain. For example,
there are instances of cutting and polishing players as well as rough trading
companies having obtained mining licenses and/or equity stakes in mining
companies in Canada, Russia, and Sierra Leone.
Forward and backward integration is also occurring at the other end of the chain,
with jewellery retailers setting up their own manufacturing unit and processing
rough on their own. This part of the chain has also seen players from the
jewellery fabrication segment expand into jewellery retailing.
Integration across the value chain
Miners forward integrating into processing
Posco
JFE
Baosteel
US Steel
2%
Mining, processing
Polished
trade
Jewellery
fabrication
Jewellery
retail
Corus
Riva
Nucor
72%
Others
Mining
Figure 89: Market share of the top 10 producers in the global steel industry.
Source: WR International -Overview of Global Steel Industry,2006, Salman Anwar ,
Mittal Steel web site (www.arcelormittal.com)
19
102
Source:
WR International -Overview of Global Steel Industry,2006, Salman
Anwar , Mittal Steel web site (www.arcelormittal.com)
Sourcing
Rough
trading
Figure 90: New emerging business models along the value chain
Source: KPMG analysis
103
Inventory build-up will result in the industrys financial health deteriorating from barely positive margins to negative
margins by 2015 20
3000
1500
Israel
China
India
South Africa
0
-11.00
-5.00
1.00
7.00
Russia, US
3000
1500
Israel
South Africa
-11.00
-1500
20
USD billion
16
-3000
-5.00
1.00
Russia,US
7.00
China
-1500
Consolidation is inevitable
Value creation = (ROCE - Cost of
capital) x Capital employed
India
-3000
12
0
2005
2006
2007
2008
2009
2010
2011 2012
2013
2014
2015
Figure 91: Global polished inventory levels before consolidation, USD billion
Source: KPMG analysis
104
20
Note:
Size of bubble represents CPD output
105
Key outcomes
16
Mounting pressure will force the diamond industry to consolidate in order to survive. Key outcomes of such a scenario
are given below:
Consolidation Zone
USD billion
12
4
Actual inventory levels
Sustainable inventory levels
This combined with decreasing margins will force the diamond industry to consolidate. This consolidation will have
the maximum impact on diamond processing. Smaller players will be acquired or will go out of business.
Industry will reduce its debt levels, lower its labour costs, and its cost of capital, post-consolidation. These
improvements will allow it to carry much more inventory without destroying value.
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Figure 94: Global polished inventory levels post -consolidation, USD billion.
Source: KPMG analysis
2015
Likelihood of occurrence
Low
Industry financial health post-consolidation, in 2015
Mediu m
High
3000
1500
India
China
Israel
South Africa
0
(11.00)
(5.00)
Russia, 1.00
US
7.00
-1500
-3000
106
107
Scenario 4
Emergence of new gems and
jewellery centres
Traditional centres give way to emergence of new centres
For years, the global jewellery map has remained almost static with a handful of
countries dominating the scene at various stages in the value chain. However, in
line with other industries, with increasing globalisation, the gems and jewellery
industry too is moving towards greater geographical dispersion aimed at
capturing either economies of scale or targeting emerging markets. And as this
trend takes off in a big way, the industry map is expected to change
considerably.
Accelerating economic growth and rising income levels in India and China are
likely to translate into higher spend on jewellery, thus establishing these markets
at par with the U.S. retail market. Rising domestic consumption in India and
China, available factor conditions for production, as well as supportive
government legislation will also see the emergence of these countries as
jewellery fabrication centers. Turkey is expected to be another major jewellery
fabrication player, as it cannibalises Italys share of the global market.
Changes are expected in the diamond pipeline too, as India is likely to position
itself as a major hub for polished diamond trading, mainly leveraging its position
as the worlds largest CPD producing nation. Diamond rough trading is expected
to make a dramatic move eastwards towards India and Dubai, while London
further loses significance as the worlds major diamond hub due to DTCs
declining share of existing incumbents and the growing share of Asian countries
in jewellery fabrication and retail. Meanwhile, China is expected to strengthen its
position as the worlds second largest diamond cutting and polishing centre after
India, riding mainly on the advantage of cheaper, highly productive skilled labour
and supportive regulatory environment.
Geographical shift in the industry centres
Traditionally, the global jewellery retail market has been dominated by the U.S.,
with none of the other countries individually accounting for more than 10 per
cent of global sales. Similarly, jewellery fabrication has been dominated by Italy
and the U.S., and to a lesser extent by India. And while India, Belgium, and Israel
have accounted for most of the worlds polishing of rough diamonds, Europe has
been the epicentre of diamond trade for quite some time. KPMG analysis
indicates that these traditional centres will fade in favour of new centres.
108
RoW
83 %
RoW
69%
109
The dominance of large diamond marketing companies has decreased over the
years, and as a result diamond trade has moved out of traditional centres like
London and Antwerp and is heading eastwards towards Dubai, China, and India.
For instance, a number of industrial bodies have been working hard to establish
their respective countries as trading hubs. The Gem and Jewellery Export
Promotion Council of India aims at making India a major trading hub for gems and
jewellery. It has embarked on a number of initiatives like setting up research,
training and development facilities, bringing about reforms on the tax and
regulatory front, and establishing Special Economic Zones (SEZs) for jewellery
trade.
600
510
474
412
Tonnes
400
324
China
10%
US
1%
Angola
3%
Belgium Botswana
5%
1%
Russia
7%
Namibia
2%
Israel
4%
Israel
15%
China
22%
India
50%
India
57%
Key outcomes
The gems and jewellery value chain is expected to witness several geographical changes over the next few years.
Changes are expected in each segment of the value chain. The key outcomes of this scenario are given below:
500
Belgium
3%
Russia
7%
Dubai, located close to Africa, Europe, and India, has emerged as a major centre
for the trade of rough diamonds, taking over from traditional centres like Antwerp
and Israel. Besides the clear tax advantages, Dubai has another strong advantage
it allows profitable companies to quickly build their equity, something which the
business environment in Antwerp, wrought with legislation on various grounds,
does not permit. In 2005, Dubai recorded total rough diamond exports of USD
3.7 billion, a 46.3 per cent jump over the previous year (USD 2.6 billion; 2004).
In recent years, China too has created a position for itself in the diamond
polishing industry. The Shanghai Diamond Exchange is one of the newest
members of the World Federation of Diamond Bourses and diamond exports
from China in 2005 (January to November) are estimated to be over USD 1.2
billion.
US
4%
South
Africa
5%
305
300
275
Emergence of China and India as new focus markets for jewellery sales.
Establishment of India, China, and Turkey as the new manufacturing hubs for jewellery.
Dubai to be the new rough trading hub, while China and India will emerge as new centers for polished diamond trading.
China to increase its share of diamond cutting and polishing, and new CPD centres start getting established in
African countries.
200
Likelihood of occurrence
100
Low
0
2000
2001
2002
2003
2004
Mediu m
High
2005
Figure 98: Usage of gold for jewellery fabrication, tonnes (2000 - 2005)
Source: KPMG analysis
110
111
Scenario 5
Synthetic diamonds enter the
industry
Synthetic or lab-made diamonds erode a significant share of natural
diamonds going forward
Favorable economic
environment
Legacy
Historical export-orientation of
precious jewellery industry
HK and Chinese diaspora
network in key markets,
particularly in the U.S.
Identification of niches
Developing capabilities in niches
Gradual brand building through
sustained quality of produce
Extrapolation of brand to other
products
Prominence on the
international scene
Trading and dis tribution centre
Touris t destina tion
Other advantages
Access to cost-competitive
manufacturing bases in
mainland China
Supported by the overarching
ambition of current Chinese
administration to dominate
world trade
As with many of Hong Kong's manufacturing industries, a large percentage of jewellery manufacturing is moving to Mainland China.
Figure 100: Advantages of the economic relations between China and Hong Kong
Source: KPMG research
Hong Kong
Mainland China
40%
60%
112
21
Source:
Hong Kong Trade Development Council, KPMG interviews
While the outcome of the first threat would depend on the custodians of both
industries and the trade as well, it is the second that has shaken up the industry.
113
Threa t of
substitution
and
deception
impacting
consumer
confidence
SYNTHETIC
DIAMONDS
Dual threat to
the natural
diamond
industry
Threa t of
changing
consumer
preference
Figure 102: Synthetic diamonds double threat to the natural diamond industry
Source: KPMG analysis
400
Industry views
S
S
If companies produce what nature does not, it benefits the industry the
most. Leading diamond industry focused bank
The precise time when synthetics will enter would depend on the
producer marketing strategy. Market for real and cultured diamonds
are different. However, natural diamonds will always have a premium
price. Rough diamond broker
Source: Interviews
Number of purchases
350
2005
300
250
200
150
100
50
0
100$ or less
101 - 200$
201 - 300$
301 - 400$
401 - 500$
> 500$
Figure 103: Number of jewellery purchases under various price bands (US, 2005)
Source: Jewellery Consumers Opinion Council (JCOC)
In addition, increasing awareness about issues like conflict diamonds could lead
to the socially conscious consumer to select synthetic diamonds over mined
diamonds as in the case of cultured pearls.
Changing consumer attributes: An inclination towards diamond jewellery
bought for fashion/ adornment over that bought for its intrinsic value could
potentially open opportunities for synthetic stones. Competition from other
discretionary spend attractors like electronics could reduce the jeweller's
share of pocket, making jewellery demand more price sensitive, and therefore,
giving a boost to synthetics that offer quality at a lower price.
Gaining industry acceptance: Despite stiff opposition, synthetic stones are
gradually gaining acceptance as a legitimate part of the gems and jewellery
industry. Synthetic stones are now identified and accepted by the Gemological
Institute of America.
The synthetic stones processing industry has also started actively promoting
synthetic stones in jewellery. This trend could gather steam as this part of
the industry consolidates further and diamond-processing companies forward
integrate into jewellery fabrication.
diamonds.
114
115
Scenario 6
Plain gold jewellery loses
attraction
Projected share of the diamond pie for
synthetic diamonds at the wholesale
level, 2015
Synthetic
7%
Natural
93%
Figure 104: Projected sale of synthetic and natural
diamonds at wholesale
Source: KPMG analysis
Gold has been a dominant vehicle of investment in many markets for long,
investment in gold used to be in the form of bullion (coins and bars) as well as
jewellery. However, the future of the metal for use in jewellery is in question
under the combined effect of rising prices, increasing variety of financial
products, and growing consumer sophistication.
Key outcomes
The threat from synthetic diamonds is real and cannot be ignored. However, the intensity of impact on the industry
is dependent on the aggressiveness of synthetic diamond players and their ability to come up with a comprehensive
market-penetration strategy for individual markets. we expect that:
synthetic diamonds will gain acceptability both in the consumer market and the trade.
these diamonds will target studded jewellery buyers at lower price points.
synthetics will have sales of close to USD 2 billion at wholesale price by 2015, and will eat into approximately
USD 6 billion of natural diamond jewellery sales at the retail level.
Going forward, availability of gold based financial products, which mirror actual
investment in gold, could potentially eat into investment based purchases of gold
jewellery. In addition to this competition from other base metals like palladium
could also exert downward pressure.
For instance palladium could eat into the retail sales of white gold and platinum
jewellery, thus negatively affecting the amount of gold used in jewellery
fabrication.
Gold jewellery investment demand in question
In a number of markets, one of the primary reasons for plain gold jewellery
purchase is investment. Also, historically, gold has maintained its value an
instrument for investment, being a physical asset, second only to real estate.
However, with gold prices rising exponentially in the last couple of years,
consumers are no longer certain of the ability of prices to stay high and hence
the future investment based demand for gold jewellery is under threat.
Where is the investment demand for gold headed?
40%
30%
20%
10%
0%
-10%
Likelihood of occurrence
-20%
Low
Mediu m
High
70
19
72 974 976 978 980 982 984 986 988 990 92 994 996 98 00 02 04
1
1
1
1
1
19
1
1
1
1
1
1
19
19 20 20 20
116
117
Figure 105, shows the five-year returns on gold over the last 30 years. It is evident
that returns are again on the rise; however, the more the prices rise, the greater
the concern over the chances of super-normal returns on investment in gold.
That need has already been met by purchase of plain gold jewellery, however,
there is a new threat on the horizon these days gold-backed investment products.
The simplest of these products are gold bars and coins. Worldwide, typical making
charges for plain gold jewellery range between 10 and 50 per cent. A consumer
looking at purchasing gold purely for investment is likely to consider investing in
gold bars and coins which appreciate in line with market prices, if a strong
secondary market develops. In addtion to these, financial institutions have now
started offering gold labelled financial products. Sophisticated consumers are likely
to opt for gold-backed investment products that have none of the transaction
costs, and do not require the handling effort associated with physical gold.
Such gold-backed investment products are likely to achieve greater penetration in
developed markets, relatively lower in developing markets and lowest in underdeveloped economies. That this trend is catching up is evident from Figure 106,
which shows that an estimated additional 200 tonnes of gold was consumed as
backing for Exchange-Traded Funds (ETFs), in 2005.
Ability to track and keep in line with underlying asset price: Some analysts have argued that real gold has its
own unique supply-and-demand profile that is independent from that of the ETF supply-and-demand dynamics.
Additional costs: Gold ETFs are subject to the added costs of broker fees for buying as well as selling and the
possibility of additional taxes, which are not applicable in the acquisition of real gold.
8000
2907
USD million
7000
1745
5000
386
4000
3000
460
298
527
1721
1497
3,263
3824
2003
2004
22
GBS (LSE)
17%
GLD (JSE)
1%
GTU (TSE)
1%
GOLD (ASX)
3%
IAU (AMEX)
5%
GLD (NYSE)
66%
2078
118
Bar hoarding
CEF (TSX)
7%
1246
2000
1000
Medals/imitation coin
Official coin
6000
2005p
23 Source :
GFMS Gold Survey, 2006, World Gold Council, Gold Price (www.goldprice.org),
ICICI Direct (www.icicidirect.com)
119
Industry views
Although, gold fought back through white gold (rhodium-coated gold), it faced
stiff competition from the pure white metal platinum.
While most of the platinum consumption for jewellery was in China, platinum did
make its presence felt in large jewellery markets like the U.S. and Japan.
The emergence of palladium is likely to accelerate the move away from gold.
Palladium is cheaper than both platinum and gold (at current prices), it is white,
lighter than gold and platinum (38 per cent and 44 per cent, respectively) and is
malleable and ductile enough to be converted into jewellery. In addition, it has
solicited a good response in traditional platinum jewellery markets in recent
years.
Gold jewellery will suffer under the dual impact
100%
90%
5.0%
0.3 %
6 .2%
4.8%
2.1%
6 .4%
41.5%
41.2%
80%
70%
6 0%
4.8%
5.7%
6 .9%
3 7.7%
50%
Plain gold jewellery demand will suffer as a result of the penetration of gold-backed
investment products and other metals like palladium. While the former will draw
away consumers whose primary reason for gold jewellery purchase is investment,
palladium will pull the more fashion-conscious consumer.
40%
3 0%
20%
47.1%
45.5%
45.0%
10%
0%
2005
Diamond Jewellery
Plain Palladium
2010
Plain Gold
Others
There is no future for gold jewellery though diamonds will survive. Gold
will cross the USD 700 mark. Industry analyst
S
S
In emerging markets like India and China although total offtake of gold for
jewellery is seen to be increasing, per capita consumption is decreasing.
More buyers are entering the segment. In that case, demand will continue.
Industry analyst
The price factor, coupled with the threat posed by other luxury
goods/services, could spell trouble for the industry. Industry player
Key outcomes
While the jury is still out on whether ETFs will be able to corner most of the investment demand for gold, there is very
little uncertainty about the emergence of palladium as the white metal of choice. Both these trends will have a negative
impact on the demand for plain gold jewellery. It is expected that
Gold-backed investment products and palladium will cause plain gold jewellerys market share to shrink by
almost four percentage points by 2015.
