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Analysis of the Diamond Industry

Info: 3093 words (12 pages) Essay
Published: 8th Feb 2020 in Business

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Introduction:

 

The diamond industry is comprised by the mining and trade of rough diamonds. The bulk of world diamond is highly concentrated in few countries with 90% share of the physical resource. World’s largest producer of rough diamond is Russia followed by DRC and Botswana. They have accounted for almost 60% of world production. (ALROSA, 2018)

The diamond industry is vital for Australian economy. Australia is blessed with high quality natural resources and also with high valued rough diamonds. The trends of diamond industry have significantly changed over the years. The diamond industry has observed important developments in their value chain with changes in diamond production and sales, mid-stream performance and the change in the demand for diamond jewellery in important markets

  1. Introduction to Company

An overview of the company: Rio Tinto Diamond

Rio Tinto diamonds is one of the largest rough diamond producers in the world.  Rio Tinto diamond has globally integrated business operation across the world. The company is engaged with diamond exploration, mining, sales and marketing activities to several markets in both established and developing countries. Rio Tinto diamond is committed to maintain the sustained supply of high quality white and coloured diamonds. Rio Tinto operates the mining projects in Europe, Australia, Asia, North and South America. As a responsible business, they strongly maintain the highest possible health, safety and environment standards while conducting their mining activities.

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Rio Tinto has 100% ownership in Argyle Diamond Mine, that is located in East Kimberly region of West Australia.  Rio Tinto is operating this remotely located mine since 1983 and produced approximately 800 million carats of rough diamonds since then.  Rio Tinto has owned another diamond mine known as Diavik Diamond Mine in Canada in which it has 60% ownership.  Rio Tinto Diamond is ranked as world’s largest producer of natural coloured diamond. As far as the pink coloured diamond is concerned, Rio Tinto is the only supplier in the world. (Diamondproducersassociation, n.d.)

In Australia, Rio Tinto is ranked as number one public company among the top 2000 companies in the country. Majority of its revenue comes from metal ore mining in Australian company.  Total revenue for Rio Tinto has reached to $67,353,480,000 that includes sales and other revenue. Total employment from all sub diaries under the company’s control has estimated as 47458 which is high.  For last 100 years, Rio Tinto is committed to build economically resilient and sustainable communities across Australia. At the bottom line, Rio Tinto is well integrated with economic prosperity of this resource -rich nation. (IBISWorld, 2018)

  1. Industry Background

 

An overview of diamond industry:

The trends of diamond industry have significantly changed over the years. The diamond industry has observed important developments in their value chain with changes in diamond production and sales, mid-stream performance and the change in the demand for diamond jewellery in important markets. Despite the persistence of volatility, diamond industry has shown a strong performance in 2018 with a 2% annual growth in almost all the segments of value chain. Diamond mining companies delivered uninterrupted supply and the production volume has increased by 20% in 2017. (bain&company, 2018)

 The future outlook of diamond industry through 2030 largely influenced by changes in mining operations, changes in key macroeconomic parameters in both regional and global level, potential source of additional supply and effects of lab grown diamonds. Overall, the demand for jewellery is predicted to improve in 2019 and beyond. On the downside, if the trade war between US and China accelerates, it will have an adverse impact to the growth prospects of global demand for diamond at least in the short and medium term.  Moving forward, the demand for natural rough diamonds is expected to remain strong through 2030 fuelled by the strong fundamentals in   United Sates and the rise in per capita income in emerging economies in Asia like India and China. (Olya Linde, 2018)

  1. Market structure of the Industry

Types of Market structure:

 

Since Ri Tinto is the single supplier of pink diamonds, it can be characterized by monopoly market structure. Monopoly arises for this diamond company from the ownership of the key resource at Australia.   Rio Tinto does not have any competitor in the production of pink diamonds thus enjoys absolute market power. Being the single seller, Rio Tinto faces a downward sloping demand curve and can determine the profit maximizing price as well as quantity. Due to absence of competition in the market, Rip Tinto can enjoy positive economic profit both in the short run as well as in the long run. Since Rio Pinto does not operate at the minimum point of ATC, it is not productive efficient. Moreover, Rio Pinto cannot achieve allocative efficiency because the price charged by the firm is greater than marginal cost. Overall, the monopoly market is inefficient due to misallocation of resources thus creates a deadweight loss to the society. (Nicholas Gregory Mankiw, 1998)

  1. Market leaders in the Industry:

There are few large diamond companies who has the bigger impact on the diamond trade worldwide. The dominant players in the diamond market are DE Beers, Alrosa, Rio Tinto Diamonds, Debswana Diamond company and Dominion Diamond corporation. De Beers is the diamond gaint who are in the business around a century and earned $ 6.2 billion revenue in 2012.  De Beers has significant control over the global diamond supply. Alrosa can be termed as Russian counterpart of De Beers and it makes sense.  The success of becoming world’s largest diamond company comes from the discovery and ownership of single mine in Russia. The mine has estimated to contain approx.  $4 billion diamonds and Alrosa has the absolute right to mine it. Dominion Dimond Corporation is another major player based on Toronto, Canada. They own the well know mine Diavik diamond mine located in Canada. The company has reported to generate $700 billion revenue in 2012. (Petragems, 2018)

