Thursday, July 18, 2013

De Beers, Forevermark, and everybody else.....

The recent trade shows and recent press reports offer a spectrum of opinions and a range of actions in and around the diamond business that leaves a distinct sense of a train hurtling uncontrolled down a track.  No derailment (as yet) in sight, but enough clatter to cause concern.

Some facts are clear:

  • De Beers, now not totally free to act as it wishes, and now with a new CEO who comes from the mining sector, is all-in with Forevermark.  This is their future. and either it flies or they may be done, at least on the marketing side of diamonds.  Or is there another future possible?
  • Two major mining companies, BHP and Rio Tinto,  are working to extract themselves from diamond mining, with some success.  Nominally, it is because there is not enough scale in diamond mining, or the outlook for it, to make the investments worthwhile.  BHP has made a sale, Rio Tinto has now backed off, as it could not find a proper buyer. 
  • The banking industry is broadly retreating from financing diamond companies (or jewelry companies, for that matter).  In particular, this has had real impact in India and Israel.  (One major Indian firm is reportedly under major pressure.)  These moves are not temporary or a reflection of current market conditions.  It is permanent.
  • Donna Baker, President of GIA, abruptly left the company, and the only explanation given by the board was "a difference in opinion on future direction." GIA, whose presence all over the world has set the standard for diamond grading and issuing of reports, is suddenly without a permanent CEO.
All these may seem unrelated, but in many ways they are not.  On the mining side, it is clear to all parties that the future is not what we have seen in the past.  What could be stranger than De Beers, the great diamond mining powerhouse, now looking to revenues from grading labs, retailer fees and sightholder marketing as their new future?  Of course, they still have mining operations going in several countries, and continue their significant and first class service from a brand new sorting and sales facility in Gabarone.  De Beers has always taken the long view in its planning, which has been to its benefit over decades.  So what is the long view now?  They, as other major mining companies, are taking a realistic view of the prospects for new major mines.  They are dim to none.  So now it is seeking to become the great source of conflict free, untreated diamonds, certified as such by their own grading laboratory.  Aside of the conflict of interest, there is a litany of forces that mitigate against success in this direction.  I will devote a blog post to that issue.

The banking industry has come to fully recognize the downside potential problems of the diamond business.  There are endless regulations now regarding money laundering, illicit trade and duplicitous bookkeeping.  The risk of substantial penalties, coupled with the inherent difficulty in controlling, tracking and evaluating inventories has led many banks to cease financing the industry.  In India alone, some three dozen banks have done so, all of them, however, smaller operators.  Worldwide, those still in the business have almost entirely gone to financing receivables and some have instituted tougher audits.  An element in all that is the realization that there are no price buffers in the diamond business (the role once assumed by De Beers for generations) leading to enough volatility to make stocking or financing inventories far more risky.

We have to wonder about the resignation of Donna Baker.  GIA has refused any further explanation of the board's action, and it could be many things.  Baker was very aggressive in expanding lab operations worldwide, and that has worked out very well for GIA.  Now, however, De Beers' Forevermark program has drawn in many prime diamond suppliers who are pressuring retailers to sign up in the program.  Part of that has been retailers accepting Forevermark grading reports.  GIA is still swamped with diamonds to grade, but probably sees some falloff in activity due to the pressure being applied by Forevermark on suppliers and retailers.  This is purely speculative, and may have nothing to do with Baker exiting GIA, but she might have pushed to have GIA aggressively counter this new threat to their core business.  As I noted, a review of the issues involved in the expanding Forevermark campaign, and to the issue of grading labs, is for another blog.

One of the observations made at the recent Las Vegas shows was that jewelry sales were good to very good.  But diamond sales were not.  Mining companies, and to a degree cutters, are seeing that there is a new paradigm at work.  Retailers and dealers are buying diamonds off the street.  While this has been going on for years (in a presentation I made at the JCK Show 5 years ago, I called the US public the "next great diamond mine") but is now truly booming.  Retailers can make extraordinary profits with such purchases.  What would you do?