Palladium jewellery is expected to increase its share of the market to 5.7 per cent over the next 10 years.
The absolute value of gold required for jewellery fabrication will still rise with the increase in overall global jewellery
demand and rising gold prices.
2015
Plain Platinum
120
If these trends are realised, we estimate plain gold jewellerys share of the
total jewellery sales to decrease from 41.5 per cent today to less than
38 per cent by 2015.
S
S
During the same period, we expect palladiums share to grow from a miniscule
0.3 per cent at present to 5.7 per cent by 2015.
Likelihood of occurrence
Low
Mediu m
High
121
Scenario 7
Jewellery retail organises in
emerging markets
Jewellery retailing becomes organised in key emerging markets like India
and China
India and China are two of the fastest-growing economies, most populous
countries and hence, the largest emerging markets for a number of consumer
goods.
45
The Indian retail industry, growing at a CAGR of 9.2 per cent was pegged at
USD 200 billion in 200524.
30
The Chinese retail industry, growing at a rate of 6.1 per cent, is expected to
reach USD 725 billion by 200724.
Retail growth spurred by growing incomes and changing consumer preferences, has
had an impact on the structure of retail in both countries. In recent years, the retail
landscape in both nations has been subject to large - scale transformation with the
emergence of malls, supermarkets and hypermarkets, e-commerce and other
modern formats of organised retail. Clearly, this is only the beginning. Organised
retail (forming 17 per cent and 2.5 per cent in China and India, respectively) is
expected to gather momentum in the years to come. Naturally, this would have
several implications for the jewellery retail industry in these countries.
Organised retail in India and China is comparatively low
2.5
India
20
P o land
ndo nes ia
30
Brazil
35
Thailand
40
Malays ia
55
Taiwan
75
0
20
40
60
80
% Organized Retail
Figure 109: Comparative penetration of Organised retail (modern format retailing as a percentage
of total retailing)
Source: Jumbo Retail Organised retail in India gets hyper, May 2005, HSBC Global Research,
122
24
% Growth
30.3
25
21.4
20
15
9.7
10
5
30.5
Top 5 Retailers
20.9
19.2
13.2
13.2
6.1
9.2
6.8
10
11.1
0.9
0
Japan
China
India
Thailand
Singapore
17
China
Largest Retailer
35
Retail Industry
39.4
40
Source:
KPMG- FICCI report: Indian retail on the fast track
25
Source:
KPMG - IBEF report on the gems and jewellery industry
123
% Market Share
Growing number of HNIs in India
90
80
Million Households
Market Maturity
60
40
20
96
300,000 traditional
retailers or Family
jewellers who are
dispersed and have a
single -town / cluster
focus
Figure 112: Level of organisation (percentage) in the Indian jewellery retail industry
Source: Insight, KPMG research
14.9
70
12.3
60
50
40
30
5.5
30.4
33.9
22.1
20
23
28.7
31
0
1996
Lo w Inc o m e
80
10
Fragmentation
Organised Retail
100
120
Maturity
Consolidation
The Indian jewellery market is currently very fragmented and unorganised with
organised players forming only 4 per cent of the overall market. Today, rapid
growth in the overall retail industry, growing output from jewellery manufacturing
bases, rapidly emerging alternative retail channels, and dynamic consumer
attributes are fast driving consolidation and formalisation in the industry. Various
analyst report indicate that organised retail in India is likely to grow at the rate of
25-30 per cent each year, touching about INR 1,00,000 billion by 2010.
2002
M a s s Afflue nts
2005
High Inc o m e Gro ups
Growth of e-retail : e-Retail is on the fast track in India which has a retail
penetration of 5.4 per cent. As per the Internet and Mobile Association of India
(IAMAI), most online jewellery purchasers fall in the 18-35 year age group. Not
surprisingly, 71 per cent of the purchases made online are made by males. Delhi
has the highest number of Internet jewellery purchasers as per IAMAI.
Brands making their way : Increasing disposable incomes and the rising number
of affluent/high net worth individuals (HNIs) in the country have opened up the
market for high-end premium brands. Indian consumers are becoming brand
conscious and are willing to pay significant premiums for purchasing branded
products. Large-scale marketing and branding campaigns in the diamond
jewellery space by large upstream diamond marketing companies and industry
associations have created brands (like Nakshatra,Gold Expression and
Sangini) that in many ways kick started the branding trend in the country.
Time
Figure 111: Jewellery markets: Stages of maturity
Source: KPMG research
124
125
126
24
Retail sales
(RMB trillion)
25
14
13
Annual growth
(per cent)
0
1997
1998
1999
2000
2001
2002
2003
2004
127
Scenario 8
Jewellery loses share to other
spend attractors
Entry and growth of multi-national retailers : In the last decade, multi-national
retail groups have made a beeline for Chinese markets following the economic
boom. Leading the fray are players like Carrefour SA (estimated to be the fifth
largest retailer in China and the largest foreign retailer in the country in the first
half of 2005 as per the Chinese Ministry of Commerce (MOFCOM)) and WalMart, the worlds largest retailer. Large players like these are now planning a
foray into the second and third-tier cities.
Key outcomes
Retail organisation will enhance the sales of jewellery in markets like India and China. World jewellery sales will be
positively impacted because of this change.
Experimentation with new retail formats, Increased emphasis on branding and marketing will ensure that the JAF for
key growth markets will experience an increase or will at least maintain its current level
With greater share of the world jewellery sales happening in China and India (traditionally low retail margin markets),
overall value addition at the jewellery retail stage will decline.
Likelihood of occurrence
Low
Mediu m
High
128
129
product in its store for more than a month, Jil Sanders 10,000 square feet store
in London, and Armani Groups network of over 300 stores across 40 countries
are all examples of the extensive marketing efforts required to counter the elastic
Brand
Parent
Value in USD
Mn .
Louis Vuitton
LVMH
19,479
Chanel
Chanel SA
6,499
Cartier
Compagnie
Richemont
Rolex
Montres
Rolex S.A.
4,925
Hermes
Hermes International
4,830
Gucci
Gucci Group
4,370
Financiere
SA
5,548
Hennessy
LVMH
4,191
LVMH
3,729
Fendi
LVMH
3,542
10
Armani
3,535
finance, and even basic market research. Its marketing and branding efforts are
still in a nascent stage and its value proposition has not changed over the years.
Interestingly, the impetus for marketing has come from players that are farthest
away from the consumers the mining company. Industry fragmentation at
various stages has also meant that the industrys influence on demand is limited.
Contrast this with the overall luxury goods industry, where players are spending
on shortening product cycles, innovative product designs, and market research.
Therefore, today, on the one hand, a consumer has a variety of options, or
objects of desire, to choose from (each one offering a unique proposition and
fulfilling a different need), and on the other hand, the validity of the basic value
proposition of jewellery is being questioned due to the rising prices of precious
metals.
Luxury goods as competition
The world market of luxury goods today is estimated to be between USD 800
billion to 1 trillion and is expected to touch USD 2 trillion by 2010. Of this, luxury
fashion brands account for close to USD 55 billion. Japan, the U.S. and China are
the three biggest markets for luxury brands today, with Japan alone accounting
for an estimated 41 per cent of world sales.
Several changes are taking place in the luxury goods market, all adding up to a
greater share of the income spend on luxury goods.
These trends mean that the basket of luxury goods within a consumers reach
has expanded in developed markets.
Developing markets enjoy now : India, Brazil, China, and Russia are considered
the emerging markets for luxury goods consumption. Purchases by residents of
China already account for 11 per cent of world sales (although only 2 per cent is
consumed within Chinas border, and rest by Chinese residents travelling
overseas). Chinese residents are expected to account for one fourth of the
global spend on luxury goods by 2011, and China is expected to become the
worlds largest luxury goods market by 2015.
130
26
Source:
The Economist Every cloud has a satin lining, March 21, 2002
131
400
295
4%
09
20
20
0
6
20
07
20
0
20
05
03
20
04
20
20
01
20
02
97
19
98
7%
108
200
19
176
4%
914
1042
520
600
00
2%
847
980
674
20
2% 1%1%
Million Uni
3%
779
800
19
9
Another emerging market, India, has an estimated one million consumers in the
luxury goods segment, a figure that is expected to treble by 2010. The upscale
market for clothing, watches, and accessories is growing at 25 to 30 per cent
year-on-year. There is a large market for plasma televisions, home theatre systems,
etc., that is growing at 30 to 40 per cent per annum.
Figure 116: Share of income spend on various products and services for emerging markets
Source: Consumer Brands and Retail Report ,May 2005, HSBC Global Research
Fine art has emerged as a new money attractor in a number of markets, both as
a means of displaying good taste and fashion, and as an instrument of
investment. The global turnover at fine art auctions was estimated in 2005 to be
around USD 4.15 billion, which was an increase of more than 15 per cent over
the previous year.
Art has emerged as a popular investment option across markets
4%
9%
2%
28%
4%
UK
4%
US
F ra nc e
Ita ly
7%
Ge rm a ny
S witze rla nd
HK
Othe rs
42%
Figure 118: Share of global fine art auction sales, 2005
Note: Above pie is based on the annual turnover at fine arts auctions in 2005 in various locations
Source: Tendances du march de l'art 2005 - Art Market Trends, Art Price
132
133
While UK and the U.S. still accounted for more than 60 per cent of total auction
value in 2005, Hong Kong, France, Italy, and Germany also exhibited a strong
performance.
The developing markets, though small, have also exhibited a healthy appetite for
fine art in the recent years. For example, in the Indian fine art market, it is
estimated that prices, on individual art pieces, have risen 20 times since 2000.
With Indian fine art expected to double its 2005 sales of USD 200 million in a
year, art is seriously being considered an investment option by the nouveau
riche.
Travel : There is a growing trend among the affluent towards luxury travel travel
consisting of exotic locations and unique experiences that average consumers cannot
afford. The U.S., UK, and Europe are leading the trend with the highest number of
affluent households opting for travel. In India, growth in the domestic travel industry,
Threat to jewellery
With so many goods and services clamouring for the consumers share of the
wallet, the threat to jewellery is very much evident. With these other sectors
being more organised than the gems and jewellery sector, the damage to overall
sales of jewellery could be significant and irreparable. As discussed earlier, the
Jewellery Affinity Factor (JAF) would change based on these changes in the
business environment.
Figure 119 shows the sensitivity of markets to JAF by estimating the negative
impact on future market sizes for a 10 per cent drop in JAF value for each
market. (Current growth rate, and impact on expected market size form the two
axis, while the size of the circle denotes the current size of each market).
Identifying sensitive markets
coupled with rising incomes, has resulted in a travel and tourism boom. Increasingly,
16%
families (mainly in the middle class and above) are looking at spending a higher
India 11%
Middle East
US
6%
UK
Japan
Italy
1%
Low growth
low impact -4%
134
Figure 119: Negative impact on jewellery sales for 10 per cent drop in JAF
Source : KPMG analysis
The U.S., the worlds biggest jewellery market is extremely sensitive to any drop in
JAF. Any drop in JAF for the U.S. market will adversely affect the world market
naturally. For instance, every 10 per cent drop in JAF for the U.S. shall result in
USD 7 billion worth of potential jewellery market in 2015 getting eroded.
China, India, Turkey, and the Middle East are high growth markets of significant
sizes and a 10 per cent drop in JAF could risk upto USD 4 billion worth of
potential jewellery market in each of these countries. Going forward, these are
the key growth markets for global jewellery sales, and a growth in JAF for any of
these markets has the potential to swing the fortunes of global gems and jewellery
industry.
135
Italy, UK, and Japan are slow growth markets, and a 10 degree drop in JAF in
these markets has a similar impact to that in India or Turkey, but in these markets
JAF is expected to decline because of more fundamental reasons, and hence will
be more difficult to arrest.
Key outcomes
Jewellery is expected to face significant competition, for a share of consumer spend, from different quarters over the next
decade. Even with extensive marketing and branding efforts, we expect JAF in most markets to face a downward
pressure. Given the advent of technology and fast-changing consumer buying habits, we expect significant downward
pressure on jewellery sales in the U.S., India, and China.
Global jewellery sales will be negatively impacted by more than USD 25 billion because of discretionary spend
attractors.
Declining in JAF in the U.S., India, and China will contribute the maximum to this drop.
136
Mediu m
Our analysis of various scenarios shows that the gems and jewellery industry is
likely to go through tumultuous times in the next few years. Each of the scenarios
have significant impact in different segments of the value chain, affecting different
stakeholders across the value chain in multiple ways. Figure 120, summarises the
impact of the eight scenarios analysed earlier and categorises them as per social,
economic, and political impact on the global gems and jewellery value chains.
The economic impact of the scenarios analysed and how various stakeholders
tackle them, will determine the growth prospects of the industry. It is evident
from the analysis presented so far that the times of high profit margins, and
disregard for the demand and supply situation are not likely to return.
The biggest impact of these scenarios on various countries from a social point of
view would be on employment creation and handling loss of employment. While the
countries where employment would be created will have to spend time and money
in providing the right skills to their workforce, the governments of countries where
employment is likely to reduce will have to spend on re-training their workforce.
Likelihood of occurrence
Low
High
The political scene is also likely to heat up in the future, as the desired of national
governments to drive the growth of key industries would drive their approach to
bilateral and multilateral trade negotiations.
137
These trends are interdependent and combine to give various possible scenarios
SOURCING
FABRICATION
RETAIL
Economic
Polished inventory burden will
decrease
Rough prices will fall
Rough and precious metal
prices will be affected
SCENARIOS
Dominance of centralised
distribution decreases
Social
Political
Relationships with
governments will weaken
The role for pla yers like India and China will increase
The following section takes a realistic view of what the industry end state will be, under the premise that all these
scenarios will act simultaneously
1
Scenario
building
Scenario 1
Scenario 2
Scenario 3
Scenario 4
Scenario 5
Scenario 6
Combined
impact of high
impact high
likelihood
scenarios
to derive industry
projec tions
Impact on
various
segments of
the industry
Realistic
prediction of
industry end
state 2010
and 2015
Scenario 7
Scenario 8
Limitations
The output of this effort is obviously limited by the fact that this is a data-scarce
industry where quantitative information is limited and, if available, could be
conflicting at times. Wherever data was not available, assumptions were made
based on our industry knowledge and stakeholder interviews. In case of
conflicting sets of information, cross-validation and our experience in working
with industry was used to determine the most trust-worthy source. The analysis
that follows is subject to these limitations.
138
139
Diamond rough prices continue their rise over the next couple of years.
Value of diamond content in diamond jewellery for specific market is not likely
to change substantially from its present state.
6. Rough diamond selling will become more fragmented, making the industry
more demand sensitive.
All CPD centres are able to achieve similar savings in diamond polishing cost
per carat post-consolidation.
7. New strategic positions will emerge and as a result the industry will see the
emergence of six-seven large conglomerates with presence across the
jewellery value chain.
These seven conclusions will change the face of the industry as we know it
today. Each of these conclusions have been explained in detail in the remaining
part of this section along with the quantitative implications on various segments
of the value chain.
Fabrication value addition does not change for a country over the next
10 years.
Global jewellery sales will grow at a CAGR of 4.6 per cent to USD 185
billion in 2010 and USD 230 billion in 2015
Growth in global jewellery sales will be sluggish at a CAGR of 4.6 per cent over
the next 10 years to touch USD 230 billion.
