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Year-End Wrap Up: How the Diamond Industry Can Move Forward in 2017

Year-End Wrap Up: How the Diamond Industry Can Move Forward in 2017

The first article I wrote this year described the changing world around us and how we in the diamond industry need to adapt to it. Interestingly, my final article for the year made a very similar point. In hindsight, it is no surprise that the same issue opened and closed the year. The diamond industry is changing, and the global environment in which we operate is changing too. There is a constant and inseparable interaction between the two. We must continue to evolve. 

I’m trying to do my part in this. For some time I am of the opinion that the diamond industry should change its traditional approach towards consumers, and in doing so transform the perceptions and behavior of the final consumer, in ways that will ultimately lead to increased polished diamond purchases. My proposed new approach towards current and future consumers is one based on openness and transparency. For most consumers, the diamond mining and manufacturing process is opaque. If we become more open about how diamonds reach the consumer, we will change the consumer’s perception of the diamond industry and of diamonds themselves. In my opinion, it is transparency that will transform end consumers’ behavior and bolster their confidence

Recently, I have presented several tools developed by consultancy Mercury Diamond© that chiefly present detailed information on and beyond the traditional 4Cs.

In light of the rise of laboratory-grown goods, I wrote that we must continually emphasize natural diamonds’ value-of-exchange, a feature not shared by laboratory-grown goods. Given this key difference, I expect the cost of lab-grown diamonds to come down as the technology involved in producing them continues to develop.

A few months ago, I stated that the diamond industry, in a painful process over the past year, has seen rough and polished prices decline in such a way that there is simply no opportunity for improved margins. To generate this opportunity, rough diamond prices cannot suddenly spike. They must not.

This situation calls for reasonable action on the part of miners. This means keeping the volume of rough diamond supply low until polished diamond inventories are reduced, while maintaining the price of rough in line with polished wholesale prices.

Meanwhile, the midstream, and clients of the main diamond miners in particular, should act responsibly, maintaining their roles as gatekeepers. It is essential that the gatekeepers continue to make educated purchases as they did over the course of last year, while keeping a watchful eye on the goods, market demand, and price.

This approach proved itself, and we now know that through the careful consideration of value, price of output, and inventory balancing, the industry was able to regain a steadier footing after a difficult 2015. Sadly, the recovery did not last long.

The issues of credit kept looming. We showed that because demand for rough diamonds improved, prices of rough increased and quickly became uneconomical. So I shared some of the tools that I use in my business to assess the market, including changes in demands and inventories in the main diamond centers.

The conclusion at the time was that many of the players in the market are caught in a vicious loop of survivalism, the result of being hooked on bank credit. The entire global diamond industry, in fact, is in survival mode, doing business simply to meet money supply deadlines.

The trade show in Basel last March was a good illustration of where the diamond industry has gone. The industry’s lackluster showing underlined the consequences of not evolving in time. BaselWorld used to be one of the four most important shows for the diamond industry. No longer.

While watch sales were positive,  sales for jewelry and diamonds were mediocre. The diamond industry’s poor performance should lead us to question the value of attending trade shows. Is it appropriate for the diamond industry to offer mass quantities of loose one-carat diamonds at these events? What is the message we are sending to the high-end consumers who frequent this trade fair, if they see high-end diamond jewelry pieces in one booth, and then loose diamonds in large quantities offered at wholesale prices in another booth? How difficult is it for a sophisticated consumer to understand the markups on luxury jewelry?

Doesn’t this behavior create discontent among consumers? Does it not lead to pressure to reduce jewelry prices? And if that is what happens, isn’t it clear to all that we are hurting our own business? Is it appropriate to offer luxury items next to their wholesale components? Is this not one of the reasons that the organizers of BaselWorld relocated loose diamonds from a spot adjacent to the main hall to one far behind it?

Taking this one step further, the need to rethink diamonds and how they are marketed led me to dive further into the details, discussing natural diamonds’ most important inherent quality – rarity. Rarity earns its importance from a combination of its role in value preservation and the enduring human desire to own a rare object. If it the rare item is beautiful, that is even better.

A brief recap on the rarity of natural diamonds:

·               There are an estimated 10,000 known kimberlitic pipes around the world

·               Of them, 1,000 are diamantiferous

·               Of the 1,000, only 100 are economically viable to mine

·               Just 30 kimberlites are presently active

·               Only 20% of the total production from these 30 mines ends up as polished diamonds fit for jewelry

There is clearly no doubt that diamonds, especially gem-quality diamonds, are rare objects. There is also no doubt that finding, mining and extracting diamonds is a major scientific and economic challenge. Furthermore, of the mines that are currently active, many are past their prime, which means they are producing fewer diamonds – and driving up the rarity of natural diamonds. There is an opportunity to seize here.

Enter Mercury Crystal Clear™, an innovative methodology for valuing rough and polished diamonds, which I have been developing as chairman of Mercury Diamond through research and diamond pricing consultancy. Using it, we can transform diamonds from a component in jewelry to stand-alone items that have their own financial meaning. Mercury Crystal Clear™ is about making diamonds' value known and transparent, based on the conviction that diamond consumers currently lack sufficient information about what it is they are paying for.

