High metal prices and growing imports have taken the sparkle out of the Jewellery manufacturing industry. Over the five year period through 2010-11 industry revenue is estimated to have grown slowly, at 1.4% per annum to reach $935.6 million. In 2010-11 industry revenue is anticipated to grow by 1.0% as overall retail sales remain subdued.
Demand around the world for gold as a safe investment in light of the economic meltdown spiked in 2008-09. Gold prices rose and industry revenue grew strongly over the year. Higher input prices have squeezed profit levels as manufacturers are under increased pressure to absorb costs.
Moreover, import levels have steadily increased over the five year period since 2005-06. Cheap, imported products from low cost countries have become more appealing to retailers seeking to protect their margins and consumers looking for value for money. Consumers have been reluctant to spend on luxury items, such as jewellery, since the global financial crisis; further hurting the industry.
Over the five years through 2015-16 the industry is expected to grow at an annualised rate of 2.8% per annum to reach $1.1 billion. Expansion in the industry will be supported by strong growth in real disposable income and increased exports to developing markets such as China and India. A focus on niche, high quality jewellery will also help the industry to excel over the years to come. Industry enterprise and establishment numbers are anticipated to increase marginally.
IBISWorld estimates that over the five year period through 2015-16 the Jewellery Manufacturing industry will grow at an approximate annualised rate of 2.8% to reach $1.1 billion. Initially, industry revenue is anticipated to grow at a subdued rate of 1.0% over 2011-12. Factors influencing revenue growth in the next five years include fluctuations in real disposable income, gem, gold and silver production and prices, number of marriages and general economic performance.
Concentration in the industry is expected to remain low and steady. High-volume manufacturers, such as Michael Hill, will continue to implement cost saving technology to maintain and improve profits. Michael Hill runs a manufacturing facility in Brisbane where it controls design and production, while also offering the market unique products that other jewellers cannot.
Specialist niche manufacturers will continue to incur high labour costs and the high cost of raw materials. With global and domestic economic growth expected to improve from 2010-11 onwards, export levels are also expected to remain strong until 2014-15, despite a strong Australian dollar over the start of the five-year period. The economic growth of traditional export destinations, such as the United States, Hong Kong, Japan, Switzerland and Germany, are all expected to return to stronger levels after the major corrections experienced in 2007-08 and 2008-09. This is expected to increase demand for discretionary jewellery.
However, revenue growth will be constrained by lower demand for gold products as hedging instruments against market risk. Continued growth in China, India and other developing nations should see exports remain positive, growing by 2.6% in 2010-11 and 3.3% in 2011-12.
The industry is forecast to remain in the decline stage of its life cyle. Rising competition is expected to invoke further price competition between operators attempting to increase market share. Higher levels of imports and the looming emergence of China are becoming a significant threat to domestic manufacturers. Many small operators will exit the industry as they will be susceptible to any changes in the market. Over the next five years the number of manufacturers is expected to increase slowly but the remaining firms are expected to be larger and benefit from greater economies of scale.
Higher concentration levels should be observed. Although trademarks and copyrights exist, industry operators will have to deal with unauthorised parties attempting to copy aspects of particular products, as counterfeit products continue to be a persistent problem in the industry. Operators will find it necessary to use technology to combat counterfeiting and authenticate their products.
Economic development throughout countries in Asia-Pacific will particularly benefit the industry. This offers opportunities for Australian manufacturers to develop ties or joint ventures with large distributors and retailers in the region.
Demand will be moderated by a downturn in the global economy with low demand from the United States for Australian discretionary jewellery products in 2010-11. A strong Australian dollar will discourage exports but as it corrects over the next five years, jewellery and silverware exports should gain some of their competitiveness on the global market from discretionary jewellery purchases. Strong global economic growth from 2011 onwards should boost demand for jewellery and silverware.
IBISWorld expects employment to increase slowly, from 4,107 in 2010-11 to 4,400 in 2015-16. This represents an annualised increase of 1.4% per annum. Skilled labour is forecast to remain in high demand, particularly in jewellery design and production which should see wages increase by substantial levels in 2011-12 and 2013-14. In an effort to attract more workers to the industry, more promotional activities and education programs are likely to appear.
Opportunities for domestic manufacturers in local and export markets are likely to focus on particular niches. These may include products incorporating Australian refined precious metals and gems. Target markets may be mementos for special events; jewellery and souvenirs for the international tourist market and export market; and jewellery for specialised markets, which are currently not serviced by domestic manufacturers (e.g. cultural jewellery traditionally purchased by different ethnic communities).
Production processes and costs in the industry may undergo various changes. The production of gem-quality synthetic diamonds that replicate many of the properties of the natural product may be possible within the decade. This would reduce the cost of production dramatically and allow manufacturers to increase profit margins. Technological developments in the industry, such as the colour bleaching of diamonds to remove impurities, can increase the value of lower quality diamonds and could cause substantial upheaval in the international diamond market.
Production costs may again decrease, as there will be a higher supply of quality diamonds. However, the use of advanced technology to improve quality of raw gemstones and diamonds may decrease demand as consumer confidence in the end product may decline. Thus, the use of artificial purification has to be used with caution in the industry.
Large profitability gains are not expected over the next five years. Profitability is predicted to decline to 5.3% of revenue in 2010-11. While the cost of raw materials begins to soften, jewellery prices are predicted to fall, for example gold is forecast to fall in 2011 but overseas cost pressures will keep the industry competitive. From 2010-11 onwards, small profitability gains are expected as firms attempt to produce more high end products and demand from developing nations such as India rises. By 2015-16, profitability is expected to rise back to 6.0% of revenue.
The future supply of materials like diamonds and base metals will ensure the success of jewellery operators over the next five years. Emphasis will be placed on the consistent supply of high quality raw materials.
The world’s sources of rough diamonds will continue to be found in a number of highly concentrated countries. Varying degrees of economic and political risk is likely to lead to some volatility in the supply of diamonds, including war, civil disputes and labour disputes.
Robert Bryant is the general manager of business information firm IBISWorld.
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