"More of the same" continues to be the dominant sentiment of the diamond industry with the “wait and see” and "play it as it goes" emerging as the prevailing attitudes. This is not by choice.
All eyes are once again turned to the upcoming Las Vegas and Hong Kong trade fairs, which have evolved from their main purpose. What were once events for meeting manufacturers, wholesalers, jewellers, retailers and even some consumers to widen professional contacts, it now seems to have turned into the main selling event of loose polished diamonds.
After two sights four weeks apart from each other, the fact that De Beers is not supplying goods in April is welcomed. It is perceived as a pause in the ongoing arm wrestling between the primary rough suppliers and their clients.
The next De Beers sight will start on May 4, six weeks after the previous one. This is a blessing, both for De Beers’ direct clients (Sightholders) and the secondary market. Sightholders cannot continue to manufacture and pour more polished diamonds into a clogged pipeline, offloading at best low cost goods into low price point jewellery that do not generate a significant cash flow back into the system. The concept of selling or "passing on" bigger parts of their rough to third parties (the secondary market) while generating some interest to cover their operating costs is definitely one of the bad symptoms of the current situation.
The Russian rough diamonds sale will take place in the coming week. Manufacturers are waiting to see what Alrosa rough allocation will looks like in terms of prices, qualities and quantities. Market players say expectations for a major change cannot be greater.
According to market sources, there will not be a price reduction and it remains to be seen if the volume of rough diamonds sold by Alrosa will be reduced. Russian goods tend typically to result in square cuts which does not make it any better because of the low demand for those goods in the current market. However, those allocations contain substantial amounts of low-grade diamonds that sadly can be of “help” to keep factories running until the polished pipeline improves.
In former years when market went slow, Gokhran, a state institution under the Russian Ministry of Finance, responsible for the State Fund of Precious Metals and Precious Stones stepped in and bought some of the overflow of the Russian rough diamonds production helping the industry to overcome harsh economic periods. Will they do it again?
The concept of buying rough at the highest possible price from primary rough sources and rough diamond tenders, only for selling the resulting polished diamonds like in a “Bazaar's” way, such as the trade shows or electronic platforms at the lowest possible price, merely for "making a sale" and even then not achieving a high sales volume, is definitely not a promising concept for growth and flourishing future.
There are some 5,000 diamond companies forming the midstream who are competing over $7 billion of added value to the $15 billion annual rough production. This is the increase in value that the global diamond-manufacturing sector adds by polishing rough diamonds, bringing their worth to about $22 billion annually.
This results in average annual revenue of $4.4 million per company. How much of it is net profit (if any) at all? Assuming a 5% margin, a company makes $220,000 a year or $18,888 a month. How can this be an adequate return on an investment of after all the effort, skills, expertise, hundreds of thousands of employees and the large risk? This calculation is based on averages and assuming a profit but what happens to the smaller manufacturer and what happens to any size manufacturer when there are losses? With the currently reduced polished diamond prices against the firm rough diamond prices how do these figures add up? How long can the midstream (manufacturers) hold on? It might be time for the companies that met in London a few weeks ago to reconsider these issues.
The functionality of the rough diamond pipeline, the profitability of each of its components, liquidity, the over loaded polished pipeline and the goal of creating a sustainable global desire for polished diamonds should be the main issues discussed and resolved with some serious creativity!
One thing should be clear: A major price reduction of rough diamonds is likely to cause a negative affect across the industry. Such a move might bring polished diamond inventory values down. Accordingly, it might result in a major loss to the midstream wholesalers, retailers, and might hurt worldwide consumers’ confidence. This, in turn, might boomerang to the primary rough sources. It might be a real kiss of death to many manufacturers that have already expressed their disagreement with price reductions of polished diamonds in India and Israel.
In India, major traders started listing their inventories at full asking prices without the common market discounts. In Israel, a group of traders published a press release protesting against the lack of transparency of one of the price lists. According to the release, prices of goods were reduced too quickly and too often. On the other hand, a certain “asking price-based list" went up while the market went down. Is it a start of a trend against price lists based on asking prices and the beginning of a process of seeking a new industry price list, one that reflects what they believe to be reality?
What is needed for now is a reduction of rough diamond volumes poured into the market either by stocking it or by a reduction of mining production with all difficulties attached to such a brave move!
The second half of the year is usually the better one in the diamond industry. A declaration by the primary rough sources about reducing rough supplies for the next six months may give the market the boost it needs right now. It will let the midstream slowly unclog the pipeline of the many polished diamonds, create some cash flow for the manufacturers that will allow them to buy rough diamonds and encourage retailers to replenish their inventories, while restoring the confidence of consumers worldwide. As for now, polished diamonds sales are sluggish and remain overloaded despite reports of shortages in limited areas.
