Monday, October 7, 2013

Diamond headaches today, a different world tomorrow

The diamond business still cannot seem to get weaned off mama De Beers.  That is not in the way of a complaint to De Beers, but rather an admission that clinging to the old, sheltered ways is gone.  And most of the trade refuses to admit it.  Even the Oppenheimers knew it was time to move on.

Sure, a $30 million auction sale is made.  And other big stones are fought over.  But something is wrong at the core of the business.  There are big bankruptcies in Antwerp and Mumbai.  Banks are backing off financing the trade, except for financing solid receivables.  Government authorities are investigating diamond companies in Belgium and India.  De Beers sights are being rejected for lack of money.  Boxes are being sold at discounts - sightholders prefer to take a loss rather than try and convert the goods and lose even more money.  Cutting factories have sharply reduced output, especially on small goods.  And everywhere we hear that due to overpriced rough, profits are gone.

Is this any way to run a business?  How does a normal business keep buying supplies that cannot be resold at a profit?

Well, too many people believe in the tooth fairy.  After all, we know that demand is supposed to keep rising as the large Asian economies continue to grow.  We know that mine output will continue to decline.  So if we just hold on, the math has to help us out.  So some feel they must keep cutting in order maintain factory personnel and some continuity.

That is exactly the thinking that would have arisen in prior downturns.  De Beers would act as the buffer, assuring everyone that they would not allow a precipitous drop in diamond prices.  We all remember their aggressive response to the drop in prices in the 1980 crunch.  But De Beers is no longer there, our backs are not protected, and yet the myth continues.  We now live in a world where pricing reflects demand, even as the trade continues to think it is supply driven.  That is an error that is causing great pain.  Too many individuals and companies plod on now, losing money every day, mostly, I guess, because they do not know what else to do.

There are arguments to be made that the forces at work today will not permit the simplistic assumptions I stated above.  The recycling of diamonds is an expanding business.  The economies of the leading industrial nations are struggling, with many observers expecting long term slow growth and persistently high unemployment.  The millennial generation does not have the same drive to collect valuable objects.  While the bridal business remains a bright spot, unit sales are flat or down even as dollar volumes might rise.

Most critical might be the burgeoning man-made diamond business.  We might all not like it, but this is where some companies are actually making money.  Mix in MMD's with natural goods, sell it all at natural prices and we have a profit.  The temptation to do this is huge, especially where there are little or no controls.  Illegal, yes.  Profitable, definitely.  And we are ill-equipped to catch the tonnage of small goods that are like a rising tide.  And the public either does not know or does not care.  The public will react well, I think, to unbloodied, environmentally favorable diamonds.  I have always contended that the public will fully accept MMD's, especially when they look great and are at very affordable prices.

Ultimately, the day will come when the business will "flip", when there are more MMD's sold than naturals, when the supply can well exceed demand.  That may take another 10 years, but the pressure is already there.  When that happens, pricing will be driven by MMD's, not naturals, though carat+ natural diamonds will have their appeal, not unlike natural pearls today, which are far more valuable than cultured pearls.

If there is a future in overpaying for, and hoarding, diamonds, it is not one to be sought for long.

8 comments:

  1. Oh how true. I entered the diamond and jewelry industry 27 years ago to assist in plotting the future of my wife's 4 generation wholesale and manufacuring business. Prior to that you could have called me a "corporate guy" putting on the 3 piece suit and helped big companies make profits. It was a structured environment in which goals and guidelines were set in order make money for the company. After all isn't that was business is all about. So in the last 27 years I have become extremely frustrated in as much as coming to the conclusion that most parties in this industry really how no idea on how to accomplish this. They continuously fail to understand their customer and their finances. They build more and buy more on the come with no rational thoughts as to the outcome of these actions, both to themselves and all the others that they are intertwined with. In the end it is unsustainable and we all will tumble like a deck of cards. I grow weary as I do not like what I am seeing unfold in front of me. I only hope that everybody opens their eyes and takes a good hard look at what they are doing and what they will do about it.

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    1. Your story is not that unusual. I realized years ago that most people in the business started out as either bench jewelers or sales people. Not to cast aspersions, but both sorts are particularly ill-suited to managing a business. Jewelers love to create and use their hands, while sales people love to schmooze and close a sale. Sometimes (as perhaps in your case) a well qualified person joins the business. Sometimes that is a second generation offspring. Most of time, as you state, business oriented people despair and quit.

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    2. Remember "natural" Pearls used to worth a lot more, but the culturing of pearls depressed their prices. Amethysts would be worth a lot more if we could easily, reliably and inexpensively distinguish mined amethysts from synthetic quartz. The notion ithat diamonds will continue to grow in value is a bubbameister, Wise up. Nothing can go up forever.

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    3. The early days of cultured pearls created new supplies capable of denting natural prices. The Japanese were able for many years to keep the cultured technology close and manage profits. That is long gone and the price of cultured pearls now are low because of the tonnage being produced. So, while prices on naturals did suffer early on, they now have regained their price advantage by a large measure.
      Diamonds are, of course, a very different story. Gone are the days of De Beers managing prices, so we do see more volatility. When production of MMD's reach meaningful levels, there will be a further effect. But in the longer run, prices on larger, better quality stones, will continue to rise, simply because of limited worldwide availability. The rest of the market (as with low quality natural pearls) will seek its own level.

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  2. vinciane van GrotenhuisOctober 16, 2013 at 2:53 PM

    Major issues to guarantee consumer confidence for the sector have never been solved:
    - child labour
    - looting, illegal mining
    - abuse of human rights (murdering and beating by dictators)
    - illegal treatments (only France has made a law of it, ...do you imagine)
    - and just faking the consumer by selling synthetics for natural
    - no marketing
    What do you expect?

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  3. You bring up some of the central issues faced by the diamond industry. De Beers got involved in all of them (partially, I have to add, to defend their own position), but the reality is that this is a highly fragmented business. That means that nobody has the leverage to act on the issues you mention - even De Beers.
    The major organizations in the industry have all issued guidelines for all to follow, but there isn't the political will in most countries to create tough regulations and enforce them.
    It would be nice to think that we could, somehow, "solve" these issues. I am afraid that will only come when mines are depleted and we mostly market man made diamonds.

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    1. Thank you for your response. And you are absolutely right. Although, I'm convinced that countries (and politics) will change.
      Why:
      - The actual situation is affecting the tax incomes of mining countries. Several African countries and companies complained about it.
      - Synthetics are a cheap (future) threat to the natural diamonds. So cheap natural diamonds mean no income.
      - Banking system is reticent against corruption, looting etc.
      When will the diamond industry stop blaming others and conduct structural changes? Where are the leaders?
      And yet, another marketing tool has been organised with the same vision again: World Diamond Mark (which welcomed the Marange diamonds in Europe).
      How can you create marketing to increase consumer confidence, based on diamond mines, where people were killed and abused?

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    2. Very well put. Those with any power back off from taking strong action because there are so many interests, big and small, that stand to lose. Marange is a perfect example.

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