Delving further into the issue of fragmentation in the midstream (manufacturing) of the diamond sector covered in last week's post, Ehud said in August 2015, "The more we examine the facts, the clearer it becomes that the main problem faced by the diamond industry is that the midstream – the manufacturing sector of the diamond pipeline that mainly polishes diamonds – does not get its fair share of the pie."
"The diamond sector is viewed by the public as a lucrative sector to operate in, enticed by the allure and profitability that diamonds represent. However, the diamond industry's midstream in reality suffers from very low profitability, constantly teetering on the verge of loss, while the mining sector and retailers – respectively the upstream and downstream of the diamond pipeline - maintain much wider margins."Ehud offered a detailed overview of the indicative margins made by a midstream market composed of many players, demonstrating a fragile midstream market has consequences for the diamond sector as a whole according to Ehud:
"It is not only that margins are narrow or that financing costs are high – the whole economic structure of the diamond pipeline is skewed against the manufacturing sector. How can a profit be made under these conditions? Where is the return on investment, let alone increasing capital? Why would banks finance a sector that cannot demonstrate growth? Of course, under these circumstances, there is no room for expenditures on advertising, it is difficult to hold a stock of goods to provide better service to clients, or even protect the price of polished diamonds. Manufacturers are in a weak position and therefore their bargaining position is unfavorable."
"It is time to wake up," Ehud stated. "It is essential for all sectors of the diamond industry that the midstream makes money and justifies its huge investment of capital, knowledge, market fluctuation and financial risks, and unlimited dedication of time.
For the sake of a long lasting and healthy industry for all its participants, we have a responsibility to adjust the current model so that the indispensable manufacturing sector receives its fair share of the profitability pie. This is a crucial step in creating a strong industry that will be stable for years to come."
The next posts will drill down into possible solutions Ehud proposed to address this problem of deep fragmentation in the diamond sector.
Miners vs. the Midstream: Who Needs to Change?
Survival Mode: Why the Diamond Industry's Credit Addiction is Leading Us Down the Wrong Path