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Starting a New Year on the Right Footing

Starting a New Year on the Right Footing

It’s the start of a new year, according to the Jewish calendar, and it is customary in the Jewish tradition during this time of the year to review the past, contemplate the future, and atone for the past year’s misdeeds. I have regularly expressed my thoughts about what the diamond industry is going through, most recently last week . An in-depth review of the past year is therefore a little redundant, but let’s go over the highlights before thinking about the future.

Reviewing the Past

I know that there are many that claim otherwise, but it is clear to me that consumer demand has declined over the past year. Despite a decline in mining, inventories held by the midstream only increased. Another metric that demonstrates the decline in demand for polished diamonds and diamond jewelry is the decline in polished diamond prices. Over the past year, polished diamond prices continued to fall across the board. There is always talk about the disconnect between polished diamond prices and sales, versus rough diamond demand. We explained that the motivation to buy rough diamonds is not always due to demand or profitability from selling polished diamonds, but is often motivated by other factors unrelated to moving product. The problem is that if you buy rough without a clear path towards selling it as polished, you may wind up with increasing inventory, and that is a financial burden.

Even when polished diamonds are sold, at shows or elsewhere, are these goods generating a profit? This is not trivial question, because at times goods are sold to generate cash flow. No less worrying a question: when polished diamonds are sold for a profit, is the sale price high enough to allow buying a replacement stone – rough or polished? I’m not convinced that this is always the case, and if I’m right, this means that a sale generates cash flow, but also a loss.

So, we are faced with softening consumer demand for polished diamonds, rising inventories, sales that don’t allow for the generation of profit, and decreasing prices. On top of all of these problems, we continue to deal with financing issues, as banks pull out of the diamond industry. Banks that are continuing to support the industry are becoming stricter in their approach, making it more difficult for some firms to get financing. This is the world in which we in the diamond industry are operating. Other trends we witnessed during the past year included limited spending on marketing .

Contemplating the Future

While all of this is taking place in diamond centers around the world, there is what appears to be a positive sign that we can’t ignore, and I hope that it is a sign for the future. One of my criticisms of the midstream is that it buys rough diamonds at high prices and large quantities, which do not reflect the achievable price of the resulting polished. This is a trend we saw up until a few weeks ago. Now we are seeing a change. Sightholders tell me that during the last De Beers Sight, they preferred to leave parcels of rough diamonds that they considered too costly, and instead buy rough in the open market. Traders and manufacturers say that they could buy the same goods for less at rough diamond auctions around the world, mainly in Antwerp.

The decision to buy goods at a lower cost cannot be underestimated. It may seem like the most obvious decision to be made, but for a long time, many contracted clients of the main diamond producers did not make this choice. This change of heart is important, necessary, and noteworthy. As for the quantities, they may also be in line with upcoming demand for the holiday season. That metric is a little more difficult to gauge at this point. The outcome of this recent move was generally a decline in rough diamond prices. This was fairly easy! All we had to do was buy sensibly, in a timely manner, in accordance with the basic economic theory of supply and demand, instead of the strange buy-to-make-your-banker/supplier-happy mode of operation.

During the last Hong Kong diamond and jewelry trade fair, traders reported decent demand for loose polished diamonds from retailers and jewelry manufacturers, mainly from China, but from elsewhere as well. This is another positive sign, and hopefully a signal that we are heading into a better holiday season than the one we had last year. This is not, however, enough. We also need to remember that every time we had the smallest of improvements in market conditions, one of the reactions was to run out and buy more rough diamonds at almost any cost. That behavior placed us in a continuous loop of small improvements followed by a series of drops and hardships. It is in our very best interests to try to stop this unhealthy cycle. That means enjoying the rise in demand, letting it dry up some of the polished diamond inventories, refraining from rushing out to buy more rough diamonds, and whenever buying rough diamonds, buying them at costs that reflect the achievable prices of the resulting polished diamonds. Most importantly, we must continue to make decisions based on consumer demand, rather than on banking or manufacturing demand.

Atone For The Past

How does a business atone for past deeds, especially if we are talking about financial operations, rather than moral issues? In my mind, there are several ways the diamond industry can do this. The first is to buy sensibly. Pardon me for repeating myself so often on this topic, but it just can’t be stressed enough: rough diamond buying is the purchase of raw material to manufacture a product. When we buy more than we need, pay too much for it, or buy the wrong selection of this raw material, we are hurting our own business. A business cannot operate efficiently, or maximize profits, if it operates in this manner.

Second, we are in a loop as to the driver of our actions. We buy and trade to satisfy needs that should be secondary: to make our banks happy, and to keep manufacturing running. If a manufacturer does so, and feels that it has no choice, then a deep change is needed. Our relationship with the banks must change, and that is, in many ways, in our hands. We can reduce debt, be more self-reliant, and reach a position where we can make business decisions based on market demands, and not on banking constraints. Even if the cost is to scale down our operations for a while, that is still the healthier approach in the long run.

If our manufacturing operations are forcing us to make inefficient decisions, then our manufacturing operations need to be reviewed. We need to figure out how to make them better fit our long as well as our short-term needs. Yes, it is complicated, and could possibly be costly to adjust. However, it is the right thing to do, and will benefit the business in the long run.

Next, we must talk about marketing. The midstream has resisted investment in marketing diamonds to consumers because of the very thin margins and limited profitability. Ideally, the much more profitable mining and retail sectors should pay for marketing, especially the retailers. However, we must face reality. Without marketing to consumers, we do not have a business. We must lend a hand in this area, and make our product desirable to consumers.

Finally, we should consider alternatives to selling polished diamonds as a component in jewelry. We have the option of creating an additional market for polished diamonds, and must consider it seriously. We have a great opportunity to turn polished diamonds into an asset for wealth preservation. Because diamonds are rare, with the right tools, such as a transparent price list, education, transparency on diamonds’ features and irregularities, and a spot market, we can reach a critical mass in the market that will make this a possibility.

As the Jewish New Year starts, I want to wish you all a great New Year, a year of success, profitability, growth, a year of opportunities, and a year of evolving into a better industry with extended longevity. Have a happy New Year.

 

        The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser. 

 

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