CAGR
(2005-2015)
On the basis of our understanding of the industry and its dynamics and using financial
modelling techniques, we have built a detailed financial model, to predict what
we believe is a realistic image of the industry going forward. We have termed
this the realistic case and following are the key conclusions:
USD billion
250
230
200
10.9
12.8
17.1
150
185
146
7.0
0.4
9.0
93.8
4.4%
95.0
3.3%
60.7
68.9
42%
6.7%
78.3
100
50
1. Jewellery sales growth will be sluggish at a CAGR of 4.6 per cent over the
next 10 years
8.8
4.0
11.9
4.6%
4.6%
81.6
0
2005
2010
2015
Dia m o nd J P la in Go ld P la in P la tinum P la in P a lla dium Othe rs
Diamond jewellery will be the slowest growing segment at a CAGR of 3.3 per
cent and will attain a size of USD 95 billion by 2015. Gold jewellery will ride on
demand from traditional markets like India, Turkey, and China to touch USD 94
billion by 2015. Over the next 10 years, palladium is also expected to establish
itself as an alternative base metal for jewellery fabrication and plain palladium
jewellery sales will reach USD 12.8 billion across the world.
Accelerating economic growth in Asian countries like China and India will
enhance the market potential for jewellery, and the two countries together will
emerge as an equivalent to the U.S. market by 2015. The Middle East will be
another large market with close to 9 per cent of global jewellery sales in 2015.
2. Jewellery fabrication will move to low-cost locations like India and China.
3. Value addition in intermediate stages of jewellery pipeline will increase
significantly.
140
141
Demand for polished diamonds increases at a faster rate than that for diamond jewellery
C hina
11.1%
R OW
28.4%
India
9.9%
India
12.3%
Ita ly
2.7%
Turke y
3.2%
UK
2.6%
90
J a pa n
3.7%
US
25.6%
Turke y
3.2%
UK
2.1%
70
60
58
4.3
9.3%
64.6
5.2%
26.5
4.2%
2.5
1.8
50
40
5.1%
76
80
J a pa n
4.9%
M iddle Ea s t
9.1%
95
100
Ita ly
3.7%
US
29.3%
(2005-2015)
USD billion
R OW
26.2%
CAGR
C hina
13.4%
52.0
38.8
30
M iddle Ea s t
8.7%
20
10
17.6
21.8
Figure 123: Share of key markets in global jewellery sales, by value, 2010
Source: KPMG analysis
Figure 124: Share of key markets in global jewellery sales, by value, 2015
Source: KPMG analysis
Jewellery fabrication will feel the pressure of sluggish demand and will
move to new centres
Slow growth in jewellery sales will affect the fabrication segment, with global
fabrication output growing at a CAGR of 5.1 per cent to reach USD 95 billion by
2015.
Demand for polished diamonds will grow at a CAGR of 4.2 per cent, which will
be higher than the growth rate of diamond jewellery primarily due to increased
sales in markets with high diamond content value in studded jewellery (like India
and China).
A strong demand for plain gold jewellery will mean that gold demand for
jewellery fabrication will continue to grow at a respectable rate and will reach
USD 65 billion by 2015. Meanwhile, platinum demand for jewellery will see a
strong rise as platinum penetrates new markets and maintains its hold on its
biggest market, China.
China and India will be the new centres of studded jewellery fabrication, as the
U.S. share declines. Turkey will take over a significant share of the gold jewellery
fabrication market from Italy.
142
2005
2010
Dia m o nd C o nte nt Go ld
2015
P la tinum
Figure 125: Estimate of diamond, gold, and platinum used in jewellery fabrication, in
USD billion, 2006-2015 27
Source: KPMG analysis
27
143
50
13.2
0.5
1.6
CPD output
6.5
(0.8)
0.8
21.8
100
USD billion
150
200
250
300
Decreasing margins and increasing debt levels will force the diamond industry to
consolidate. Smaller players in CPD will be acquired or will exit the business as
large players expand their presence within the CPD segment or players from
jewellery fabrication integrate backwards. Shrinking margins as well as the need
to maximise value-add will push some diamond-processing companies to forward
integrate into diamond jewellery fabrication.
With fabrication moving to low-cost locations, and retailing picking up in emerging
markets like India and China, an increasing number of jewellery fabricators in
these markets will forward integrate into retailing.
54.6
Jewellery
fabrication/wholesale
As a result, the industry will witness the emergence of a number of large integrated gems
and jewellery players with presence in diamond processing through jewellery retail.
26.7
Jewellery retail
81.9
185
Figure 126: Value of diamond rough, diamond jewellery retail sale value of diamonds and value add
expected at intermediate steps, in USD billion for 2010
Source: KPMG analysis
Cumulative
10
50
15.5
0.6
1.6
100
USD billion
150
200
250
300
3.1
3.5
2.4
2
0.7
CPD output
7.7
0.4
0.7
26.5
Jewellery
fabrication/wholesale
0.7
0.3
-0.1
-0.4
-0.4
-2
2005
2006 2007
2008
2009
2010
2011 2012
2013 2014
2015
Figure 128: Annual and cumulative polished inventory in the pipeline, USD billion.
Source: KPMG analysis
69.2
34.3
Jewellery retail
100
230
Figure 127: Value of diamond rough, diamond jewellery retail sale value of diamonds and value add
expected at intermediate steps, in USD billion for 2015
Source: KPMG analysis
144
1.0
0.0
For the next couple of years, CPD centres will accumulate inventory at a
rapid pace till it reaches unsustainable levels in 2007.
Polished inventory is expected to cross USD 10 billion in 2007 from its current
levels of USD 3.65 billion.
Pressure to build polished inventory and consolidation post 2008 will lower
rough prices.
At best, in certain years, CPD centres will be able to clear small amounts
of accumulated inventory.
Amongst all value chain stages the benefit of falling rough prices will have
the maximum positive impact on CPD players As a result value addition by
CPD centres will rise to USD 6.5 billion in 2010 and USD 7.6 billion in 2015.
145
Other
38.3%
Namibia
0.3%
India
61.7%
Russia
2.5%
Botswana
4.8%
South Africa
3.0%
Belgium
0.1%
Angola
1.3%
Belgium
1.6%
Botswana
2.8%
China
15.8%
Israel
9.5%
India
52.9%
Russia
7.1%
Namibia
1.5%
Israel
4.7%
Angola
South Africa
US 3.2%
5.5%
1.4%
Belgium
0.7%
Botswana
5.3%
China
21.3%
India
49.3%
US
0.1%
146
147
140
Any price decrease at the CPD level is likely to be passed on to mining companies,
thus impacting the total value of rough output. Rough diamond output, in value
terms, will, therefore, experience an absolute fall in the 2008-09 period, even as
the volume of rough produced remains stable.
120
100
80
60
40
20
2010
NonTrade
4%
NonTrade
5%
Direct selling
14%
Trade
34%
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
07
20
06
20
05
20
20
03
20
04
02
20
A number of distinct business models will emerge along the value chain by 2015
Direct selling
12%
Centralised
distribution 39%
01
2015
Trade
45%
Centralised
distribution 47%
20
20
20
00
Mid-sized
Jewellery
Fabricators
18
USD Bn
14
12
0.8
1.6
10
8
6
4
2
0
2.2
0.7
0.8
1.4
3.2
1.7
1.4
1.5
0.7
0.7
1.0
3.5
2.7
R OW
1.6
1.0
0.9
0.7
0.7
S o uth Afric a
4.6
C a na da
0.3
0.5
1.5
0.3
2.4
3.0
2005
2010
2015
Niche
Jewellery
Fabricators
13.2
12.7
Jewellery
Brands
e-tailers
MNC Jewellery
Chains
15.5
16
Multi-product
Retailers
(Global and
National)
R us s ia
Relative
scale of
operation
Niche CPD
players
Small
Jewellery
Fabricators
Na m ibia
National
Jewellery
Retailers
Regional Jewellery
Chains
C o ngo
B o ts wa na
Aus tra lia
Ango la
Junior Mining
Companies
Mining
Upstream
Pure Play
Rough
Traders
Sourcing
Small and
Mid-sized
CPD Players
Diamond
Processing
Value Chain
Jewellery
Fabrication
Jewellery
Retail
Downstream
Figure 134: Structure of the gems and jewelry industry (various business models and their illustrative market
share) in 2006
Source: KPMG analysis
148
149
Our analysis indicates that these business models are defensible strategic
positions for players in each segment of the jewellery value chain. Existing
players will gravitate towards one of the positions depending on capabilities
that they may develop over time.
Nature and structure of the industry by 2015
Relative
scale of
operation
Niche CPD
players
Niche
Jewellery
Fabricators
Junior Mining
Companies
Regional Jewellery
Chains
Upstream
MNC Jewellery
Chains
National Jewellery
Retailers
Pure Play
Rough
Traders
Mining
e-tailers
Sourcing
Diamond
Processing
Jewellery
Fabrication
Value Chain
Jewellery
Retail
Downstream
Fair amount of activity (restructuring, relocation, consolidation, etc.) can be expected in the next few years.
The impact on stakeholders will be a mixed bag. The negatives (shake-out, flattening of employment growth) will be
balanced by the positive consequences (greater demand sensitivity, retail organisation, and more stable strategic
postures).
While the negative outcomes will force the industry to wake up and change, this change will be for the better as
industry and player fundamentals will become stronger.
150
151
A time for
collective action
Secondly, the industry (large players and industry bodies) needs to build internal
capabilities to manage and sustain this growth. We believe that in this process of
taming and conquering these waves of change, the industry will sift out leaders
from the laggards.
1
Promote jewellery
as a category
Enhance image of
the industry
5
Enhance
talent supply
Strategic
Capabilities
rprise c apab
ent e
ilit i
ild
es
u
B
Operational
Capabilities
Consumer
Demand
Pull
end
rprise c a
p
a
b
iliti
ente
es
ild
Bu
Financial
Capabilities
Manage a portfolio
of markets
Supporting
Capabilities
Figure 136: KPMGs two-fold approach for realising projected industry potential
Figure 136 shows the linkage between the two objectives. Proactive marketing
and promotion efforts directed at specific markets could lead to demand growth
and the realisation of the now-dormant potential. Individual players need to build
internal capabilities to harness this potential, maximise individual returns, and
manage the overall growth process as effectively as possible. .
154
Industry
Supply
Push
end
Reduce
financing cost
3
Grow the
jewellery
market
Grow the
jewellery
market
At the consumer end, players individually, and collectively, need to establish pull
for jewellery demand globally, by gaining consumer confidence through quality
assurance, increasing transparency, and product consistency. Such pull is critical
in developed markets, where jewellery needs to come up with new value
propositions through marketing innovation and by continuously developing
products that consumers demand.
It is equally important that the industry sees itself as a part of the global luxury
goods industry. Consequently, it needs to promote jewellery as a whole vis-vis selective metals or stones. The industry also needs to influence global
policies on international trade, ensuring a level playing field with competing
luxury goods. Special efforts need to be put in, to capture and boost demand in
emerging markets like India and China. The industry also needs to undertake
ongoing research to identify new markets for jewellery. The efforts in these
emerging markets need to be partially funded through lower financing costs for
players.
155
In addition to these, the industry also needs to initiate efforts internally, working
towards more professional work practices, building consumer confidence by
increasing transparency, attract managerial talent similar to other luxury goods and
increase competitiveness by increasing access to competitive finance for growth.
Each of these initiatives have been elaborated in the section that follows
1. Promote jewellery as a category instead of distinct metals and stones
So far, various constituents of the industry (diamonds, gold, platinum, coloured
gemstones, and silver) have been operating as separate sub-industries
developing markets and promoting their products through individual efforts and in
many ways, competing with one another for a bigger slice of a limited pie. The
industry at this point needs to recognise two things:
WJF could also take on the role of the industry custodian where quality and
certification is concerned by institutionalising a uniform global gem certification
and jewellery hallmarking standard. It could also propose legislation/voluntary
codes of conduct for ensuring adherence to the same.
The body could also provide industry players with an enabling environment for
building internal capabilities by:
The WJF could also take on the role of an industry representative or spokesperson
at various forums and drive large-scale planned change.
The real threat to the jewellery industry is not from within the various subsegments of the jewellery industry but from other luxury products and
services trying to grab a bigger share of the consumers wallet. With this in
mind, clearly, various sub-segments of the industry need to come together to
promote jewellery.
Although consumers seek and purchase distinct jewellery products, the
image or the value proposition of jewellery in the minds of the consumer is
unified. In other words, whether a consumer is buying a diamond bracelet or
a gold chain in his mind he is still buying some piece of jewellery.
Constituents: Given the global nature envisaged, The WJF must consist of large
and small players of the industry, across segments, products, and markets
coming together at a common forum with a single mission of developing the
jewellery market. To that extent, it is expected that WJF will consist of two types
of members:
156
Activities: The WJF should initiate marketing and promotion campaigns for
jewellery and jewellery products at a global level. It could achieve this by acting
as a nodal body for guiding the efforts of individual sub-segment and
undertaking initiatives independently.
157
While there have been efforts in this direction by industry bodies involved in
promoting diamond, gold and platinum jewellery, there clearly exists huge
potential to initiate efforts in some of the following areas:
Offerings at various price points also present the opportunity to tap new
consumer segments. As indicated by the JCOC, more jewellery purchases by
American consumers fall below the USD 100 per piece mark. Changes in pricing
strategy and introduction of smaller jewellery pieces could target the low-end
consumer segment, which could significantly increase volumes. Branding in this
case could help in the creation of a clear-cut dichotomy between high-end, highvalue jewellery and low-end jewellery, thereby maintaining jewellerys clear value
proposition of being precious as well. Jewellery fabricators and retailers could
foray into parallel areas such as mens jewellery, high-end abstract fashion
jewellery these could also open avenues for boosting overall jewellery sales.
3. Manage the portfolio of markets
So far, most jewellery players have reserved their attention primarily for the worlds
largest market the U.S. The need of the hour is to recognise other markets and
build a portfolio that, while riding on the back of developed markets, penetrates
deeper into emerging markets and invests constantly in identifying new markets
with a potential for growth.
Re-establish value proposition in developed markets: Two of the worlds
largest consumer markets for jewellery the U.S. and Japan have had a
strong historical intrinsic affinity for jewellery. However, due to competition
from other luxury goods and services and the inability of jewellery to compete
with these, the U.S. market is facing slowdown and the Japanese market is
actually on decline.
Markets with declining or stunted growth but having a latent demand for jewellery
products need to be targetted aggressively by critically re-examining jewellerys
value proposition, marketing and brand development efforts, product and service
innovation, and reaching out to untapped consumer segments. Luxury industry
trends would soon necessitate the development of new jewellery products, using
newer, more contemporary designs and materials. Large players would need to
lead the industry in these initiatives.
158
Drive demand within the existing consumer base: Players need to focus
efforts to increase per capita consumption of jewellery. This could be done
through strategic pricing, design and product innovation, value-added services,
marketing, and branding. Gathering sales data, subsequent customer
segmentation, in-depth market research, and sophisticated product development
programmes are also likely to boost consumer spend on jewellery.
159
Low growth
Limited
earnings for
reinvestment
Lack of
transparency
Few trusted
people
Family management
of business
160
While the industry has always had access to artisans through generations, an
infusion of fresh talent will go a long way in catapulting the industry into a
different league. The industry not only needs to train its workforce better, it also
needs access to the wider talent pool, that currently does not view the industry
in good light. The industry, therefore, needs to:
Attract talent from the luxury goods industry: Managers, marketers, and
sales people in the luxury goods have perfected the art of selling a product/
service much above its intrinsic value. At the same time, designers in the luxury
goods industry know the pulse of the market as they constantly come up with
new designs to retain consumer interest. The jewellery industry needs to look at
sourcing professional and managerial talent from these industries as it moves
into the future.
Establish learning centres: The industry, in collaboration with governments,
needs to establish institutions that impart education/training relevant to the
sector. The industrys aim should be to make a career in the gems and jewellery
industry an attractive option for jobseekers.
