Strong growth in rough diamond sales this year may lead to a repeat of last year’s damaging inventory pile-up if consumer demand does not improve, Bain & Company warned.
Rough sales grew 20 percent in the first half of this year as the midstream restocked following a stockpile sell-off in the second half of last year, Bain explained in its annual Global Diamond Report.
However, jewelry retail performance in the first-half suggests sales might not be keeping pace with growth in the rough market, Bain observed.
“Strong rough diamond sales in 2016 may again lead to swollen midstream inventories if retail demand does not strengthen proportionately,” the consultancy group said. “Declining sales at major jewelry retailers in the first half of 2016 indicate a possible demand slowdown in the U.S. and China.”
Sales were hit by weaker economic conditions in the energy-producing U.S. states and a temporary drop in overall consumer expenditure. Baby boomers have begun to move beyond the peak spending point of their lives, but millennials are yet to reach theirs, Bain pointed out. The outlook for the rough and manufacturing sectors early next year will depend on the strength of retail sales in this year’s holiday season, the report added.
Profitability in the midstream fell last year as polished demand slumped, mainly because of a weaker Chinese demand. Bain estimated that 2015 revenue in the diamond manufacturing sector declined 2 percent as polished prices fell approximately 10 percent, while margins were at or below break even. Meanwhile, diamond jewelry retail sales grew 3 percent at constant exchange rates, but declined 2 percent in U.S. dollar terms, according to Bain.
The group cautioned that consumption may continue to slow in China, while there is a risk of a cyclical recession in the U.S.