Trade Resources Industry Views The Presidents' Meeting Highlighted Five Challenges Facing The Diamond Industry

The Presidents' Meeting Highlighted Five Challenges Facing The Diamond Industry

The Presidents’ Meeting that took place in Tel Aviv this week highlighted five challenges facing the diamond industry, but the issue of profitability was the most pressing. Constituents of the World Federation of Diamond Bourses (WFDB) and the International Diamond Manufacturers Association (IDMA), which hosted the meeting, are fighting for survival as they’re unable to make money from polishing rough diamonds.

In that context, speakers at the three-day event noted that their most pressing issues were:

1.The lack of profitability in the midstream;
2.Declining bank credit to the industry and the high-risk perception that the banks have about the trade;
3.Over-grading and the temporary color treatment of diamonds;
4.Undisclosed mixing of synthetic diamonds; and
5.The call to increase competition and transparency among service providers, with particular reference to the Rapaport Price List.

Tough times indeed. While the WFDB and IDMA already have systems in place to tackle some of those challenges, and debated solutions for others, the industry remains at a loss about profitability.

The clearest directive at the meeting was WFDB president Ernie Blom’s appeal to the trade not to buy high-priced rough.

“We’re our own worst enemy,” Blom said at the closing press conference. “We buy those diamonds at prices at which it’s not possible to make money.”

Still, much frustration was leveled at the mining companies during the meeting. And while there was a consistent call to work with the mining sector to find a solution to the profitability problem, it’s not clear what the market expects of the producers.

The mining companies have a clear agenda to drive their own profits, as they have to answer to their shareholders well before the trade. In his address to the Presidents’ Meeting, De Beers CEO Philippe Mellier tried to soften his previously stated, somewhat infamous, “we must all make our own margins” remarks. However, his toned-down clarification still made the same point: “No one is better placed to run a business than those who live and breathe it on a daily basis, and each and every diamond company in this great industry must make its own choices about how to succeed in this new world,” he said.

At the end of the day, every business – and sector, for that matter – is responsible for its own margins, as it should be.

Therefore, diamond dealers and manufacturers need to clarify their own agendas with regard to rough prices. What does the midstream want from the mining sector?

In a weak market, the mining companies are faced with two choices. Firstly, they can lower supply in an effort to maintain relatively stable rough prices. By doing so, they would be selling what they can at prevailing high prices and holding inventory (in the ground or the vault), if necessary, until the market returns to their price levels. Or, they can make sharp price cuts to stimulate demand, thereby realigning prices to reflect the weaker levels of demand.

From the conclusion of the Presidents’ Meeting, it seems that the manufacturing and mining sectors are on the same page. Both are content to keep rough prices stable-ish and supply lower during the current weak market.

Shmuel Schnitzer, president of the Israel Diamond Exchange (IDE), stressed that a sharp rough price reduction would have a negative impact on the market. “What we can ask of rough producers is to lower their supply, although I’m not sure they’ll do it for an extended period,” he said.

So far, that’s exactly what the miners have done this year. Rapaport estimates that De Beers rough sales fell about 28 percent year on year to around $2.5 billion in the first half of 2015. ALROSA, which reports in Russian rubles, saw its sales by volume down 29 percent to 9 million carats in the first quarter, while its bottom line was boosted by the weak currency.

The midstream dealers and manufacturers prefer lower supply and stable rough prices, and are afraid of a sharp correction for two reasons: a) they’re concerned that lower rough prices would influence polished prices to decline further, and b) a sharp correction would devalue their existing inventory.

However, the problem with stable rough prices is that manufacturers’ margins tighten further if polished prices continue to fall. Indeed, Schnitzer stressed that, “if rough prices stay as they are and the Rap List goes down, we’ll lose even more than today.” Certainly this writer hopes that any transparent and competitive polished trading network or price list would reflect the true state of the diamond market – both in good and tough times.

The reality in 2015 is that polished prices continue to downtrend. Far East markets are slow and the U.S. is stable at best. Andrey Zharkov, ALROSA’s newly appointed president, stressed in Tel Aviv that the main problem is that there is an oversupply of polished in the market. That means that supply needs to be lowered, but also that demand is weak.

The RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds is stable so far in June, but RAPI for 0.30-carat, 0.40-carat and 0.50-carat diamonds are all down by nearly 1 percent. Margins are likely to continue to be squeezed.

Perhaps the answer is to stimulate consumer demand, which is a goal that everyone should, and does, agree upon. After all, the new millennial generation of consumers buys differently and is currently not being enticed into diamond purchases.

In that regard, the trade is pinning its hopes on potential generic marketing campaigns to fuel demand. Current efforts are focused on the WFDB’s World Diamond Mark and potential involvement by the newly formed Diamond Producers Association.

However, it’s worth noting that while generic marketing will raise consumer desire for diamonds, it won’t necessarily improve margins in the midstream. As consumer demand grows and polished prices increase, rough prices will also rise further.

For now, with lower supply, rough prices do not reflect the same market reality as polished. In such a prolonged non-profitable environment, the midstream will continue to consolidate.

Rather, in order to restore manufacturers’ and dealers’ margins, rough prices need to drop sharply to make the diamond business viable again – both now, and especially when the market improves again. When rough prices decline, polished suppliers should be disciplined and hold their polished prices firm. They should revalue their inventory at the lower replacement value, if necessary, instead of at cost, and resume trading in an upward trend. And, they should continue to refuse high-priced rough.

The midstream needs to be selfish and push its own agenda. Diamond manufacturers and dealers need to be clear to the miners that they’re indeed fighting for survival.

While the deliberations in Tel Aviv highlighted the many challenges facing the diamond industry, everything else is secondary if the trade is unable to make money from polishing its rough supply.

Source: http://www.diamonds.net/News/NewsItem.aspx?ArticleID=52624
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