6. Reduce financing costs
Given the industrys image, the extent to which industry players have been able
to access finance in the past is surprising. However, this financing has not been
available without a huge premium, and unless the industry changes its mode of
operation, there is no guarantee that this premium will not rise further. To
aggressively push its expansion plans, the industry needs access to finance and
that too at cheaper rates. This will only be possible as information about the
industry is shared, business models are scrutinised, more companies are made
public, adequate default mechanisms are established, and financiers develop a
certain degree of comfort with the industry. Once this happens, there is no
reason why industry players should not be able to access all forms of capital
(equity, bonds, long-term loans, working capital loans, gold loans, private equity,
etc.) at an adequate risk premium.
7. Professionalise and transform family-owned businesses
In keeping with the changing times, it is imperative that the players in the gems
and jewellery industry move towards a greater degree of professionalism, by
establishing and internalising appropriate organisation structure, policies, and
processes. By doing so, the industry will generate and retain intellectual capital
and attract the best talent from other industries.
Players need to separate ownership from management by attracting, recruiting
and empowering professional managers. They also need to clearly define roles
and responsibilities with objective performance measures.
161
Strategic
Financial
Raising capital
Managing financial and
operational risk
Managing operational
costs
Marketing capabilities
Technology and
product innovation
Managing supply chain
Adopting best practices
Operational
Defining robust
organisation models
Sourcing and
managing talent
Managing processes
Supporting
162
163
These large players would have to work like large multinational organisations and
hence attention to designing the organisation, with clear and empowered roles
and oversight mechanisms for ensuring corporate governance would be
essential. Such organisations would have to source talent from other industries
to lead their various business functions and also institutionalise recruitment from
engineering/management/design institutions at entry levels.
Niche CPD players: These players would focus on polishing high value stones or
developing new cuts and marketing them. Such players will sustain themselves on
the basis of attracting and retaining highly skilled polishers and gemologists from
across the world. Being known for polishing skill is important, since that will then
attract business. Players developing new cuts will have to invest in marketing and
branding and hence need deep pockets or sponsors for funding.
High volume polishers: For such players, strategic sourcing (developing supply
linkages and alliances with large mines, governments of producer countries,
trading companies) to ensure a steady supply of rough would be essential for
survival. Scale would allow them to negotiate better terms from the open market
trade, and the juniors. Simultaneously, these players would need to track market
trends downstream to understand and track demand for diamonds/ coloured
gemstones in order to ensure a steady off-take of production.
While so far growth has been organic for most players, given the overcapacity
and the impending competition in this segment, many small players would prefer
to exit the industry. Such acquisition opportunities will enable players to focus on
building scale to ramp up capacity, economically. With guaranteed access to
rough, the additional capacities can become immediately productive.
Managing operations and ensuring high levels of operational efficiency across the
entire supply chain would allow such players to squeeze margins in a competitive
industry.
Companies in this part of the value chain would also need to carefully manage
their rough and polished inventories, and associated financial risks through
appropriate hedging. They need to build a process driven organisation which
allows high levels of efficiency.
Pure play rough traders: These would clearly need to build finer sourcing
capabilities and skills given trends like local beneficiation, large polishers
forming direct links with rough sources etc. Further to this, these players would
need to enhance their marketing capabilities building on parameters such as
quality, origin of stones, consistent assortments etc. to sustain operations in a
highly competitive environment.
Trading organisations need to also institutionalise skill development so that young
talent can be trained to become high caliber traders. Knowledge of the stones,
price movements and risk management are critical. Institutionalised recruitment
from high quality institutions that offer education in commodity trading and
structured training are essential capabilities.
Niche jewellery fabricators: Players wanting to operate in this niche will focus
on a particular type/segment of jewellery e.g. high end designer jewellery, high
quality, high value jewellery, thus dominating the high-end jewellery segment and
seizing a premium for design and superior quality.
Key capabilities required to sustain this strategic position would be strategic
planning, design and marketing. A formal strategic planning process would
help reduce the risk associated with the low volume-high value business
model adopted by these players. Investment in design both people and
technology is critical, so is investment in developing and promoting a brand,
developing and running marketing campaigns and programmes and forming
alliances with retailers. Access to consumer insights and trends would be a
significant competitive advantage especially in the more developed markets
with a preference for higher design sophistication.
Mass jewellery fabricators: These players would focus on producing high quality,
jewellery at the lowest cost possible (low price-point jewellery), often within given
price bands (which are driven by retail price points such as USD 99, USD 199 etc.).
Such players would need to develop factories which meet with international
standards regarding safety, hygiene, work processes, automation and
employee welfare, as these would be hygiene factors for the large retailers
to consider sourcing from these players. While polished diamonds would be
easily available, getting consistent size/quality/color in large volumes will
require them to have alliances with the large polishers. Using standardized
processes designed to six sigma standards and cellular manufacturing
methods will be necessary in order to get zero defect rates, minimum
wastage and high productivity levels.
High standards of security and systemic controls to prevent switching of stones,
theft, fraud are essential.
Presence in multiple markets (for rough) will allow such players to acquire scale
and hedge one source against another and guard against risks.
164
165
166
Such retailers will need to continuously identify and develop new large volume
mass market jewellery manufacturers in low cost locations with decent design
capabilities to feed the growing demand from the stores.
Jewellery brands: Jewellery Brands would grow by creating an identity for
themselves in an increasingly competitive market. Jewellery manufacturers
wanting to integrate forward would also adopt this position.
Critical success factors required for sustaining this position will be design , marketing
and branding, retail relationship management and identifying new markets for
growth.
Jewellery e-tailer: The e-channel will emerge as a large sales channel and many
more players will get to enter this space.
As with all e-tailers, superior supply chain management capabilities, scale in chosen
segments, marketing and reach are critical for success. With increasing volumes
and competition amongst the e-tailers, focus on select segments will become
important to acquire scale.
Independents: Historically, mom-and-pop stores have dominated the retail part
of the value chain in every market. As markets mature, large retail chains emerge
and acquire market share from these independents.
An independent succeeds by focussing on a small set of loyal customers in a
nearby geographical area. Growth is typically slow and many get acquired or get
out of business as organised retail penetrates.
The independents that want to survive the onslaught of organised retail and
manage to retain a niche for themselves will have strengthen their design,
inventory management and customer relationship management capabilities.
Backward integrated retailers: Some large retailers will want to integrate
backwards to capture additional margins since their size gives them the
advantage of doing so.
Such players will have to develop capabilities for managing modern manufacturing,
which is very different from managing a retail chain. Balancing the contradictory
needs of jewellery manufacturing which needs large orders and fewer varieties and
retailing which needs larger varieties and smaller order runs is critical for survival.
Players would also do well to develop small manufacturing units which specialise in
a type of product rather than very large establishments which are good for
producing volumes.
167
As discussed earlier, and shown in Figure 135, sustainable business models of the
future will change the shape of the industry as we know it today. Players across
segment must identify their strategic position in the market, and compete based on
the inherent advantages that come with occupying that particular position.
All the different business models discussed earlier can be summarised under the
following broad strategic positions:
Clearly the basis for competition would vary, depending on the position chosen.
Our analysis indicates that players in the gems and jewellery space will largely
compete along four areas. These include:
Big brother Players whose presence spreads across more than two
segments of the value chain and who function as large multinational
corporations. For such players their scale itself is a huge advantage over
others.
Possession of skill
Specialist Players that rely on their skill in a particular segment of the value
chain and have developed capabilities that cannot be matched by a large player.
Straddler Players who are spread across two segments of the jewellery
value chain, either to ensure strategic sourcing capabilities or capture greater
value addition in the adjoining segment of the value chain.
Strategic
position
Big brother
Basis of
competitive
advantage
Spread across
value chain
Advantages enjoyed
z
Portfolio of businesses
Demand visibility
Access to talent
168
Volume player
Depth of
operation a
single segment
Mitigate risks associated with being present in only one segment of the
value chain (similar to an integrated oil company that is able to manage
risks better in case of volatility in crude prices).
Gain size, thereby leverage a huge asset base to mobilise large amounts of
funds which could in turn facilitate expansion.
Economies of scale
Specialist
Possession
of Skill
Straddler
Presence
in adjacent
segments
Greater margins
Strong relationships
Relevant business
models
Integrated industry
majors,
169
Estimates have indicated that emerging markets such as India and China also
have the potential to contribute significantly to the aspirational pie. Clearly,
emerging consumer markets have much more to offer if the players ride on the
back of the retail revolution that is likely to take place in these markets. Together,
India and China, could contribute as much as USD 80 billion to global jewellery
sales by 2015. As per our analysis, other markets that bear potential for higher
growth are Middle East and Turkey.
As per KPMG estimates, the global gems and jewellery industry has the potential
to grow to USD 280 billion by 2015, an increase of USD 50 billion (21.7 per cent)
over what the realistic case promises. To achieve this size, the industry will have
to grow at a CAGR of 6.7 per cent over the next 10 years. These projections
have been made bearing a number of observations in mind:
300
Aspirational case
USD billion
Realistic case
50
billion
200
100
Key markets and industry segments though will help realise aspirations
Turkey
9%
Others
5%
Plain palladium
Others
jewellery
5%
Plain platinum 5%
US
35%
Middle East
9%
jewellery
1%
USD
50
.
billion
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
India
17%
Plain gold
jewellery
43%
Figure 141: Industry potential over and above realistic case projections
Source: KPMG analysis
Key markets
Much of the latent demand lies with one of the largest, most developed markets
the U.S. The U.S. jewellery market has the potential to reach USD 77 billion by
2015, growing at a much higher rate than what has been projected in the realistic
case. Presently, the worlds largest consumer market for jewellery has faced a
slowdown in overall demand growth. Competition from other discretionary spend
products and services such as consumer electronics, luxury travel, and lifestyle
goods have begun to slowly erode jewellerys share of wallet.
170
USD 50
billion
Diamond
jewellery
46%
China
25%
Figure 142: Key contributors to the estimated
demand potential of the industry
Source: KPMG analysis
171
India and China, together will realize total sales of USD 80 billion by 2015 and will
therefore form a market that will be bigger than the US market.The US will still
dominate as the single largest jewellery market in the world with China and India
as second and third largest, respectively.
2010:
0
Turkey will emerge as the fourth largest market with sales of USD 11.5 billion in
2015, while all the countries of Middle East together are expected to sell USD
24.5 billion worth of jewellery. UK will see marginal increase in its jewellery
market and will reach sales of USD 5 billion in 2010 and USD 6.7 billion in 2015.
Italy and Japan will be the only two markets that will see an absolute decline in
jewellery sales, because of jewellery losing attraction in these markets. The country's
market will fall from the present sales of USD 7.3 billion to USD 6.8
billion in 2010 and USD 6.2 billion in 2015. However, the fall in the Japanese market
is expected to be more significant as it shrinks from its current level of USD 12 billion
to USD 8.4 billion by 2015, reducing at a rate of -3 percent over the next 10 years.
50
USD billion
150
100
200
250
300
250
300
15.3
0.5
1.9
6.0
(1.2)
0.7
23.2
59
Jewellery
fabrication/wholesale
28.8
Jewellery retail
89
200
2005
2010
2015
45
2005
2005
58
2010
U.S.
5
2010
2005
2010
12
13
2015
2005
Turkey
2015
U.K.
12
2005
2010
2015
2015
7
2010
Japan
2015
2010
13
18
2005
2010
2015
RoW
24
12
2015
Middle east
2005
21
2010
50
18
0.7
1.8
CPD output
66
2005
2015
China
Italy
49
2010
77
2005
35
27
2015:
43
USD billion
150
200
7.0
5.2
0.9
33.6
Jewellery
fabrication/wholesale
100
87.5
41.9
Jewellery retail
117
280
37
Figure 145: Jewellery pipeline and value addition at various stages, in 2010 and 2015 (USD billion)
Source: KPMG analysis
2015
India
Figure 144: Outlook for retail jewellery sales in key markets, 2010-15, USD billion
Source: KPMG analysis
172
173
Conclusion
The study clearly shows that the industry is in the midst of exciting times.
Growth is staring in the face, while competition from other industries is very
intense. In a way, the industry has emerged from the shadows and finds itself in
the glare of the consumers' eye. In the years to come, the industry will forever
lose its traditional tag as it reinvents itself and integrates into the luxury goods
industry.
This transition will bring its rewards and the inevitable pains. The responsibility of
preparing the players for the change and handholding them through this journey
rests with the industry and individual players.
This report is an effort to highlight the dynamism in the industry and the
tremendous scope of opportunities it presents to nations, conglomerates
entrepreneurs, professionals, industry analysts and financial institutions. We
sincerely hope that this study will be the beginning of a series of soul-searching
discussions within and about the industry, and stir stakeholders into action.
174
Appendices
Appendix
Page
178
Silver
216
Coloured gemstones
219
Glossary
228
230
Acknowledgements
236
Angola
Country snapshot
Mining
Mining
currently account for over 4 per cent of the worlds produce in terms of volume
Diamo nd
and 12 per cent in terms of value, a large percentage of them being gem quality.
Gold
With the end of the civil war and the opening up of the economy, Angolas
diamond mining sector is attracting companies willing to invest and explore the
ption
Consumption
Processing
Processing Fabrication
Fabrication Consum
Platinum
Others
Country
profiles of
key players
Industry snapshot
Angolan diamonds are considered to be amongst the worlds best in terms of
quality. The countrys rich reserves, most of which according to sources are yet
to be tapped, lie in the provinces of Lunda Sul and Lunda Norte in the central and
northeastern parts of the country.
CAGR 15.49 %
1.5
1.6
1.3
1.4
1.1
178
USD Billion
1.2
Page
Diamond mining
Country
Legend
Legend
0.9
1
0.8
0.73
0.73
0.6
1.
Angola ..........................................................................
179
0.4
2.
Botswana......................................................................
181
3.
183
4.
India ..............................................................................
187
5.
Italy ..............................................................................
192
6.
Japan ............................................................................
195
7.
Namibia ........................................................................
197
8.
Russia ..........................................................................
198
9.
201
204
206
208
0.2
2000
The end of the 27 year long civil war in 2002 and the opening up of trade channels
has ushered in a number of mining companies willing to invest in exploration and
development for the cause of diamonds in Angola. According to the countrys
designated governing body for the diamond industry Empresa Nacional de
Diamantes de Angola (Endiama), Angola has plans of doubling its capacity to
reach 12 million carats by the end of 2006, and 13 million carats by 2007.
2001
2002
2003
2004
2005
State officials have estimated that the country loses over USD 375 million
worth of revenue each year due to the illegal trade of diamonds. In 2003,
Operation Brilliant was established as a measure to curb illegal trade. As per
the UN, the operation has been successful as over 250,000 illegal miners have
been identified and deported from the country.
179
Botswana
Angola: Growth in diamond production
(volume - million carats)
Million carats
CAGR 11.79 %
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
7.5
7.0
6.3
5.2
5.0
2001
2002
Country snapshot
Diamond processing
2003
2004
Catoca
Fucauma
Luarica
Luzamba
Diamond mining
Ownership
Gold
Legend
Legend
The desire to maximise value obtained from a rare natural resource and create a
large number of jobs for local citizens has pushed the Angolan government and
Endiama to promote local beneficiation. This initiative is being supported by large
CPD players from major processing centres.
Mine
Diamo nd
ption
Consumption
Processing
Processing Fabrication
Fabrication Consum
Others
2005
Mining
Mining
Platinum
As an outcome of the local beneficiation wave that is taking place across the
southern tip of Africa where most of the diamond production centres are housed,
Angola has recently got enlisted as a cutting and polishing centre.
4.0
2000
Mine
Contribution to
countrys total
output (%)
Damtshaa
1.00
Jwaneng
44.00
Lethalkane
3.00
Orapa
52.00
Debswana
Debswana
(A 50-50 per cent
venture between
De Beers &
Government of
Botswana)
Botswana is the largest player in terms of value, with nearly 35 per cent of its
total produce qualifying as being gem-quality. The industry in general has been
witnessing a general upward trend in diamond production since 1995, owing to
the large reserves found at the four key mines Damtshaa, Jwaneng, Lethalkane
and Orapa. These mines currently produce over 30 million carats of high quality
diamonds. The Orapa mine is known as the worlds largest diamond mine (in
term of actual size of the open pit) and the Jwaneng Mine is known as the
Worlds Richest diamond mine.