I want to create a new perception for high-end gem-quality natural diamonds that addresses future generations, who will view these exceptional natural creations as assets, not expenses. I want to encourage a large group of people to understand the value proposition of natural diamonds. Consumers buying natural diamonds should do so because they understand the economy of rarity, thanks to transparency and education by the industry. This will allow people to purchase diamonds with the confidence that they are a reliable store of value that can appreciate. For consumers to gain this new perception, we need to create it, jointly.

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One way of doing this could be achieved by institutionalizing diamonds as an asset. A large and high-quality diamond should be sold in a different environment to diamond jewelry retailing, within a framework that supports its unique qualities, rareness, and resale value - features aside from its beauty. A diamond spot market, which would function similarly to a stock market, the Amsterdam flower exchange, or the grain market in Chicago, will transform these diamonds into a commodity.

As I wrote, a characteristic of commodities is their ability to be split in two or more and retain proportionate value. If, for example, one took an ounce of 24-karat gold and divided it into two pieces of half an once each, than the value of each half will equal half the value of the whole ounce. The same is true for five notes of $10 – they will always equal the value of a $50 bill, just as a liter of oil can be divided into three and together retain the same value of a liter. You can split the volume and still retain the value.

This is not true of diamonds. If you cut a 1-carat diamond into two equal half-carat diamonds, the individual value of each half falls by more than 50% and the collective value is reduced. After all, a diamond’s value rises exponentially with size.

However, this is a manageable issue. We at Mercury Diamond™ developed a special tool, the Mercury Exchange Converter™, which can match the current transaction price of any diamond regardless of size, color, clarity, cut, shape or irregularities to any other number of diamonds of equal value.

The options are nearly limitless, and the tool we developed see more details here. Translates the value of any diamond one could buy, for any size, shape and clarity, to an equal-value diamond or diamonds.

By mid-year, it was clear that after the early improvement in the market, things were about to turn bad again. I made a long list of issues around the world, and stated that continuing to buy rough diamonds at the prices they reached at the time may get us into trouble. Sadly, I was right. I suggest all diamond pipeline stakeholders to act with prudence. Instead of being carried away by market trends, take a minute to see what is not working correctly, stick by the fundamentals, and act accordingly: buy only the needed rough at a profitable price and at the required quantities, polish them, and sell them to the retail sector at a profit.

But matters got worse. Responding to an article published in GemKonnect, that highlighted the legal aspects of some of the business closures in the Indian diamond sector and advocated much stronger steps against those involved in shady dealings, I provided a breakdown of how prices and costs spiraled out of control. Later I suggested to improve profitability by raising prices. 

While advocating caution and thoughtfulness in buying rough diamonds, higher polished diamond prices can be achieved through greater education and investment in consumer marketing. There are several reasons for such efforts. One of which is profitability, as mentioned above. The other is positioning. Diamonds are a luxury product, and must be treated as such by the diamond industry as a whole.

I know that change is a lengthy process, but feel it is important to continue reminding my readers of its importance. That is why in August I stated that excess capacity of manufacturing infrastructure, plus excess capacity of manufacturing, plus excess capacity of financing, minus production demand, equals price of production decline! This is the rule we need to remember, as it not only applies to today’s diamond market - it is also a rule to live by A buildup in inventory of polished diamonds at the time was an ominous sign that we did not balance our manufacturing process on the basis of real consumer demand.

To provide a positive approach, I pointed out the contribution of adding value to a diamond. My contribution to adding value was by introducing a price list based on real transactions. Mercury Diamond tracks real transaction prices of white diamonds. We created a monthly price list based on those transaction prices. We also track fancy color transaction prices, and created a price list for them as well. Using the above we can find the right cost of rough diamonds that will leave us a real profit in hand.

In addition, we track changes in demands and changes in availability of goods, which allows us to understand which areas of the trade are saturated, where goods will be needed, and at what prices. We also created a tool that allows final buyers to find out what kinds of diamonds they can buy for any given budget, make their choice based on their preferences, whether they are related to size, shape, color, clarity, or any combination thereof, and help them stay within their budget. These are proactive tools that help us make much better decisions, maintain profitability, and prepare for real changes in the market.

Most recently, I wrote about the issue of India’s demonetization and how it impacts the diamond industry. From our perspective, any change that helps improve an economy is welcome. I can only hope that the demonetization will not disable the Indian diamond center, but will instead help it to reduce bank lending, decrease rough purchases as the consumer market cools, and generally find a path to healthier trading.

As these lines are being written, we are waiting to hear how well the holiday season ended in the main consumer markets, most importantly in the US. Currently the reports are mixed, and it may take a few more weeks until the finally tally is in.

I hope that the industry develops to the point where it learns how to handle the changes, and how to evolve while dealing with some of the issues that are weighing down on all of us. I’m optimistic about the future, and I’m sure we can make it through – as long as we remember to keep our eyes on the horizon and adjust as we go.

I wish you a very happy holiday season and a happy New Year.

Ehud

 

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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