Diamond Conferences Forecast Big Changes
By Russell Shor
 
Profound changes will rock the diamond industry in years to come, and not everyone will survive them, according to speakers at the Oct. 20 Rapaport Diamond Conference in New York and the Second Antwerp Diamond Conference, held Nov. 3-4 in Antwerp, Belgium. Most agreed that the net result of these changes would be mergers and stronger partnerships with diamond producers and retailers.

Moshe Leviev, of LLD, Israel’s largest diamond manufacturer, told the audience at the Rapaport event that shortages of rough diamonds over 20 points, especially high-quality goods, will be a dominant factor for the next decade.

“Diamond stocks, held by De Beers and other mining companies, totaled over $22 billion a few years ago. Now these are down to $3 to $4 billion – essentially working stocks, meaning there is no overhang,” he said.

He added that there will be no major new “breakthrough” diamond mines coming on line for five to eight years at minimum, so shortages will get worse as demand rises.

Dilip Mehta, president and CEO of Rosy Blue, noted that the industry is entering an era of fundamental change: from an excess of supply over demand, to the reverse.

“We’ve seen how rising demand helped De Beers liquidate nearly all its buffer stocks of
diamonds; and, assuming that demand keeps rising, production will not be able to keep up,” he said.

Both warned that prices for diamonds will rise significantly in coming years, beyond the point where retailers and suppliers will be able to absorb them.

The De Beers Diamond Trading Company (DTC), however, has set a growth target of 50 percent in worldwide diamond jewelry sales – $84 billion – by decade’s end, according to S. Lynn Diamond, director of the Diamond Promotion Service, New York. Because of supply shortages, it’s apparent that most of this growth will come from price increases, not rising unit sales, added Ken Gassman, analyst for the Rapaport Group.

Leviev stressed that the DTC’s Supplier of Choice initiatives will take their toll on diamond manufacturers.

“First, there is no guarantee that sufficient rough will be available to support all of these initiatives. Second, the market cannot support 130 different diamond brands. So we are likely to see many companies bankrupted by high costs,” he said.

Shortages in quality rough diamonds will ultimately lead to a major reorganization of
the industry, with prominent retailers and diamond suppliers vertically integrating, said Elliot Tannenbaum, partner of the Israel-based Schachter Namdar Group.

“By 2010, we will see suppliers taking major stakes in retail jewelers. By 2028, we will see a situation like the oil companies where a few major players have operations integrated from mining to retail. Retailers not attached to major suppliers may have difficulty finding supplies,” he said.

The future, however, is less worrisome than the current industry debt and inventory situation, said Peter Gross, who heads the diamond and jewelry division of ABN AMRO.

“Before we get to the supply shortages, there is an excess of polished inventory hanging in the market and manufacturing capability, which are driving the price of rough to unrealistic levels,” he said.

He said the excess manufacturing supply is causing the current increase in rough prices,
even as large quantities of polished are still sitting in dealers’ safes.

“The rising cost of rough and lengthening credit terms of U.S. retailers, have contributed to a very sharp rise in industry debt during the past year, from $6.88 billion to $8.66 billion. Most of that increase is from India, where the debt nearly doubled in three years,” he said. 
 
Antwerp Conference
The concern at the Antwerp conference was not long-term shortages of rough diamonds, but rather the growing inventory overhang of polished goods and the high costs of branding initiatives.

Maurice Tempelsman, chairman of Lazare Kaplan International, New York, told the audience of some 500 that the changes instigated by the DTC’s abandoning its traditional custodianship of the market have increased risk throughout the diamond pipeline. Yet the ability of the industry to deal with such risks has “not yet been tested.”

The DTC, he said, essentially sold off its well-capitalized, non-debt-financed diamond stockpile to its clients, many of whom financed their purchases by increasing debt as they piled up inventory. These firms have compounded their problems by making “imprudent” deals with retailers that include very long payment terms and memo purchases. At retail, he added, margins for diamond jewelry have been shrinking, leading to decreased profitability.

Pierre Gurdjian, a specialist for the business consulting firm McKinsey & Company, told the audience that major consolidations are inevitable in the diamond industry because many firms will not be able to sustain the high costs of marketing and branding activities without taking on partners or merging with larger players.

He said that of the more than 100 new diamond cuts introduced in the past few years, only about five are truly distinctive with any consumer recognition. Branded diamond jewelry lines have even less consumer recognition, and thus, for the most part, their advertising campaigns “are not a sustainable platform for sales growth.”

Gareth Penny, DTC sales and marketing director, stressed that effective marketing and branding of diamond jewelry is the best way to break out of the discount trap sapping profits.

In presenting the principles of branding, he showed examples of diamond jewelry advertisements featuring cluttered arrays of pieces with discount prices splashed throughout. He contrasted that with a Gucci advertisement showing a stylish woman showing off a new handbag.

“Who in the world discounts Gucci?” he asked, adding that even some U.S. merchandisers are starting to get the message that diamond jewelry should be advertised like a luxury product.

Paul Goris, chairman of Antwerp Diamond Bank, stressed that marketing programs require money, “big money,” so only the few largest, best-capitalized firms will be able to fund their own branding initiatives. He expressed concern that other companies, even fairly large DTC sightholders, will draw funds from their business operations that would normally go to maintaining inventories and use them for marketing activities that may not have a swift return.

Clinton Praises Industry
Former U.S. President Bill Clinton gave the keynote address at the Antwerp Diamond Conference. In it, he praised the diamond industry for its initiatives in ending the trade in conflict stones through the Kimberley Process.

“The industry has put aside traditional differences for its common interests, and is working to end problems such as AIDS in Africa and conflict diamonds,” he said.

He added that it is well worth the money spent to combat these problems, because they ultimately bring a more stable, peaceful world based on shared values, benefits and interests.