The industry is of great significance to Botswana as rough diamonds account for
77 per cent of total export earnings and 45 per cent of the countrys GDP. Over
the last 35 years, revenues from diamond exports have funded the development
of healthcare facilities, schools, transport and communication.
Botswana is currently a favoured destination for diamond explorers from around
the world. Diamond exploration in Botswana continues at an aggressive pace
with a number of local and foreign organisations investing to carry out various
phases of exploration. In fact during 2005, there were 574 diamond prospecting
licenses in operations.
In order to accelerate economic growth (given the heavy reliance on the industry) a
number of exploration projects are being carried out by private and public sector
entities in the country. For example, De Beers and Debswana plan to invest
around USD 1.2 billion on the construction of the DTC Botswana facilities and
ramp-up the Orapa III plant. DTC Botswana is a 50-50 joint venture between the
Botswana government and De Beers, set up to undertake (once fully operational)
the full sorting and valuation operations of Debswanas diamonds. Currently,
these activities are carried out by the Botswana Diamond Valuing Company (BDVC).
180
181
USD Billion
2.5
2.12
2.4
2.16
Country snapshot
3.2
2.94
DTC Botswana is also deemed to take on the role of a sales and marketing function
for selling rough diamonds to diamond polishing factories in Botswana. DTC has
also announced its plans of moving its London operations to Botswana, under
DTC Botswana28.
1
0.5
2000
2001
2002
2003
2004
2005
The diamond processing industry has emerged mainly due to the local beneficiation
trend that is sweeping key African producer countries. The industry is still at a nascent
stage, employing only 800 people in the cutting and polishing units (estimates for
2005). Majority of the units have been established by existing sight-holders of DTC
and are largely managed by expatriates. The industry in Botswana enjoys the
advantage of having comfortable access to high quality diamonds, however the
labour costs of manufacturing diamonds in Botswana are high, rendering the
business uneconomical for independent players. Another rampant problem is the
high penetration of HIV/AIDS in the Botswana population (Botswana has one of the
world's highest rates of HIV infection 24.1 per cent in adults). This high AIDS
penetration has significantly increased the mortality rate which implies a high
turnover of employees.
35
30
24.65
26.41
28.4
30.41 31.12
Together, China and Hong Kong make up a significant chunk of the global jewellery
manufacturing industry. In the recent years, jewellery manufacturing has seen a
shift from HK to mainland China with the third phase of the CEPA III coming into
place.
China is the second largest consumer market for jewellery of all kinds growing at a
CAGR of 9 per cent (2000 2005).
Hong Kong has emerged as a hub for trade of gems and jewellery in the last few years.
CAGR 5.41 %
250
200
224.1
201.9
205.6
217.3
192.8
2001
2002
2003
2004
2005
172.2
150
100
50
0
2000
31.9
Diamo nd
Gold
Platinum
Others
Legend
Gold mining
CAGR 5.29 %
Million carats
Diamond processing
1.5
25
China is an eminent producer of gold; the countrys overall output of gold has been
increasing since 1979 at a year-on-year growth of 10 per cent. China is also a large
producer of silver, production of the metal has grown at a CAGRof 5.41 per cent in
the last five years.
1.8
20
15
10
China is the worlds fourth largest producer of gold. GFMS has reported a gold
output of over 224 tonnes in 2005, a 30 per cent increase from the countrys output
in 2000. Production has grown as the country has undergone several economic
reforms notable ones being the implementation of the Open Door Policy in
1979 and the subsequent deregulation of gold in 2001.
In the years to come, gold production is likely to increase mainly due to the
increase in the inflow of foreign investment in the sector as well as consistent
domestic explorations.
The Jinfeng Gold Project, which has reported reserves of about 65,000 kilograms,
represents the largest investment by a foreign company in Chinas growing gold
sector.
5
0
2000
2001
2002
2003
2004
2005
CAGR 4.75%
70
Million ounces
60
50
51.3
55.6
52.9
2001
2002
58.8
63.8
64.7
2004
2005
40
30
Silver mining
As per the Silver Institute, China ranks fourth amongst the top 20 silver producing
countries (as per 2005 figures). The country along with Mexico, Peru, Australia
represented 60 per cent of the silver supply for 2005. Silver output from China
has been on an upswing since 2002 at a CAGR of 4.75 per cent with total output
in 2005 standing at 64.7 million ounces.
20
10
0
2000
2003
28
28
182
Source:
DTC Annual Review 2006
Antwerp facets news service (March 2006)
Note:
Figures for 2005 have been obtained from Tacy Ltd, 7th Feb 06. As mentioned by Baledzi Gaolathe,
Botswanas Minister of Finance and Development Plan
183
CAGR 10.32%
3
USD Billion
2.5
1.85
1.53
1.47
1.5
1.44
1
0.5
0
2000
2001
2002
2003
2004
3.50
3.03
3.00
2.50
2.00
2.06
1.72
1.50
Chinese diamonds are being appreciated for quality and precision of cut, being
now labeled by the international diamond trade as 'China craft,' comparing with
'Belgium craft' and 'Israel craft.
The Chinese diamond processing industry receives considerable support from
the government in the form of regulatory and taxation reforms. Only recently, the
government has brought about radical changes in the tax structures reducing
Value Added Tax, Import Tariff and Consumption Tax to 0 per cent in 2002 for
import-process-export model processors.
A number of industry sources and analysts have indicated that the Chinese
manufacturing industry needs to keep a close tab on any erosion in its key
source of competitive advantage cheap labour. This advantage is under threat
on account of:
Projected flattening out and decline in the total number of employable people
over the next two decades mainly due to the stringent family-planning laws of
the country.
Jewellery fabrication
China: The Chinese jewellery manufacturing industry employs a large base of
skilled labourers (approximately 5 million) working at relatively lower wage rates
(around USD 300 per month). The Chinese jewellery fabrication industry is growing
at a phenomenal rate of 12.84 per cent year on year, with the total output in
2005 being USD 3.14 billion.
1.00
0.00
2000
2.35
3.14
2.62
0.50
2005
184
CAGR 12.84%
2001
2002
2003
2004
2005
2.33
2.5
USD Billion
Diamond processing
2,665
2,233
2,000
1,000
0
2003
2004
2005
29
Note:
2005 Figures are from January to November
185
India
China: Growth in retail sales of jewellery
Country snapshot
per cent of the worlds rough, by value. India's exports of cut and polished
diamonds in the year 2005 stood at USD 11.18 billion.
As per a recent report, Chinese consumers currently spend around USD 2 billion
on high-end fashion and accessories including fine jewellery, expensive watches
and a host of other luxury products. Estimates are that China has grown to
become the third-largest consumer of luxury goods globally after Japan and the US.
Figure 157: Growth in retail sale of jewellery,
value terms (USD Billion.), 2000-05
Source: KPMG analysis
The performance of the jewellery retail market in the year 2005 is representative
of the general health of the industry. The year logged a total sales of jewellery
worth USD 13.06 billion, growing at year-on-year rate of 9.15 per cent since 2000.
Sales made in Shanghai, the largest jewellery retail district contributed over
10 per cent of this pool.
China is a large market for most of the key elements of the precious jewellery
family. By a large margin, China is the largest consumer of platinum jewellery
(sale of plain platinum jewellery in 2005 recorded at USD 4.17 billion. China is
also the third largest consumer of gold jewellery after India and the US, logging a
total consumption of USD 4.17 billion worth of gold jewellery in 2005. In addition
to this, China is estimated to be fifth largest market for diamond jewellery. Total
consumption of diamond jewellery in 2005 was recorded at USD 1.32 billion.
As per estimates of 2006, jewellery consumption in China is projected to reach
USD 14.24 billion. This upward trend is expected to continue in the near future,
reaching a total of USD 20.44 billion by 2010 and USD 30.72 billion by 2015.
India is the largest player in the diamond processing industry, processing over 57
India is also a large producer and exporter of various forms of jewellery, jewellery
output in 2005 logged at USD 12.17 billion.
India is one of the fastest growing market for Jewellery, growing at a rate of 10.20
per cent per annum over the last five years.
Diamond processing
As per the figures published in 2005, India accounts for over 57 per cent of the
cut and polished diamond pie in terms of value. It is said that 11 out of 12 stones
set in jewellery are cut and polished in India.
Although, the industry traditionally grew by polishing lower quality stones (in
particular those classified earlier as near-gems), today India is processing the full
range of sizes and qualities of gemstones including stones larger than 10 carats
in size. However, the bulk of the production remains small and mid-sized stones.
In the recent years, Indian processing companies have been seen to be
experimenting with more complex cuts and colours. From a formalisation and
technological point of view, the industry is continuingly evolving. Increasing number
of processing companies are conforming to international quality standards.
India: Export of polished diamonds by destination
186
187
Jewellery fabrication
India is a prominent jewellery manufacturing base, accounting for 14.3 per cent of
the world jewellery fabrication pie (2005), as per our estimates. In the last two
decades Indian exports of jewellery have risen exponentially. The exports
opportunity has attracted CPD players to forward integrate and move up the
value chain. The initial advantage of low cost labour was supported by
investments in manufacturing leading to international quality products.
India: World jewellery fabrication share
India
14.3%
The success of the Indian jewellery manufacturing industry has been attributed
to five distinct factors; namely:
The industry is currently witness to a variety of trends and changes such as the
emergence of new manufacturing locations and reduction in the concentration
around Surat and Mumbai, technological changes, increased design sophistication
and adoption of industry standards, forward integration of diamond processors,
into diamond jewellery manufacturing, integration of jewellery manufacturers and
retailers etc. These trends are nascent and are likely to strengthen in the years
to come.
In recent years, Indian manufactures have forayed overseas and at the same
time several large overseas players have outsourced manufacturing to India (or
have entered into alliances). Manufacturing in India for Indian hand-made
jewellery has always had a high demand in overseas markets, mainly from the
large Indian immigrant population settled in the Middle East, South-East Asia, the
USA and Canada.
188
CAGR 10.20%
14.00
12.17
12.00
10.00
8.00
9.89
7.49
7.16
6.43
7.40
6.00
4.00
2.00
0.00
2000
2001
2002
2003
2004
2005
RoW
85.7%
USD billion
Plain Platinum
Jewellery 0%
India has for long held its position as one of the worlds largest consumer of plain
gold jewellery, consuming over USD 10.07 billion worth of gold jewellery in 2005.
India is also one of the fastest growing markets for diamond jewellery. Diamond
jewellery consumption in 2005 was valued at USD 1.51 billion. Demand for diamond
jewellery in India has grown at a CAGR of 43.5 per cent in the last five years
(2000-05; in value terms).
Platinum jewellery in India has gained popularity over the last few years mainly in
the high-end segments for women between the age group 25-45 years. Growth
in demand has been encouraged by efforts of Platinum Guild International and
affiliated jewellery manufacturers and retailers. To encourage domestic manufacturing
of Platinum jewellery and boost demand, the government has reduced import
duty on platinum from INR 550 to INR 200 per 10 grams.
India has traditionally been a large consumer of coloured gemstones and silver
jewellery, with jewellery designs that extensively used coloured gemstones, and
this trend continues even today.
In line with the development of the retail sector in India following liberalisation
and growth in per-capita income, jewellery retailing industry too is slowly
transforming. The jewellery retail sector, traditionally dominated by small scale
local players is rapidly moving towards greater organisation as retail channels
mature and obtain greater penetration across the country. Also evident in the
industry is the increasing level of professionalism, quality controls and processes
and a heightened consumer focus. The need for being consumer focussed has
emerged as a response to increasing levels of consumer sophistication, both in
terms of design and product demand, as well as a general orientation towards
jewellery product origins, gemstone certification and jewellery hallmarking.
189
Ensure value retention for the Indian industry on domestic mining contracts awarded to international companies
22 karat jewellery
Commission exploration programmes and surveys to ascertain availability of coloured gemstones in India
Persist with direct procurement of diamond rough (similar to Russia) and coloured gemstones rough through
Government interactions
Figure 165: Changing trends in the Indian retail market for jewellery
Source: KPMG analysis, Interviews with retailers
The industry is witnessing some other trends as well. The urban areas of the
country are seeing strong white wave taking over. Rhodium polished white
gold is the most popular in lower and mid-ranged segments. Towards the higher
end, consumers have shown a preference for platinum jewellery and demand for
the metal in the premium category has witnessed an increase. The western
trend of opting for white metal as a base for diamond jewellery is catching on in
urban India. The last few years have witnessed a large influx of jewellery brands
in the Indian market. This is also related to the fact that the average age at which
the person purchases jewellery has reduced in the last couple of decades.
India is witnessing changes in the design and styling preferences as well. On one
hand jewellery for the metro-sexual man is coming into vogue, innovative
designs such as mesh jewellery, paved diamond jewellery is also catching up.
190
Emerging Trend
Negotiate favorable trade regimes and agreements with countries which currently impose high tariffs on imports
from India (e.g. Brazil, Mexico, China)
Spearhead initiatives to legalise current mining activity through an appropriate licensing framework and develop a
regulatory framework for new mining and exploration
Participate in initiatives aimed at promoting transparency - promoting hallmarking and encouraging consumer
activism in matters related to quality, purity, transaction legitimacy etc.
191
Italy
Italy: Declining market share in jewellery
fabrication
Country snapshot
Italy has traditionally been a large manufacturing destination for high quality
jewellery. However, the jewellery industry in Italy is on the decline in the face of
tough competition from more cost competitive nations like India and China as well
as from other nations like Lebanon and Turkey.
Italy is one of the largest consumers of jewellery globally. Retail sales of jewellery
in 2005 was estimated at USD 7.30 billion
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
16%
Jewellery manufacturing in Italy was initiated by the French fabricators in the mid
1900s. Even today, the industrys history resonates with French names such as
Cartier, Boucheron and Van Cleef & Arpels. Italians were quick to learn and fast
to industrialise production in anticipation of a soaring demand for high-quality
jewellery. Soon they eclipsed their French teachers.
Since then jewellery-making in Italy is considered an art, possessed by few and
passed down the generations through intensive training. Italy has earned a name
for itself for its imaginative and high-fashion jewellery. By 1998, Italy turned more
precious metal into jewellery than any other country.
The scenario is now changing as the centre faces tough competition from low
cost manufacturing centres like India, China and Turkey.
Key export destinations of Italian jewellery
10%
Italy
RoW
2000
Jewellery fabrication
15%
2002
2005
District
Specialisation
Manufacturing
Technique
Valenza
Handcrafting
Vicenza
Arezzo
Manufactured mainly by
machines
Milan
Marcianise
Torre del
Greco
Handcrafting
192
Italy typically produces jewellery of relatively high purity. Around 60 per cent of
production is in 18 carat gold, with close to 25 per cent in 14 carats. A large part
of Italian imports comprises contract manufactured jewellery. Majority of the
production is through mechanised manufacturing, handcrafting, wax casting and
stamping. It is also important to note that a large portion of Italys produce are
chains and chain products. Chain products account for more than one-third of the
total output.
The jewellery industry in Italy is declining in the face of tough competition from
more cost competitive nations like India and China as well as from other nations
like Lebanon and Turkey. The industry size has been dipping by 3 per cent each
year (since 2000). Italys share of the jewellery industry has dipped by 6 per cent
only in a matter of six years.
193
Japan
Italy: Jewellery fabrication output
2000-05
9.50
9.19
8.82
USD billion
9.00
CAGR - 3%
9.09
8.37
8.50
8.00
8.00
7.89
Italy is a large consumer market (USD 7.3 billion) for jewellery of various types.
