Digital disruption is being redefined by changes in the diamond industry where synthetic engagement rings are growing in popularity just as demand for bigger gems dries up.
The net result from those events at the top and bottom of the market is relegation of diamonds to last on a "commodity preference" list published by the investment bank
Too Many Gems And Too Few Buyers
According to an analysis of the diamond market in the bank's latest Global Metals Playbook increasing supply and a rising level of inventories are capping any increase in the price of freshly-mined, or rough diamonds.
Confirmation that conditions are tough in the diamond trade came at almost the same time as Morgan Stanley published its report when the world's biggest diamond trader, De Beers, revealed a surprise fall in the value of gems sold at its latest offering to its principal customers, or sightholders.
The 12% drop in sales to $540 million at the latest offering of diamonds from $636 million at the previous event earlier this year was described by De Beers chief executive, Phillipe Mellier, as "somewhat lower" but in line with expectations and typical of seasonal demand patterns.
De Beers Is Optimistic But Cautious
"Rough diamond demand and polished diamond prices remain stable, reflecting steady consumer demand," Mellier said, before adding a warning comment that: "We maintain a cautious outlook"
Not everyone agrees with Mellier's optimistic assessment that diamond demand and prices for polished gems are stable.
Bids at a London auction earlier this week for the world's biggest diamond discovered in more than 100 years failed to reach the reserve price and while the top offer of $61 million was impressive the owner, Lucara Diamond Corporation, was reportedly hoping for $70 million.
It's the series of events occurring within days of each other (the failed London auction, the De Beers sales drop and the low ranking assigned to diamonds by Morgan Stanley) which combine to spell a return of the troubles which disrupted the diamond industry two years ago.
Come And See The Real Thing
Hints that a fresh crisis is brewing in the diamond industry surfaced last month when the influential industry commentator, Martin Rapaport, warned about the challenge of laboratory-grown diamonds.
"The diamond industry must establish reliable chain of custody and source certification protocols to ensure that legitimate diamonds from good firms are differentiated from unknown diamonds from questionable sources," Rapaport said.
"The industry must be able to answer the question: where do our diamonds come from".
One answer to that question is that people without deep pockets do not seem to be interested in the provenance of the diamond they're thinking of buying with price the key determinant.
Smaller Gems First To Feel Synthetic Heat
Morgan Stanley detected that price-comes-first trend when noting that smaller diamonds in the less-than 0.2 of a carat range "will be most susceptible to demand disruption".
But, it's the overall combination of factors that range from the rise of synthetic diamonds, to global economic uncertainty which is hurting all segments of the luxury goods market, to the more simple problem of excess production which has driven diamonds down the investment pecking order.
According to Morgan Stanley's analysis of the commodities sector diamonds currently sit below iron ore, steel, coal and aluminum in a 17-member list of preferred to least preferred commodities.
Top of the list is zinc, the metal used to galvanize steel, which has entered a period of short-supply thanks to a crop of mine closures rather than a surge in demand.
Diamonds, however, are being whacked from all direction with Morgan Stanley predicting a 9% increase in production from the world's mines next year just as demand falters.
The bank's supply and demand analysis assumes that total diamond production will rise from 130.9 million carats this year to 143.4 million carats in 2017.
Unfortunately, a lot of that extra material will go directly into an already large stockpile which grew alarmingly last year to 34.1 million carats, and while the industry has been able to whittle it down to around 28.6 million carats it looks unlikely to continue falling.
What that means is that the stockpile of diamonds, which stood at 27% of supply last year could drop to 22% this year before stabilizing at a price-depressing 19% in 2017 and sitting there for the next two years before rising to 20% in the year 2020.
To put that inventory surplus into perspective the proportion of diamonds in stockpiles before the 2008 global financial crisis stood at around 7% and as recently as 2014 was at 12%.
A stockpile of 20% is a challenge for the industry, especially in uncertain economic times and with the threat of a synthetic diamond revolution brewing in the background.