  1. Demand- supply dynamics

Determinants of demand for diamonds

  1. Lab grown diamonds: 

The demand for natural diamond is largely influenced by the growing presence of lab grown diamond. With the fall in production cost, the lab grown diamond will be accessible to wider consumer audience in the longer term. It may increase the overall demand for the diamond but will reduce the demand for natural diamond as supplied by Rio Tinto. It will push a downward pressure on the diamond price. (Hill, 2018)

  1. Shifting the preference of younger generation consumer:

The demand for diamond jewellery will vastly depend on the spending power of GenZ female consumers. While making purchasing decision, younger generations are highly influenced by social media. Changing consumer preference and appetite for diamond jewellery is identified as one of the longer-term risks that can be negatively impacted the demand.  (bain&company, 2018)

Determinants of supply for Diamonds:

 

  1.  Emergence of digital technology:

The emergence of digital technology is affecting all the parts of value chain of diamond industry. It would help to improve efficiencies in the operations for producers, midstream players and the retailers. With the help digital technology, the diamond suppliers can deliver superior customer experience.

  1. The rising cost of production:

 Cost of production is one of the key determinants that affects the supply side. The higher cost of production for mining, sales and marketing activities may become an obstacle to have an uninterrupted supply of diamond from Rio Tinto in the years ahead.

4. Elasticity

Diamond is a high priced, unique product with a very few substitutes. The demand in quantity of diamond remains fairly constant even there is a change in price as it has a very less substitute effect so, due to this Diamond is considered as an inelastic product. It has a PED greater than 0 but less than 1. For the Diamond to become more inelastic or perfectly inelastic it should be a necessity item for the people and essential for their day to day life.

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In my view, the factors that affect the elasticity of demand of diamond the most are Income level and availability of Substitute. Rich people doesn’t get influenced by the change in price of diamond whereas the situation is completely different in case of lower-class people. Elasticity of demand of diamond is generally less for the rich people as they buy the luxurious product even the price increases. Whereas the lower-class people demand for diamond decrease with the increase in price and vice-versa. As a result, the demand of diamond for higher class people are inelastic and demand for lower class people are highly elastic. In 2008, due to the global financial crisis people were losing jobs and earning very low then previous and at that time the demand of diamond was also affected negatively. In 2009 as the global economy started to recover financial sector started to stabilise, people started earning good incomes and even afford Diamonds. In 2009, the demand for diamond also increases as the income level of people started rising (Gaud 2010).

Availability of Substitute is also one of the major factor for affecting the elasticity of product. Availability of the substitutes make the product more sensitive and cause the change in demand with the change in price. If the substitute of Diamond will be introduced in the market then people will look to buy it’s substitute if the price of diamond increases and thus the demand for the diamond will fall.

 

5.  Record breaking Tender in the industry

Rio Tinto had recent record-breaking tender of Argyle Pink Diamonds in 2018.The tender consisted a collection of 63 rare pink, red and violet diamonds. These vivid coloured diamonds are regarded as the world’s most important diamonds renowned for their unique beauty. (Rio Tinto,2018)

The main attraction of this tender were six hero diamonds (namely, Argyle Muse, Argyle Alpha, Argyle Alchemy, Argyle Mira, Argyle Odyssey and Argyle Maestro). These diamonds are especially named, and the tender was held with the theme Magnificent Argyle to mark their record in the huge contribution of rarest pink, red and violet diamonds in the diamond history (Australian Mining,2018). There were altogether 63 diamonds weighting 51.48 carats including five fancy red diamonds, two purplish red diamonds and three violet diamonds. All the diamonds in the tender bore great value as only one carat of such polished carat was made after one million carat production of rough diamonds from Argyle Mine (Fowler 2018).

Collectors from all around the world bid on the tender for these top rare diamonds. The tender was competitive as the Argyle Mine is to be closed by 2020 which made these scarce diamonds scarcer. The fanciest and most valuable diamond was purplish Red Argyle Muse (2.28 carat, oval) which was sold to an undisclosed buyer. The other one similar to it was the largest diamond (3.14 carat) named Argyle Alpha, a fancy vivid purplish diamond. The Argyle Diamonds partner, Glajh THG had the winning bid for it. Matthew Aldridge, a chief executive of Gemcut Geneva, won several diamonds in the tender including 2.08 fancy intense pink Argyle Odyssey. He said that he was extremely amazed with those unique diamonds bearing magnificent colour potential from this mine (Rio Tinto,2018).