The country has a large demand base for diamond and plain gold jewellery. In the
diamond jewellery segment Italy is a mature market with diamond jewellery
sales accounting for 6 per cent of the global market (consuming around USD 4.2
billion worth of diamond jewellery in 2005) Italy is also the largest market for
diamond jewellery in Europe.
Japan is one of the largest consumer markets for jewellery and constitutes 8 per
cent of the global jewellery sales.
7.50
7.00
2000
2001
2002
2003
2004
2005
7.32
7.25
7.34
7.30
7.20
Japan, like the United States (US) is a mature market, ranking fourth in the world
with jewellery sales to the tune of USD 12.13 billion (2005).
7.12
7.10
In our estimates of 2010 and 2015, Italy's off-take of jewellery of all forms is
expected to decrease (at a slow and gradual pace) dipping down to USD 6.81 billion
in 2010 and then further down to USD 6.19 in 2015.
7.01
7.00
6.90
6.80
2000
2001
2002
2003
2004
12.13
12.20
12.00
2005
CAGR 0.66%
12.40
USD billion
USD billion
7.30
Italy is also a strong market for gold jewellery. Demand has been growing at the
rate of 7 per cent year on year, consumption in 2005 standing at USD 2.58 billion.
11.80
11.34
11.40
11.15
11.00
10.80
7.30
10.60
Plain Platinum
Jewellery 1%
2000
2001
2002
2003
2004
2005
In addition to the above, Japan is also the worlds second largest market for platinum
jewellery after China. Sale of platinum jewellery in Japan has declined over the
last five years by 5 per cent year on year. In the estimates for 2010, Japans off
take of platinum jewellery is expected to fall to USD 7 billion.
11.61
11.60
11.20
Others 5%
11.88
11.74
Japan is the second largest consumer of diamond jewellery after the U.S., with
diamond studded products forming 79 per cent of the total jewellery market. 13.7
per cent of the worlds diamond jewellery is consumed in Japan.
Japan, although not a major consumer of gold jewellery, features in the list of top
20 consumers of gold jewellery. Japanese import of gold into Japan have been
reducing since 2002. Consumption of the metal in the form of plain non-studded
jewellery in 2005 has been estimated to be worth USD 0.9 billion. Japan is also a
major consumer of coloured gemstone studded jewellery and a sizeable market
for pearls.
7.20
USD Mn
7.00
6.81
6.80
6.60
6.40
6.19
6.20
Diamond Jewellery
59%
6.00
5.80
5.60
2005
2010
2015
194
195
Namibia
Japan: Estimated jewellery consumption
(2010 2015)
14.00
USD billion
12.00
12.13
10.00
9.08
8.00
8.39
6.00
Another important change seen is in the choice of metal. While 18 carat gold
remains the object of choice, white gold has gained popularity mainly as a cheaper
substitute for the highly priced platinum jewellery. Pink gold and Green Gold,
generally set with coloured gemstones or as pearl chains experienced growing
demand.
Country snapshot
Namibia is a significant contributor to the rough diamond pool, producing over 5.5
per cent of the worlds rough diamonds in terms of value and 1 per cent in terms
of volume.
Japans share of the world jewellery pie is expected to decrease at a rapid pace
by 2010 (reaching USD 9.08 billion) and then further in 2015 (to USD 8.39 billion).
4.00
2.00
0.00
2005
2010
2015
Diamond mining
Others 5%
Plain Platinum
Jewellery 9%
Plain Gold Jewellery
7%
CAGR 10.76%
0.8
USD Billion
0.6
Diamond Jewellery
79%
0.5
0.7
0.69
0.7
0.5
0.42
0.47
0.41
0.4
0.3
0.2
0.1
0
2000
2001
2002
2003
2004
2005
CAGR 2.26%
Million carats
2.5
2.01
1.52
1.5
1.49
1.35
1.7
1.55
Most of Namibia's deposits are alongside the river Orange or alongside the countrys
shoreline. Namibia is also home to the worlds richest marine diamond deposit,
De Beers Marine Namibia, which produced over 900 million carats in 2005. The
majority of both the land and sea mining operations are licensed to Namdeb, a
50-50 joint venture between the government of Namibia and industry major De
Beers. The Namibian economy is highly dependent on exports of rough diamonds,
the industry contributing close to 70 per cent to the countrys GDP. The countrys
largest diamond mining company Namdeb alone contributes about 10 per cent to
the countrys GDP and 30 per cent to the countrys export revenues.
Several industry sources have voiced concern over the fact that the countrys
onshore diamond reserves are rapidly depleting and no new kimberlite deposits
have been fround in the past few years. Given this, Namibias future production
depends largely on its marine diamond mining operations. It is predicted that by
2009, diamonds sourced from marine locations will supercede those sourced
onshore. Namdeb has recently announced its target of reaching 10 million carats
(annual production) by 2010.
Diamond processing
0.5
0
2000
2001
2002
2003
2004
2005
196
Namibia is a key player in the global diamond industry producing over 1.7 million
carats and USD 0.7 billion worth of rough diamonds each year. Namibian rough
diamonds are largely of gem quality; 95-98 per cent of the total production qualify
as gem quality.
197
Russia
Russia: Snapshot of key diamond producing mines
Country snapshot
The Russian diamond industry contributes 17 per cent to the worlds production of
Name of Mine
Ownership
Contribution to
countrys total
produce
Aikhal GOK
Alrosa
16.20%
Anabar GOK
Alrosa
1.10%
Mirny GOK
Alrosa
21.40%
Nyurba GOK
Alrosa
19.20%
Udachny GOK
Alrosa
42.00%
Russia is also a large producer of gold, however the output has been on a
downtrend since 2003.
Russia also has the largest diamond processing industry amongst all the diamondproducing countries with polished output estimated to be worth USD 1.2 billion.
Diamond mining
Russia: Growth in diamond production
(Value - USD billion)
CAGR 6.71%
2.5
2.2
1.96
1.59
1.66
1.5
1.6
1.5
Figure 181 : A snapshot of key diamond producing mines in Russia (as on 2005)
Source: Websites, Annual reports of various mining and sourcing companies
Gold mining
1
0.5
0
2000
2001
2002
2003
2004
2005
38.15
40
It is reported that the Russian production of rough diamonds has currently flattened
out as some of the largest mines have been almost mined out. However, Alrosa
has plans of investing in the operations at Mir and Udachny as well as of increasing
capacity in Zarnitsa and Aikhal to maintain production. The company is also looking
at increasing exploration in Western Russia, where it holds a 92 per cent interest
in Severalmaz, operator of the Arkhangel pipe, one of the five in Lomonosov
deposits.
Starting from a small stake in Angolas Catoca mine, Alrosa is also looking at
strengthening its footprint internationally and is considering projects in DRC and
Sierra Leone.
185
180.6
180
182.3
181.6
175.5
175
Tonnes
USD billion
Russian rough diamonds account for 17 per cent of the total world production in
terms of value and 21 per cent in terms of volume (2005). The main player in the
Russian diamonds industry is the state mining company Almazy Rossii-Sakha
(Alrosa) which mines over 98 per cent of the countrys diamonds from seven
kimberlitic pipe mines and three alluvial pits. Alrosa is not only involved in mining,
but also in diamond manufacturing and marketing of polished diamonds and
diamond jewellery in Russia.
170
165
165
160
154.3
155
150
145
140
2000
2001
2002
2003
2004
2005
35
Million carats
35
30
25
20.5
23
20
19
20
15
10
5
1300
1400
0
2001
2002
2003
2004
2005
1200
Million ounces
2000
1100
980
1000
1050
845
890
2004
2005
800
600
Most of the production is from placer deposits in the eastern parts of Russia.
Nearly half of Russias gold is produced from the Magadan Oblast, Krasnoyarsk,
and the Yakutia Sakha Republic Region.
Platinum mining
Russia is the second largest producer of platinum after South Africa. The countrys
contribution to the global production pool has come to light only off-late as
secrecy policies have been lifted and production and trade data has been made
public. Russian output of the metal is clearly on a decline, as illustrated in Figure
183. Although no quantitative data is available, the production of platinum from
the alluvial mines of the Far East of Russia, (primarily Kondyor and Koryak) is
believed to have slightly reduced compared to 2004.
Russia also holds the position of the worlds largest producer of palladium. One ounce
of PGM mined in Russia yields 16 per cent platinum and 8.3 per cent palladium.
400
200
0
2000
2001
2002
2003
198
Russia has a strong gold production industry with only 14 per cent of its gold
producers producing 74 per cent of total gold production in the country. GFMS
reported output of 176 tonnes in 2005, an increase of 14 per cent from 154
tonnes in 2000. However, the mine output has been on a decline since 2003,
mainly due to the drop in the country's alluvial production.
Exploration for deposits of both platinum and palladium are rampant in the country.
Norilsk Nickel, the worlds largest producer of palladium and one of the largest
producer of platinum, plans to invest USD 820 million during 2006, USD 205 million
of which is to go towards expanding production.
199
South Africa
Russia: Cut and polished diamond output
CAGR 10.27%
1.40
1.12
USD billion
1.20
1.00
0.80
1.20
0.89
0.74
0.71
0.69
0.60
0.40
0.20
0.00
2000
2001
2002
2003
2004
2005
Diamond processing
Russia is home to the largest diamond processing industry amongst all the
diamond-producing countries. Most of the processing units are state-owned,
carrying forward the legacy from the Soviet era. This includes one of the largest
factories, Kristall of Smolensk, employing around 900 people (out of the total
5000 people estimated to be employed in the industry). The state mining company
Alrosa also owns a diamond cutting and polishing factory Brillanty Alrosa which
recorded a total production worth USD 143.7 million in 2005. The state also has a
handful of players in the private sector including Lev Levievs Ruiz Diamonds
in Moscow.
Russia polishes a range of sizes, from smaller stones (starting from 0.01 carats)
to large stones of over 5 carats. The industry has leveraged the advantage of
being one of the largest producer of rough diamonds in the world. Alrosa currently
allocates more than 50 per cent of its produce to the local cutting and polishing
industry.
Country snapshot
Diamonds mined in South Africa contribute 13 per cent in value terms and 9 per
cent in volume terms to the global production.
South Africa is the world largest producer of gold, contributing 12 per cent to the
world output and also the worlds largest producer of platinum with a market share
of 78 per cent.
South Africa is also a key emerging diamond processing centre - in many ways the
heart of the much talked about Local Beneficiation initiative.
Diamond mining
South Africa has been an eminent player in the diamond mining industry not only
in terms of the overall contribution to the world output each year, but also
because South Africa is more often than not the birthplace of large industry
trends and changes the trend towards Local Beneficiation being one such
example. With a large percentage (estimates to be around 35 per cent!) of rough
being supplied to in-house processing companies, the role of the country in the
next few years is expected to change.
Russian cut diamonds are increasing their presence in world markets, as the
country is gaining strength as a rough diamond producer and as a major centre
for cutting and polishing.
Most of the diamond mines (about 90 per cent of total produce) in South Africa
are owned and managed by the De Beers group under the name of De Beers
Consolidated Mines (DBCM). In fact the rise of the diamond industry in South
Africa is closely linked to the rise of the De Beers group since the De Beers mining
company was formed in 1888 in Kimberley, South Africa. The term Kimberlite
used to describe a diamondiferous pipe has been adapted from the name of the
mining town Kimberly.
Diamonds have played a pivotal role in developing the economy and the socioeconomic structure of South Africa. The government has therefore, in the recent
past, taken a few proactive measures to maximise the benefits the country can
potentially derive from this precious natural resource.
200
201
The controversial Diamond Bill seeks to promote greater value addition to the
country's diamonds within the country South Africa is in some way leading the
trend of Local Beneficiation (i.e. in-house processing of diamonds produced
within the country to maximise value). It has been reported that about USD 575
million worth of high value rough has been distributed within the country.
Given its large rough diamond reserves, South Africa wants to target greater
value addition within the country and enhance employment generation. However,
it has only off-late created waves in the diamond cutting and polishing industry.
In 2005, South Africa cut and polished diamond output was valued to be
USD 0.85 billion.
South Africas production of diamonds has increased over the years. However,
the industry has a number of challenges to face, notably the rising costs of mining
as the U.S. Dollar grows weaker against the South African Rand. As per De
Beers, five out of the seven mines operated by them are running into losses.
South Africa: Gold mining output
(volume tonnes)
Gold mining
Diamond processing
South Africa is the world's largest producer of gold, having a market share of
12 per cent in the year 2005. Production in 2005 was estimated to be 296
tonnes, a decline of 31 per cent from 428 tonnes in 2000. Since 1925, for the
first time mine production has gone under the 300 tonne mark.
The decline in production has purely been an outcome of the prevalent economic
environment which has led to the scaling down or closure of select mines
temporarily till the economic forces change direction again.
Being the worlds largest producer of gold, South Africa is more susceptible to
movements in price as its deep level mines are the highest cost producers in the
world. Industry sources indicate that production costs in South Africa are the
highest in the industry.
In terms of gold reserves South Africas estimated 40,000 tonnes, represents
40 per cent of the global reserves.
Platinum mining
South Africa is the world's largest producer of platinum, producing over 5.1 million
ounce in 2005, an appreciation of 34 per cent from 3.8 million ounce in 2000. The
platinum mining industry was the biggest export earner for the country in 2004,
accounting for about 8.1 per cent of total exports. From 1995 to 2004 inclusive,
the country accounted for an estimated 78 per cent of the total rise in global
platinum production.
202
Most of the platinum in South Africa is mined in the Bushveld Igneous Complex
and with South Africa being the largest player in the world, the output from this
location contributes 72 per cent of the annual global production. The estimated
proven, probable reserves and inferred resources of platinum add up to 1142 million
troy ounces. The South African platinum industry has witnessed a sudden influx
of small mining companies, all keen to benefit from increasing prices of platinum.
203
Turkey
Country snapshot
Turkey is also, now being viewed as a major jewellery distribution hub for various
destinations across the world.
Lithuania 4%
Spain 4%
Jewellery fabrication
Turkey today has established itself as a growing jewellery manufacturing base
largely due to its reputation for quality and innovative designs. The industry has
state of the art technology, computer aided design and manufacturing systems
and high quality processes and standards. The success of the countrys jewellery
manufacturing industry is reflected in its export figures Turkeys exports of
jewellery in September 2005 stood at USD 772 million, a 17 per cent increase
over the previous year.
6.77
USD billion
7.00
6.11
6.00
3.36
3.00
2.37
3.02
2.00
1.00
0.00
2000
2001
2002
2003
2004
2005
204
Israel
5%
Libya
5%
USA
47%
Italy
5%
Germany
6%
Russia
6%
UAE
14%
Figure 192: Major export destinations for jewellery fabricated in Turkey
Source: Turkish Association of Jewellers
The Turkish jewellery industry consists of 60,000 firms (10,000 being gold-processing
workshops; 50,000 of them are retail shops). It is estimated that there are more
than 50 companies each of them employing 200-1500 trained workers. Jewellery
manufacturing is one of the largest manufacturing industries in Turkey.
Istanbul, Ankara and Izmir are the centres for gold jewellery production. Some
cities in East and Southeast Anatolia also produce gold jewellery.
4.92
5.00
4.00
UK
4%
It is important to note that a major chunk of Turkeys exports is plain gold jewellery.
According to figures published by the Turkish Association of Jewellers, gold
jewellery export was about 105 tonnes in 2004. Furthermore, taking into account
sales made to tourists and by the informal sector, total export of plain gold
jewellery was estimated to be over 150 tonnes. It is estimated that approximately
250-300 tonnes of jewellery is produced every year in Turkey.
205
United Kingdom
Country snapshot
UKs market share of the world jewellery retail pie is expected to increase at a
slow CAGR of 0.6 per cent reaching a total sales figure of USD 4.78 billion in
2010 and USD 4.84 billion in 2015.
