Can Cayman Dominate the Diamond Industry?
The diamonds business is a lucrative industry. Global diamond jewelry demand grew 2.9 percent to $81.4 billion in 2014, according to diamond miner De Beers.
If longtime Cayman jewelry maker Dennis Smith’s plans come to fruition, Cayman could well take a share of that market.
Smith is pitching the idea that Cayman would be an ideal trading hub for diamonds, with a focus on serving the United States, the largest consumer market for diamond jewelry in the world.
According to his project, diamond firms in Cayman could develop an active and substantive business presence based on the import-export of diamonds and value-added services supporting the industry’s supply chain before finished goods enter the U.S. market.
These value-added services could include anything from compliance, certification and trading to gem cutting and valuations. Marketing and supply chain management services could also be executed from Cayman, potentially leading to the creation of many new local jobs.
While more than 80 percent of the world’s diamonds are cut in India, the country only supplies 32 percent of the U.S. market, Smith says. “A diamond trade center in the Cayman Islands would give them same day access to the U.S. and enable their American clients to visit the Cayman Islands on business and return home the same day.”
South African diamantaire Ernie Blom, president of the World Federation of Diamond Bourses, believes, if handled correctly, Cayman could become a very important exchange.
Cayman could emulate the Dubai Diamond Exchange, which launched in 2000, and has become a huge success story, he says. “They have now got a 40-story building and they are turning over $34 billion in 15 years.”
Blom says this is mainly due to the tax-free status of the exchange and because of the ease of doing business, as well as the professional support that is available there.
“I think that is the same that Cayman can offer. And Cayman feeds into the North American continent, which is the biggest consumer and will be for a long time to come.”
Unlike Dubai, which is located near the bottom end of the supply chain between the African supply of rough diamonds and Indian manufactures, the Cayman Islands would be placed at the final, high-value aggregation point for the industry’s global supply chain.
In the region, Panama already opened a similar diamond trading hub four years ago and recently launched the Panama Diamond Exchange with a view to cater to the South American consumer markets.
The Panama exchange aims to attract some 200 Latin American companies and another 200 international businesses from the U.S., Israel, India, China and Russia. The plan is to generate more than $3 billion direct and indirect income per year by 2020.
For multinational luxury firms that are frequently registered in Cayman, adding a tangible value-added activity here could also validate any substantive presence requirements, if international rules around tax and intellectual property are tightened in the future.
Positive industry outlook
The prospects for the industry as a whole are largely positive.
South African company De Beers controlled the diamond industry for more than 100 years. Founded in 1888, the diamond miner produced 90 percent of the world’s rough diamonds for much of that time and therefore controlled the supply in the industry.
But over the past few decades, the fortunes of the sales monopoly have changed. The miner’s share of global production volumes declined from 80 percent in 1980 to between 30 and 40 percent today.
This makes de Beers, which is now part of Anglo American, still the biggest producer by value, but Russian company Alrosa has become the largest producer by volume.
Other players like Rio Tinto and BHP Billiton also have sizeable chunks of the industry, however, both mining groups have recently been looking for buyers of their diamond interests.
Blom says De Beers’ previously monopolistic market dominance was not healthy for the industry. “What you have now is a scenario where there is no one company that can control the market. It is consumer demand that is driving the market.”
Most of the demand for diamond jewelry is coming from the U.S., closely followed by China and India. Compared to other commodities like iron ore or copper, diamonds are less susceptible to supply shocks that can disrupt prices. Likewise, there have been no new significant diamond discoveries in the past 15 years, and in the medium term output, is even forecasted to decline slightly.
Despite expectations that consumer demand will continue to rise, especially in China where half of couples that are getting married buy diamond rings, prices have dipped recently.
But in the long term, diamond prices should rise, as the supply curve continues to widen.
According to Blom, projections show a $10 billion shortage in terms of supply, as a result of growing consumer demand and lack of new big mines coming onto the market.