The tender was very competitive. Although Rio Tinto hasn’t revealed the figure by 55 carats collected, it has disclosed that the tender reached double digit price growth (Fowler 2018). Since the mine is coming close to the end, the demand has been increased tremendously for these vivid diamonds and so has the price since the scarcer becomes more valuable in price as well.  The value of the pink diamonds has increased dramatically after this tender. But the supply of such diamonds is likely to be minimum as the main mine producing them is going to be closed. There is small quantity of pink diamonds mined in Brazil and South Africa. The chief executive of Rio Tinto copper and diamonds said that after this event was highly successful and it will result into rise of price and demand of these type of limited and extraordinary coloured diamonds (Rio Tinto,2018).

Conclusion

To conclude, Rio Tinto has globally integrated its business successfully in the world having zero competitors in case of Pink Diamond.  Overall, Diamond industry now are progressing by having improvement in their value chains with change in value production and sales.  Rio Tinto is the only supplier of Pink Diamond, so it can be forecasted that it will enjoy economic profit in both short term and long term. In 2018 Rio Tinto had the record breaking tender which consisted a collection of 63 rare pink, red and violet diamonds. The event was very successful as a lot of people were attracted by the vivid diamonds especially the pink diamonds but the Argyle mine is soon closing in 2020 which made these rare diamonds even scarcer. Hence, with scarcity demand and price of pink diamonds has tremendously increased.

 

List of References:

  • ALROSA, 2018. World Diamond Market. Available from: http://eng.alrosa.ru/diamonds-explained/the-world-diamond-market/ ed. s.l.:s.n.
  • Australian Mining 2018, ‘Rio Tinto delivers record Argyle Pink Diamonds tender’ November 13, Available from: https://www.australianmining.com.au/news/rio-tinto-delivers-record-argyle-pink-diamonds-tender/ [1May,2019]
  • Bain&company, 2018. The Global Diamond Industry 2018. [Online]
    Available at: https://www.bain.com/contentassets/a53a9fa8bf5247a3b7bb0b10561510c2/bain_diamond_report_2018.pdf
    [Accessed 29 April 2019].
  • Diamondproducersassociation, n.d. Rio Tinto. [Online]
    Available at: https://diamondproducers.com/about-dpa/members/rio-tinto/
    [Accessed 29 April 2019].
  • Fowler, C 2018, ‘One in a million: Bidding heats up at Rio Tinto’s 2018 Argyle pink diamond tender’ ABC Rural ,17 November , Available from:https://www.abc.net.au/news/rural/2018-11-18/argyle-pink-diamond-tender-feature/105083c02 [1 May 2019]
  • Gaud, JM,2010, ‘An economic analysis of the rise in prices of diamonds and its price elasticity of demand’ Available from: http://economicspoliticsanthropology.blogspot.com/2010/11/economic-analysis-of-rise-in-prices-of.html [1 May 2019]
  • Hill, A., 2018. The Jewelry Industry Grapples With The Real Impact Of Lab-Grown Diamonds. [Online]
    Available at: https://www.forbes.com/sites/andreahill/2018/08/13/the-jewelry-industry-grapples-with-the-real-impact-of-lab-grown-diamonds/#7fbbffeb530c
    [Accessed 29 April 2019].
  • IBISWorld, 2018. Rio Tinto Plc – Rio Tinto Limited – Premium Company Report Australia. [Online]
    Available at: https://www.ibisworld.com.au/australian-company-research-reports/mining/plc–rio-tinto-limited-company.html
    [Accessed 29 April 2019].
  • Nicholas Gregory Mankiw, ‎. G. M., 1998. Principles of Microeconomics. s.l.:Harcourt Brace College Publishers.
  • Olya Linde, O. G. a. A. E., 2018. The Global Diamond Industry 2018: A Resilient Industry Shines Through. [Online]
    Available at: https://www.bain.com/insights/global-diamond-industry-report-2018/
    [Accessed 29 April 2019].
  • Omairs blog 2013,  Available from: https://omairsblog.wordpress.com/2013/11/07/ped-of-diamonds/ [1 May 2019]
  • Petragems, 2018. Top Ten Diamond Companies in the World. [Online]
    Available at: https://www.petragems.com/education/top-ten-diamond-companies-in-the-world-/
    [Accessed 29 April 2019].
  • Rio Tinto 2018, ‘Rio Tinto showcases its largest Fancy Purplish Red diamond in Asia’ Rio Tinto ,13 September. Available from: https://www.riotinto.com/media/media-releases-237_26109.aspx  [1 May2019]

         Rio Tinto 2018, ‘Rio Tinto’s Argyle Pink Diamonds Tender delivers record results for pink, red and violet diamonds’ 9 November, Available from: http://www.riotinto.com/media/media-releases-237_26379.aspx [1May 2019]

 

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