(2010-15)
The UK jewellery market has got clearly segmented in the last few years.
Diamond and platinum jewellery has dominated the high end (above GBP 500) of
the market, while bulk of the volumes are generated from consumers whose
annual spends are less than GBP 100.
Figure 196: Estimated jewellery consumption in
Italy in 2010 and 2015
Source: KPMG analysis
206
Note:
30 Timelines April 2004 - March 2005
31 Year ending June 2004 and 2005
207
The U.S., which is one of the largest producers of gold, has a 11 per cent market
share. In 2005, the U.S. produce exceeded that of Australia, thereby taking it to
CAGR 10.27%
0.90
0.80
Million ounces
300
390
2002
Jewellery manufacturing
385
360
2000
200
150
100
50
0
2001
2002
2003
2004
2004
4.50
4.00
USD billion
Alaska and Nevada are the main contributors to the production pool, with the
former producing majority of the countrys gold output (83 per cent in 2005).
About 30 mines contributed most of the U.S. gold output. The large gold mines
in the U.S. are located in northern Nevada, the Goldstrike Mine owned by Barrick
Gold Corporation being the largest in the country.
CAGR 2.7%
3.50
3.53
3.60
3.12
3.80
3.93
4.03
2003
2004
2005
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2000
2001
2002
Platinum mining
North America as a whole is the third largest producer of platinum. It reported an
output of 360000 oz in 2005, an increase of 50 per cent over the 240000 oz
mined in 2000.
Others
15%
France
3%
Italy Dominican Republic 4%
2%
UK
4%
India1%
Platinum accounts for 25 per cent of the PGM mined and recovered, with palladium
largely making up the rest an average one ounce of PGM mined in North
America 28 per cent Platinum and 70 per cent Palladium.
The U.S. manufactures over USD 3.5 to 4.00 billion worth of jewellery each year,
contributing around 5 per cent to the global jewellery pie. Being the largest
consumer nation of jewellery, a majority of the jewellery manufactured in the
country is consumed domestically. Exports constitute approximately 25 per cent
of the total jewellery production, major destinations being Japan, UK, Mexico,
Canada and Hong Kong.
The U.S. Jewellery manufacturing industry was originally located in New England,
Massachusetts and Rhode Island, but has since then moved to other parts of the
country such as Florida and Los Angeles. The industry is characterised by over
4,000 production units of which 80 per cent have less than 25 employees. The
bulk of the jewellery produced in the U.S. is of 14 carat variety. However, there
has been an increase in the production of 10 carat as well as 18 carat jewellery in
the recent past.
High infrastructure and administrative wages costs have rendered jewellery
manufactured in the U.S. to be significantly more expensive than to other nations
(average employee wages per month reaching up to USD 2000, compared to
USD 200 and 300 in Indian and China respectively). As a result, jewellery
manufacturing in the U.S. is witnessing a steady decline. This downward trend is
also reflected in the countrys demand for precious metals mainly gold. In U.S.
consumption of gold for jewellery fabrication has reduced over the last few years.
Netherlands
5%
Canada
6%
2005
2005
250
2003
295
285
2000
2001
0.30
Gold mining
The gold mining industry in the US, currently the third largest in terms of total
annual output, is on a steady decline. As per GFMS, the countrys gold output
has declined by 28 per cent over the last five years from 355 tonnes in 2000 to
260.3 tonnes in 2005. Production stabilized in 2005, logging a 1 per cent growth
over 2004.
360
0.45
0.10
400
0.58
0.46
0.40
The U.S. market estimated at USD 44.98 billion is the largest market for jewellery
450
0.48
0.00
350
0.50
The U.S. diamond manufacturing industry (mainly based in New York) is relatively
small; employing around 400 people in around 100 small processing units.
New York ranks as the most expensive labout cost destination (average cost of
processing being USD 100 per carat), amongst all processing locations and
processes stones of larger sizes (2 carats and above) and higher quality.
0.20
0.60
0.78
0.73
0.70
USD billion
Diamond processing
Israel
17%
HK
8%
Mexico
8%
Belgium
10%
Japan
9%
Switzerland
8%
208
209
2000
34.61
2001
2002
39.51
2003
42.09
2004
44.98
2005
In the estimates for 2006, the slowdown is expected to continue with the industry
growing once again at a lower pace of 4.7 per cent to reach USD 46.62 billion.
Share of various types of jewellery in
value terms
Others 5%
Plain Platinum
Jewellery 1%
Plain Gold Jewellery
24%
The U.S. fine jewellery market is diverse, with almost all significant segments of
the jewellery having a sizeable share. It is also the largest market for gold jewellery
accounting for 17.9 per cent of the global consumption with India closely following
at 16.6 per cent. U.S. gold jewellery sales in 2005 added to USD 10.85 billion.
The U.S. is also the largest market for diamond jewellery. Retail sales of
diamond jewellery has been growing at a Y-o-Y rate of 5 per cent; total diamond
jewellery sales in 2005 reach USD 31.25 billion.
Notwithstanding the high price tag, platinum has remained popular amongst
consumers, however majority of the sales are restricted to a small number of
people in the high-end category.
Figure 204 and 205, describe the characteristics of the worlds largest market for
jewellery.
1000
350
2005
300
1200
Number of people
33.90
37.18
Currently valued at USD 44.98 billion, the U.S. is the largest consumer market for
jewellery in the world. The U.S. market has been a robust market for the last
several years and has steadily grown at a CAGR of 5.81 per cent between 20002005. After logging an impressive 6 per cent growth rate in 2004, the market
reported a rather less than average growth rate of 3.87 per cent in 2005. A number
of market analysts have attributed this slump in jewellery demand to the slow
down being experienced by the U.S. consumer markets. Also, shift to other
luxury products and services and a dip in the consumer confidence are
considered as the main reason behind the real fall in demand, possibly signaling
new challenges for the industry.
Number of purchases
USD Bn
CAGR 5.81%
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
250
200
150
Valentines Day
purchases
800
600
400
Slump due to
holiday season
100
200
50
0
100$ o r le s s
101 - 200$
201 - 300$
301 - 400$
401 - 500$
> 500$
USD billion
50
54.10
58.70
45.00
0
Jan
Feb
March
May
July
Aug
Sept
Oct
Dec
Figure 205: Survey estimates of jewellery purchases in the U.S. around the year.
Source: Jewellery Consumer Opinion Council (JCOC)
It is expected that the United States will remain a large markets for jewellery of
various types in the future. Overall demand for jewellery will reach USD 54.09
billion by 2010 and then to USD 58.72 billion by 2015. The country will remain a
large demand centre for diamond jewellery, expected to grow to reach USD 37.83
billion in 2010 a CAGR of 4 per cent. Growth will slow down 2010 onwards to 2
per cent per annum till 2015 where the industry will reach a total size of USD
41.66 billion.
40
30
20
10
0
2005
2010
2015
Demand for gold and platinum jewellery will increase by 14 per cent and 2 per
cent respectively till 2010, after which as in the case of diamond jewellery,
growth in demand for the metals will cool off to 2 and - 3 per cent respectively in
2015. The market for plain gold jewellery and plain platinum jewellery will reach
USD 10.35 billion and USD 1.25 billion respectively in 2015.
Most of the sales made in the U.S. fall within the USD 100 or less price band. A
large number of sales are also made in the USD 500 and above price bands a clear indication of a polarisation based on price.
Jewellery sales in the U.S. are seasonal with Christmas and Valentines day
being the largest occasions for purchasing jewellery.
210
211
Emergence of eminent destinations for large volume retailers where a mass of consumers can be tapped.
Pressure to specialise
Industry consolidation in part is also due to the large scale consolidation taking place in the industry across the
supply chain as a whole the largest factor being the efforts of large upstream players to influence diamond sales
downstream.
The internet has emerged as a major vehicle for purchase of low value products.
As per reports from eBay and Amazon, consumers have started making high value purchases online.
Amazon, the largest player in this space is marketing itself as a low-cost, nomark- ups retailer claiming to have
made phenomenal sales during the festive season
A number of chain stores are moving beyond the mall or retail store format and establishing private viewing
rooms and design studios to cater to their upscale customers who typically would not visit a mall or a retail store for
their purchases and would prefer discreet environments for high value purchases
Change in the market share of major retail categories over the years
100%
4%
7%
90%
9%
80%
70%
Independents
53%
49%
49%
60%
50%
Competition is pressurising retailers to specialise either in terms of product category or customer segments. This
trend is largely observed in the independent category.
Discount Stores
Jewellery Chain
Stores
40%
30%
23%
24%
22%
20%
20%
20%
1987
1992
2003
20%
10%
0%
Figure 207: Changing market structure of the U.S. jewellery retail market
Source: OneSource
212
213
IN FOCUS: Declining output from the traditional diamond processing centres: Israel and Belgium
Rising labour costs, threat from the low-cost giant India, emergence of low-cost processing centres like China has
resulted in the market share of Israel and Belgium traditional houses of cutting and polishing to decline. In the
future, the market share of both these centres is expected to decline from 17.2 per cent in 2005 to 11.1 per cent in
2010 and then further decline to 5.5 per cent in 2010.
Israel's polishing industry, which is concentrated in Tel Aviv and Netanya, has been one of the traditional processing
centres of diamonds owing to its large base of skilled cutters. Israel's output of cut and polished diamonds mainly
consists of larger stones (half carat and above) processed using state-of the art technology. Amongst the high labour-cost
manufacturing centres, Israel has the highest output of cut and polished diamonds and currently employs about 2000
workers in cutting and polishing factories.
Industry sources point to gradual diminishing of the Israeli cutting and polishing industry on account of a number of
reasons:
Belgium
80%
Israel
70%
60%
RoW
90%
82.8
50%
88.9
94.5
40%
30%
20%
10%
2.6
14.6
1.6
9.5
2005
2010
0%
0.7
4.8
2015
Figure 208: Estimated decline in market shares of Belgium and Israel in 2010 and 2015
Source: KPMG analysis
214
Antwerp in Belgium, once the diamond trade centre of the world is no longer a major centre for diamond processing
due to the high cost of skilled labour. However it still retains its position in diamond cutting expertise. As of today, the
country only processes stones of high value and larger sizes (of size one carat and above) in order to absorb the high
labour cost.
Belgium also remains a major trading centre for rough diamonds. The majority of rough imported into Belgium is
re-exported to India and Israel to be cut and polished. In 2002, India's off take of the total Belgian rough diamond
exports was 78 per cent by volume and 48 per cent by value while Israel imported 4 per cent (in terms of volume) and
10 per cent (in terms of value).
Like in the case of Israel, some of the older traditional cutting and polishing houses have moved to low cost countries.
Many of the factories in Russia, China and the Far East are owned by Antwerp companies and managed by Belgian
technicians.
As per our estimates, the share of Belgium in the global cutting and polishing industry is likely to reduce as the industry
moves towards the east (India) and far east. While major players may not stand to lose (as they would still earn large
revenues from processing factories owned and contracted in low cost nations), Belgium may not remain the preferred
cutting and polishing destination.
215
As in the case of gold and platinum, sources of silver supply include both primary
and secondary sources. Supply from primary sources (from key mines across the
world) has been growing at 1 per cent per annum (2000 to 2005). Secondary
sources of silver include net government sales, silver obtained from old silver
scrap and from producer hedging.
Producer Hedging
2%
Old Silver Scrap
21%
Mine Production
70%
Silver
The use of silver by mankind dates back to as far as 3000 BC. Due to its
malleability, ductility and lustre, silver has been a metal of choice for fabricating
lower end fashion jewellery. Today, the white wave that has gripped many
consumer markets has enhanced the demand for silver manifold making it one of
the most popular precious metals for jewellery fabrication. The whitish metal has
a unique positioning mainly due to its distinctive ability to adapt to the fashion
world. Silver jewellery is purchased by almost all types of consumer, from the
lower end consumers who purchase it for its affordability to the high end fashion
conscious segment who purchase silver set with precious and semi precious
stones to wear it on a one-off occasion. Silver jewellery today is available in many
lightweight, sophisticated and trendy designs. In many markets, the metal has
caught on in the form of Sterling silver (commonly known as 925 silver) an
alloy made from a mix of silver (92.5 per cent) and copper (7.5 per cent).
Industrial
Applications
46%
Photography
18%
650
642
640
In the year 2005, growth in global silver mine production exceeded expectations,
with an increase of 3 per cent or 21.1 million ounces. This improvement was
partly explained by record performance at two of the worlds largest silver
producing mines, namely Penoles Fresnillo in Mexico and BHP Billitons
Cannington in Australia offsetting the reduction in output recorded by the U.S.,
Bolivia, Poland and Canada. Canada generated the bulk of last years losses,
accounting for 52 per cent of the gross decline in the global mine production.
Mine closures and reduced output at Eskay creek, where reserves are expected
to be exhausted by 2008, explained much of the fall.
634
630
620
612
610
611
607
600
590
2000
2001
2002
2003
2004
2005
216
Silver is mainly mined as a by product of gold and other metal, with only about 20 per
cent being mined as a primary resource. Supply of the metal from primary sources
(mining) has witnessed a slow but steady increase at a year on year growth rate of
1 per cent. Key mining countries for silver are Mexico, Peru, China and Australia.
Jewelry and
Silverware
27%
million ounces
Peru ranked as the number one producing country by crossing the 100 million
ounces mark and recording a 4 per cent jump in production volumes. As for
future supply, higher silver and base metal prices have improved the outlook for
mine production, with fairly significant growth expected in 2007. As per GFMS,
mine production output is expected to rise by a modest 1 per cent or 6.4 million
ounces. Faster growth will be seen during the 2007-08 period due to expected
production from new mines in Bolivia and Mexico.
217
611.8
607.4
611.2
634.4
641.6
6%
6%
5%
7%
6%
7%
7%
8%
Australia
7%
7%
7%
Peru
9%
9%
100%
Others
80%
7%
5%
Chile
Poland
China
60%
40%
20%
5%
5%
6%
6%
7%
7%
7%
8%
8%
10%
11%
10%
10%
11%
11%
14%
13%
12%
11%
11%
10%
17%
15%
15%
14%
14%
12%
2002
2003
2004
Mexico
0%
2000
2001
2005
Figure 212: Changing market share of key production centres for silver
Source: GFMS, Silver Survey 2005
Coloured gemstones
Coloured gemstones have been an integral part of the gems and jewellery
industry at all times. Going by contemporary definition, any stone other than
diamonds is labeled as a Coloured Gemstone (diamond occupying the position
of a separate sub segment due to its share in the overall global jewellery pie)
Coloured gemstones may be precious or semi-precious:
Stones that qualify as being precious are Emeralds, Rubies and Sapphires.
100%
90%
7%
6%
6%
5%
6%
7%
6%
7%
8%
7%
7%
8%
5%
80%
70%
60%
11%
11%
10%
50%
11%
13%
40%
China
US
5%
6%
7%
Mexico
7%
7%
Thailand
9%
Italy
India
10%
14%
12%
11%
15%
14%
30%
Coloured gemstones are more often than not mined using picks, chisels,
hammers and shovels by small scale miners. This is in contrast to diamond
mining which usually comprises of very large, mechanised, highly efficient
operations
11%
20%
17%
15%
10%
14%
0%
2000
2001
2002
2003
2004
2005
218
219
gem kingdom. The green colour depends on the chromium content and iron
traces serve to enhance it. Emeralds often contain inclusions and other flaws.
However the finest emeralds are transparent. Unlike rubies and sapphires which
undergo heat treatment for clarity enhancement, emeralds are not heat treated.
Major producing centres for emeralds are Columbia, Brazil and Zambia
Rubies: Ruby is a variety of corundum (aluminum oxide) with chromium as an
impurity. Synthetic rubies have been successfully produced since 1904. Apart
from being set in jewellery, rubies are used in space research in connection with
communication systems. Major production centres for Rubies are Myanmar,
Madagascar, India, Afghanistan and Pakistan.
