Global Value Chains

International Trade Patterns

Social & Political Factors

Bibliography

Global Value Chains

Source: DiamondFacts.org 2

Formation

Diamonds obtain their unique and beautiful structure deep inside the earth from extreme heat and pressure, beginning 3.3 billion years ago. The carbon atoms within the diamond bond into pyramidal structures, making them among the hardest minerals on Earth. Diamonds can be created artificially; however, most of the diamonds used for jewelry exist naturally. Given the immense time it takes to for a diamond to be form, it is the following stages that are more important to the global supply chains.

Exploration

Diamonds are found all over the world with companies investing in exploration, always looking for new, substantial sources of diamonds. Deposit discoveries often lead to direct revenue growth from firms and the host countries. Diamond exploration investment has increased from $210 million in 2002 to $250 million in 2003. Exploration project numbers have increased from 380 projects in 2002, 460 in 2003, and 500 in 2004. 3 Money invested in exploration continues to increase, and we predict that this will be a continued trend at least for a decade. While many firms tend to "stockpile" diamonds, this trend is changing, and substantial investment in exploration is crucial to maintain a competitive advantage.

Mining

Most diamond mining is conducted in two ways:
- Open pit mining – excavation on the surface of the ground
- Underground mining – excavation below the ground

Other methods, such as extraction from alluvial deposits, are also used. Mined diamond production in 2005 was about $12.7 billion, with operation costs around $4.7 billion. Production has increased over the last 35 years, with discoveries in 35 countries.4 The key to sustaining an advantage in mining lies in utilizing the mining techniques that are most suitable to the conditions. This is extremely hard to predict, and to some degree is one of the "crapshoot" aspects of diamond production.

Sorting

Rough diamonds are sorted into different value categories depending on size, shape, color, and quality. The best diamonds are sent off to the next stage of the value chain, with a Kimberley Process certificate proving they are from a conflict free source. The rest are used for industrial purposes.

Cutting & Polishing

Cutting and polishing often does not occur in the same location as the exploration and mining. Rather, sorted diamonds are shipped off to be cut and polished in countries further along the supply chain. The diamonds are then classified once more, according to the four C’s: Color, Cut, Clarity, and Carat weight. Global production at this stage is worth $19.3 billion.5 In fact, this is one of the most crucial aspects of the diamond supply chain. It is where a substantial part of the mark-up occurs, and it is almost always what makes the supply chain "global". The countries and firms that are able to find the most cost-effective, quality-assured, and (increasingly) safest means of cutting and polishing represent those that will be globally competitive in the future.

Manufacturing

Cut and polished diamonds are sold through one of the 24 worldwide registered diamond exchanges (“bourses”) or directly to manufacturers. Using designs from jewelry designers, retailers, or in-house designers, manufacturers transform these diamonds into jewelry. There is also a great deal of value-addition in this phase of the supply chain; the diamonds are finally "becoming" jewelry. Further, this is one of the higher levels of production, and one that many countries aspire to "upgrade" to. Ultimately, the manufacturing centers hold a lot of power in the final destination of the diamonds, which has the highest potential for profit.

Retail

Finally, jewelry is sold from the retailer to the consumer. The final diamond jewelry product is worth $31 billion in terms of diamonds, and $62.5 billion including the non-diamond components.6

An overview of the global supply chain process is depicted below.

Diamonds: Global Supply Chain

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The countries in red reperesent operations owned by De Beers. As the diamonds progress through the pipeline, they increase in value, though most of the mark up occurs on the retail side. As you can see, much of the production lies in African countries like South Africa, Namibia, and Botswana, as well as in Russia and Canada. The chart also shows some of the Cutting & Polishing locales, as well as the final retail destinations. These are discussed further in the countries and firms pages.

It is useful to attempt to quantify how much value is added in each of the production stages. The mark-up value of diamonds increases exponentially as it passes through the links of the global value chain.The charts below show how much value is added during each stage. The first shows how much is added in terms of the percentage of the original value. The graph on the right reveals how $9 billion of rough diamonds translated to $57 billion in diamond jewelry sales in 2002.

As you can see, the highest potential for profit lies in retail. We also feel the need to offer some words of caution regarding the limitations of our analysis. Although the numbers and figures above have been provided by credible sources, it is unlikely the diamond trade is fully encapsulated by them. Because of the conflict diamond trade, which will be discussed at length in the Social and Political section, the true value of the industry and the role each of its players has in the global value chain is unclear. The Kimberley Process, which tracks every cross-border interaction, helps reduce the quantity of conflict diamonds in the market, and also enables each link of the global value chain to be documented.

Click here for specific information on major countries and firms in the diamond global value chain.

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Sources