Looking at the future of the natural diamond industry, BCG said in the in collaboration with De Beers Group that “Stable midstream inventories expected to remain, while efficiency reduces downstream inventory!” Natural diamond inventories are held across all stages of the diamond value chain at varying levels.
Inventory management dynamics directly influence diamond price formation in the short term by impacting the immediate supply availability. Midstream and downstream inventory levels are particularly relevant as demand flows up through the value chain.
Midstream: In the short term, midstream inventories fluctuate, largely driven by prevailing market conditions, short-term views on the market outlook, and financing. Longer term, structural midstream inventory levels are dictated by the need to manage stock for operational purposes.
Although efficiency and scale gains in the midstream have generally reduced stock levels from those observed in the early 2000s, lead times for processing and sales require cutters and polishers to generally maintain a minimum inventory level. However, this floor is occasionally breached in very sharp demand-recovery scenarios.
Downstream: Historically, retailers have held structurally higher inventory levels than midstream players to ensure that a wide range of products are available to consumers. However, the growth of more efficient major brands and retailers and the rise of online retail have reduced stock-to sales ratios, albeit at a slowing rate. While stock-to-sales ratios could continue to decline, they are increasingly nearing their technical inventory floor (for example, approximately 90 days for major brands), absent a fundamental change in downstream industry structure.
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