Sapphires: Sapphires are available in colours ranging from very pale blue to deep
indigo, depending on the quantities of iron and titanium present. Its chemical
composition is the same as that of a Ruby essentially corundum, which is the
second hardest known natural substance after diamond. Apart from jewellery,
sapphires are used in the manufacturing of jewel bearings, gauges, dies, and
high grade abrasives. Key production centres are India, Myanmar, Sri Lanka,
Thailand and Madagascar.
Major production centres for precious and select semi precious coloured gemstones32
Production of emeralds is
concentrated in three major
countries Columbia, Brazil
and Zambia
AfghanistanPakistan
India
Columbia
LEGEND
Emeralds
Brazil
Myanmar
Sri Lanka
Zambia
Sapphires
Rubies
Madagascar
Australia
Tanzanite
Topaz
Opal
220
32Note:
Locations plotted on the map are representative and do not depict exact locations of the sources of the stones
Myanmar: The Mogok region in the central part of Myanmar is the largest
mining area producing the finest quality rubies. Mong Hsu in the north east of
Myanmar is the second largest mining area producing rubies of lower quality but
in far larger quantities.
Initially rubies from Myanmar were considered unfit for jewellery purposes as
these crystals show two colours when untreated a purple to blackish core and
a bright red brim. However, they found their way into the jewellery market after
it was discovered that heat treatment of these stones would eliminate the dark
core and only the deep red would remain. The size of heat-treated rubies from
Mong Hsu varies between 0.5 and 3 carats. Most of the mining which is carried
out by independent miners is of the secondary deposits of ruby in the river
terraces of the Nam Hsu.
221
Given the nature of the Industry, reliable production data is not available.
Gemstone dealers in Thailand have estimated that about 80 per cent of the world
supply of rubies comes from Myanmar. It is however believed that the quantity
has reduced in the past few years.
Sri Lanka: Sri Lanka is home to some of the oldest sapphire mines in the world.
Ratnapura district is known to have contributed to mining for over thousands of
years. The quality of stones found in Sri Lanka has been depleting as older mines
are running out and production on the whole is on a decline. New productive
mines include Kantale, Horana, Mihintalaya, Ragala and Bogawantalawa.
Luminosity and brilliance of the colour typifies Sri Lankan sapphires.
India: India has been the biggest supplier of low-end rubies. Andhra Pradesh,
Bihar and Tamil Nadu produce facet grade rubies while Karnataka produces gem
quality rubies. Most mining is done on a small scale, by small units of locals
producers. Because of their poor clarity, Indian rubies are often dyed and oiled.
Other production centres: Afghanistan is another prominent producer of rubies.
However, political difficulties and rugged terrain have made mining in Afghanistan
difficult and complex. There are two mines, one located at Jagdelek, east of
Kabul and Badakhstan on the banks of Shignan river. Kabul is a major centre for
the trade of rubies though most of it enters the market through Pakistan.
Ruby deposits also occur in the belt extending between Hunza valley and
Ishkoman valley in Pakistan. These rubies are transparent to translucent and
brownish pink to pinkish red or deep red. Pakistan is one of the few regions in
the world that is producing blood red rubies which fetch a very high price in the
gem market. It is estimated that Hunza belt has a reserve potential of 1.8 million
carats of ruby, spinel and sapphire.
World production of sapphires
India: India is a notable producer of sapphires. Kashmiri sapphires, incidentally
discovered in 1880 after being uncovered by an avalanche, are considered to be
of a very high value. The key characteristic of Kashmiri sapphires is its pure and
intensive blue colour which is maintained under artificial light.
222
Myanmar: The colour of the sapphires found in Myanmar varies from royal blue
to deep cornflower blue. Sapphire deposits occur in the Mogok region, Mong
Hsu region and Kachin state. Mong Hsu region produces higher quantity of
sapphires than Mogok region though the quality of produce is inferior. Though
the quantity of pink sapphires produced by Kachin state is little, the quality is
exceptional.
In the past decade, Madagascar has emerged as one of the key producers of
sapphires. Ever since the discovery of the first sapphire mine in southern
Madagascar, there has been a fairly steady supply of blue sapphires from the
country. Madagascar is also an eminent producer of yellow and pink sapphires.
Blue sapphires from Madagascar are similar to those found in Kashmir, India in
terms of crystal morphology, however they appear to be slightly more cloudy
with significant colour zoning. Heat treatment is believed to give a lively blue
colour to these gems.
223
Colour is the most significant factor in determining the quality of tanzanite. Clarity
is the second most important characteristic in the same. Carat weight comes
next in order of significance and cut is the least important of the 4Cs in
determining the value of a tanzanite. Synthetic tanzanite has never been made.
Topaz
The Oro Preto hills in Brazil hold almost the entire known commercial reserves of
Imperial and Precious topaz. These hills produce colourless topaz which is then
heat treated to give it a blue colour. Majority of the Topaz currently available in
the market is produced by a single mine, Capao, located about five kilometers
from the small village of Rodrigo Silva.
While pink to reddish-orange is the most valuable colour, the most common
colour of topaz is yellow with a reddish tint. Topaz is of two types Imperial and
Precious. While Imperial topaz exhibits a strong multicolour effect, precious topaz
usually exhibits a yellow colour range. Synthetic blue topaz has been in the
market since 1976.
China: With rising labour costs in Thailand, China is replacing Thailand as a major
cutting center for coloured gemstones.
Sri Lanka: It is interesting to note that although the coloured gemstone cutting
industry in Sri Lanka is an age-old traditional industry, it was only as recent as the
1980s (with industrialisation and the removal of trade barriers) that the industry
began to make meaningful contributions to the countrys economy. However, the
industry is currently facing a number of challenges such as competition from
other low cost, more technology-savvy centres, difficulty in retaining talent,
smaller enterprises losing out due to rapid fluctuations in gemstone prices etc.
Current trends
The coloured gemstone industry is also drawn in to the web of the sweeping
changes taking place across the upstream segments of the gems and jewellery
industry:
Coloured gemstone mining countries increasingly processing in-house:
Opal
Australia accounts for more than 95 per cent of the world supply of opals. The
three states that house opal mines are Queensland, South Australia and New
South Wales. Opals are found in locations all over the world, from Canada to Japan.
224
The industry is getting more organised with the entry of large players who
Thailand: Thailand holds the top position in coloured gemstone cutting. It was in
the 1980s that Thailand rose to prominence as a cutting center for gemstones.
The development of skillful gem cutters through extensive training has been a
success factor for Thailand. Proximity to the gem producing nations of Myanmar,
Sri Lanka and Cambodia has also aided Thailand in easily sourcing the rough
gemstones. Until recently, Thailand itself used to be a significant producer of
coloured gemstones. Thailand supplies around 80 per cent of the cut rubies and
sapphires in the world1.
India: Jaipur is the worlds largest and most diversified center for cutting and
polishing coloured gemstones. In 1927 when Jaipur was built, the maharajas of
the time used to offer tax concessions to skillful artisans and jewellers thus
laying the foundation of a thriving gemstone industry here. In 2005, India
imported USD 83 million worth of coloured gemstones and exported USD 193
million of cut stones. Rough emeralds are imported from Colombia, rubies from
Myanmar and aquamarines from Brazil.
225
IN FOCUS : Tanzanite industry setting an example for the global coloured gemston industry 33
The industry for mining and production Tanzanite, a violet-blue gemstone, occurring only in remote regions of Tanzania,
has made spectacular progress in key markets over the last few years.
Name
34
Relative Pricing
Available colours
Very high
High
Green
Medium
Ruby
Small
Bixbite
Blue-green
to light blue
Small
A stone 1000 times rarer than diamonds, is expected to die out in 15-20 years: The worlds only known source of
Tanzanite is along a six-km strip in the Merelani Hills of northern Tanzania, near Mount Kilimanjaro. Production has
been steadily rising from USD 54.1 million in 1996 to around USD 185 million in 2000 reaching USD 300 million in
2005. As no major sources of the stone has been found in any other country or location within Tanzania, production
of Tanzanite is expected to be exhausted within the next 15 to 20 years given the estimated life of the current
mine.
Sapphire
Blue
Medium
Tanzanite
Blue
Small
Benitoite
Small to medium
Alexandrit e
Cats-eye
Greenish to brownis h
Small to large
Aquamarine
Blue-green
Blueto light blue
Any
Nature of the stone: Unique structure in the rough form; the stone radiates three different colours blue, violet and
burgundy. Once cut and polished, tanzanite ranges from electric violets and pale blues to deep royals and rich
indigos.
Fancy Sapphire
Medium to large
Peridot
Any
Amethyst (Quartz)
Purple
Large
Garnet
Small to medium
Opal
Large
Pearl
Small
Amber
Yellor,
Yellor red, green, blue
Any
Topaz
Medium
Tourmaline
Medium
Zircon
Small to medium
Coral
Branching, medium
Moonstone
White
Large
Turquoise
Blue to green
Large
Jadeit e (Jade)
Large
Nephrite (Jade)
Large
Relative Pricing: After the three key precious stones emeralds, rubies and sapphires tanzanite is the fourth most
popular coloured gemstone in the largest jewellery market US. In comparison to these stones, tanzanite is much
cheaper with average price ranging from USD 500 USD 2000 per carat.
Medium
> 50 carats --------------------< 5 carats > USD 200 per ct----------------------<USD 25 per ct
Emerald
1
1
1
1
1
11
11
11
11
Unified marketing efforts: What clearly differentiates this industry from that of
other gemstones is the marketing initiatives of the industry players and
associations that are driving the growth in a very big way. Tanzanite Foundation
has been marketing the stone, showcasing its various unique propositions such as rarity, colour and other
characteristics. Notable among these efforts is the marketing campaign Be Born To Tanzanite that has created waves
in the industry.
33
226
Source:
Tanzanite Foundation Tanzanite Report, Maverick April 2006, TanzaniteOne Annual Report 2005, ICA World Mining
Report 2005, ICA Website, Jewellery News Asia Sep 2005, National Jeweler 01 May 2006
34
Note:
Size: Small-up to 5 carats;medium-upto 50 carats; large-more than 50 carats
227
Glossary
228
AIDS
HIV
Alrosa
Almazy Rossii-Sakha
HK
Hong Kong
ASSOCHAM
HNI
BDVC
HPHT
BEE
HRD
CAD
CAGR
IAMAI
CAM
IGI
CBGA
ILO
CEO
IMF
CEPA
IMRG
CIA
INR
Indian Rupees
CIS
JAF
CPD
JCOC
CVD
LBMA
DBCM
MIBA
Miniere de Bakwange
DDE
Mn
Million
DFID
OECD
DRC
Oz
Ounce
DTC
PGE
EITI
PGI
EIU
PGM
ENDIAMA
PWP
ETF
RMB
Renminbi
FDA
SEZ
FDI
SOC
Supplier of Choice
FICCI
U.A.E.
GBP
U.K.
United Kingdom
GDP
UNAID
GIA
UNITA
GSP
U.S.
USD
WGC
YoY
Year-on-year
229
230
31
32
33
34
Diamond Facts 2005: Diamond Industry Report, 2005, Northwest Territories Canada
35
36
37
38
39
10
40
Diamonds by Louis Perron, 2006, Minerals and Metals Sector, Natural Resources Canada
11
41
42
12
13
43
Diavik Calendar 2005, Production Statistics, January 2006, Toronto Stock Exchange
14
44
15
45
16
BHP Billiton 2005 presentation by Sean Brennan President & COO EKATI, Sept 2005
46
17
BMRB International
47
18
48
19
Facts and Figures 2005: Ministry of Industry, Trade and Labour, Diamonds,
Precious Stones and Jewellery Administration, Israel
20
49
Financial Times
21
50
22
51
23
52
24
53
25
54
26
55
27
56
28
57
29
58
30
59
60
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91
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92
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95
Mineweb (www.mineweb.net)
66
96
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99
70
100
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90
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Research Report on the Jewellery Sector in Hong Kong - Prepared by ICE HK June 2005
122
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234
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168
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169
143
170
144
171
145
The Economist
World Colored Gemstone Mining Report 2005, Gordon Austin, Morgan Beard, Mick Elmore,
Cara Woudenberg and Megan Zborowski
146
172
World Economic Outlook Database, April 2006, International Monetary Fund (IMF)
147
The Gem and Jewellery Sectors of India and Italy - A Cluster Perspective, 2004,
Indo Italian Chamber of Commerce
173
174
148
175
149
176
150
177
www.emeralds.com
178
www.goldsouks.com
235
Acknowledgements
236
31
32
33
34
Chaim Evan Zohar, Managing Director, Tacy Ltd., Ramat Gan, Israel.
35
36
Philip Olden, Managing Director, Marketing and Jewellery, World Gold Council, London, UK
37
38
Prashant Kapre, Business Director, The Diamond Trading Company, Mumbai, India.
39
10
40
Rajiv Mehta, Chief Executive Officer, Dimexon Diamonds Limited, Mumbai, India
11
41
12
42
Sanjeev Agarwal, Managing Director - Indian Subcontinent, World Gold Council, Mumbai, India.
13
Gaurav Gupta, Vice Chairmand and Joint Managing Director, Aerens Gold Souk, Gurgaon, India
43
14
44
15
Harsh Dalal, Vice President Sales, Aber Diamond Corp., Toronto, Canada.
45
16
Hemant Shah, Chief Executive Officer, Uni Design Jewellery, Mumbai, India.
46
17
James Courage, Chief Executive Officer, Platinum Guild International, London, UK.
47
18
48
19
49
Stephane Fischler, Vice Chairman, HRD Diamond High Council, Antwerp, Belgium
20
50
21
Konal Doshi, Modern Impex, GJEPC Co-convener gold jewellery panel, Mumbai, India.
51
22
Lawrence Bentley, Strategy and Business Development, De Beers Group, London, UK.
52
23
53
24
Loet Kniphorst, Global Head of Diamond & Jewellery Group, ABN Amro Bank,
Antwerp, Belgium.
54
Varda Shine, Managing Director, The Diamond Trading Company, London, UK.
55
Vartkess A. Knadjian, Group Chief Executive Officer, Backes and Straus, Antwerp, Belgium.
25
56
26
Mahesh Rao, Carbon, GJEPC Convener -Gold Jewellery Panel, Mumbai, India
57
27
28
Mark Jenkins, Group Company Secretary, Signet Group plc., London, UK.
29
30
237
About GJEPC
About KPMG
The Gem & Jewellery Export Promotion Council (GJEPC) is an all - India apex
body representing more than 7000 jewellers from India, established to promote
the export of various gems and jewellery products from India. Set up in 1966, the
council is a non-profit organisation, operating under the supervision of the
Ministry of Commerce, Government of India and elected representatives of the
industry.
The core objective of the GJEPC is to introduce Indian gem and jewellery
products to the international market and promote their exports. To achieve this,
the council provides market information to its members regarding foreign trade
inquiries, trade and tariff regulations, rates of import duties, and information
about jewellery fairs and exhibitions.
As a secondary objective, the council has also taken on the role of compilation
and publishing industry import-export statistics of India and select other nations
on a regular basis.
KPMG member firms provide audit, tax and advisory services through industry
focussed, talented professionals who deliver value for the benefit of their clients
and communities. With nearly 100,000 people worldwide, KPMG member firms
are spread over 144 countries.
Arrangement for the participation of its members in foreign trade fairs and
exhibitions.
Acting as a liaison body between the industry and the government to ensure
a smooth flow of exports
The council also forms an effective link between foreign buyers interested in
importing gems and jewellery from India via appropriate Indian exporters. The
council plays a nodal role in establishing and managing the international network
between Indian exporters of gems and jewellery and foreign buyers.
238
239