There is an urgent need for a clearer definition of the different roles of the different sectors in our industry. Let each sector do what it does best: Miners should mine, take care of exploration in order to preserve the stream of life of the diamond industry and make profit out of that activity; traders should finance, evaluate, stock when needed, be able to take the risk of market fluctuations and trade while making their share of profits, manufacturers should polish diamonds and wholesale them while making a profit from the added value, jewellery manufacturers should make jewellery and profiting from their designs and product, retailers should brand those products and use their skills and heavy overhead to reach consumers in order to sell the magnificent product of diamond jewellery.
Today it's seems that everyone wants to do a little bit of everything (or alternatively, do everything!) and it might be one of the reasons why our industry arrived at where it is today. Is it possible that the reason for this is the fact that there is a little revenue and margin to be shared as mentioned above?
We might see some strong activity on the open market for rough diamonds after Easter vacation, but again it will derive from specific needs to fill up the gap created by shortage of specific rough. Isn’t it again more of the same?
Taxes and Regulations
There is new regulation in Belgium and India, which may provide some support to the diamond industry. In Belgium, it is the proposed Carat Tax, which is a form of a turnover tax instead of taxes on companies’ profits.
In India, it is a new foreign trade policy aimed to support services and exports. A Special Notified Zone (SNZ) is to be created and will be in effect for the next five years. The SNZ will enjoy a taxation regime that will encourage mining companies to sell rough directly in India. Mining companies will be able to bring rough diamonds on a consignment basis to have Indian diamond manufacturers view it and buy. A budget allocation and interest subvention have been allocated for 2015/2016 fiscal year. The SNZ may provide India with a competitive advantage over other diamond centres.
It might seem as if the midstream is tax-driven, but just try to imagine what a positive impact these new regulation and tax regimes can have on creating mass employment. The midstream by nature creates low profitability but a high level of employment.
Financing and Liquidity
We have reported previously that Dubai, Israeli and Indian banks are stepping in to fill some of the gap created by the planned closure of the Antwerp’s Diamante Bank (ADB). Market sources are reporting that the ING Bank has also moved to take a share.
The vacuum, which appeared to be created by the departure of ADB, is being filled up gradually. I believe that it is time for mining leaders who assembled in London a few weeks ago to step in and decide to support the industry by reducing rough diamond production. Such a move, combined with banks stepping in to finance the industry, will give it a boost.
Sotheby’s sale in Hong Kong last week has proven again that when you present a diamond for sell with a supporting environment that highlights the uniqueness and nobility of the diamond, you can achieve the right sell price. Despite the current polished diamonds market situation, the auctions totalled $37.2 million and the fulfilled market prices.
Dubai diamond conference is scheduled to take place on April 21-22. It is scheduled to focus on Financing, Ethics and Synthetic diamonds, corporate governance, innovation and growth supported by collaboration in the African, Middle Eastern and Asian diamonds industries and markets. It is no doubt an important meeting opportunity for representatives of all the diamond industry sectors and seems to be giving a boost in recognition to Dubai as one of the most important diamond centres. It remains to be seen what this conference will achieve.
Is it not a great opportunity for the industry leaders to meet and make a difference? The conference can be the start of a turning point for the current market situation. It needs boldness and creativity on behalf of producers as well as all other sectors represented. I brought up a few ideas in this market update.
It remains to be seen if it will be discussed even as a start to a creative brainstorming leading to creative solutions in regards with what can make a difference. Will the conference enhance the notion of separated rolls of the different diamond sectors? Will producers declare a reduction of rough diamond production for the next 6 months?
The International Rough Diamond Week will take place at the Israel Diamond Exchange (IDE) April 12-16. The event will include auctions of goods by Alrosa, De Beers, Rio Tinto, and Fusion/Hennig. It is one of several events initiated by the IDE to create more business in the industry – and bring more of it to Israel. Despite the efforts, isn’t this still “more of the same?"
The Panama Diamond Exchange will celebrate its official inauguration on April 27. This new diamond exchange aims to become the gate to the Central and South American markets. It attracts the interest of many prominent diamond companies and personalities. This is the type of effort that should be made by the industry leadership in order to grow the consuming market and we watch it with hope, support and belief.
Invitation to the Panama Diamond Exchange inauguration
In June, diamond industry leaders will meet in Tel Aviv for the bi-annual presidents meeting. This is another important opportunity for the leadership to consider major changes that can benefit the diamond industry as a whole. It can help it overcome the current problems and set it on a new, better course.
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 advisor.