Wednesday, April 26, 2017

Protecting the Image of Diamonds

Late last year there were two events in New York about the diamond business.  I'd call them bookends to the business, in that they address two real concerns - the image of diamonds, and the growing presence of man-made diamonds (MMDs).

The first was the presentation by DPA (Diamond Producers Association) on the new advertising and promotional program for natural diamonds, "Rare is Real."  This was, finally, an attempt by the leading mining companies to rebuild the natural diamond image in the minds of consumers.  Two ads were shown (you have probably seen them by now) and I liked them both, if that means anything, while other people were very dubious.  Both were appeals to the millennials, with different approaches, though both skated around the classic themes of commitment and happiness.  As I think further about it, both reflect lifestyles that most Trump supporters, and even many Clinton supporters, probably disapprove of.  In introducing "real life" stories, filled with doubt and adventure, the DPA seems to be trying to equate real life with real diamonds.

One question here is whether the DPA at this point is deliberately not reaching for Boomers and Trumpers, and plain old-fashioned thinkers.  It seems so, though I was told a whole range of ads have been prepared targeting other demographics.  Another question is money.  The DPA reportedly has put in some $15 million, to get this rolling, but getting money from the trade over an extended period is a real question.  It will take a lot more than that to reinvigorate the image of diamonds, I'd say at least ten times as much.  In the New America, I suspect, people will be keeping their wallets closed.  Money goes further in these days of social networking, but will this new message carry?

Here we are, months later, and I sense no impact from the DPA initiative.  And when the subject is raised at various industry get-togethers, I see eyes glaze over.  People involved in the program made a point of saying this is not a short term blast, and that it will take time, maybe a couple of years, before the effort is full-blown and showing results.  OK, we are patient, and we will wait and see.  But frankly, I can't seem get very energized by this program.

For one thing, the message is so subtle as to beg explanation.  Rarity in diamonds starts at stones of a few carats.  But jewelry is composed overwhelmingly of small stones, of which there is tonnage.  Of course that factoid will not be publicized.  So is the message that rarity is the important aspect, or that "real" is the important aspect?  (I needn't add that an MMD of eight or ten carats is also rare, at least for now, and some say it is real.)  I guess DPA is pitching both, not an easy chore.

I do not watch much TV, or dabble much in social media, but I have not seen anything from DPA so far.  Nor have I heard of any retailers, wholesalers, manufacturers, diamond dealers, cutters or traders getting on the bandwagon and putting money into the program, though I imagine there are some.  Could it be that everyone is already working on very thin margins, and image programs have no budget lines for them?  Or is everyone taking a wait and see attitude?

Diamond producers fully understand the importance of protecting the diamond image, as does everyone else involved in the business, even those now expanding production of MMDs.  Mines will still be producing for a decade or two, and anything resembling a decline in public interest will be damaging, if not destructive.  We do need to remember that diamonds are still a huge draw, with spectacular prices still being paid for unusual stones and beautifully made jewelry.  But, again, is "real" and "rare" the message, or is beauty, excitement, love and life events the message?  Real and rare no doubt applies in the auctioning of multi-million dollar stones, but can the same motivation be applied in the local store?

The other "bookend" was a special session held in New York to discuss MMDs.  The speakers concentrated on the dangers MMDs present, and the need for all parties to expend every effort possible to assure themselves that they are dealing only in natural stones.  This was followed by presentations on a range of equipment that will make it possible to check all diamonds, loose or mounted for MMDs.  An important sponsor of the event, Sterling Jewelers, has more recently offered to pre-check all diamonds to be used by their vendors.  A good move, as it makes vendors responsible if any MMDs slip through.

I noted to an attendee here that the whole session is a tribute to the creativity, dedication and genius of the criminal mind!  For all our efforts and pleas that everyone up and down the value chain should abide by best practices, the fact remains that the opportunities for fraud are everywhere.  It's a game of whack-a-mole!  Right at the session, some importers noted privately that the problem is out of control in Asia, and becoming almost laughingly so.  One technology company told me that a simple test run at a few stores of an important retailer promptly turned up MMDs mixed in with naturals in low-priced jewelry.

So, yes, we have major retailers like Sterling and others that have the scale and dedication to strictly enforce proper protocols.  But that does not account for the significant portion of the worldwide market.

We can all agree that the efforts being made by the major laboratories and marketers of diamond jewelry are important contributions to the maintenance of an ethical business.  But what I had expected at the conference was an open discussion about the impact of MMDs on diamond retailing, and how to handle it, quite aside of detection.  I wrote at length, in three blogs in May and June of 2015, about the potential impact of large scale introduction of MMDs in the market.  The consequences, even if all of it is done above board, can be severe.  So thorough presentations and discussions on the subject are the least that should be done.  We see none of that, only attempts to suppress the use of MMDs, to keep them out of the bourses, and to claim that they are worthless.  This is ostrichism of the worst sort.  MMDs are a reality that will be a solid part of the jewelry business.

On balance, both these sessions were appropriate and worthwhile.  But both fell far short of leading the industry into the future that is coming at us full speed.

Tuesday, April 11, 2017

Kimberley Process, aka Swiss Cheese

A little dust up lately about the Kimberley Process.  A noted market observer called it BS, and others responded by saying it has value.  We have been hearing this give and take since the KP was instituted a couple of decades ago, so it comes as no surprise.

Does it have a future, and does it serve a purpose?  Yes and no on both points.  Perhaps it is time to look at it again.

The KP was developed with significant De Beers encouragement and participation when the "conflict/blood diamond" scare first came up.  There was good reason to be concerned, as the association of diamonds with the financing of brutal human abuses and chaotic warfare in Africa.  Conceptually, there was no argument about its objectives - stop or intercept conflict diamonds from reaching the markets.  The carefully built image of diamonds could be destroyed if the public took on this association.

No intent here to be cynical, but the industry was looking to protect itself.  Gem quality diamonds (or, at least, those diamonds that end up being used in jewelry) are a discretionary purchase, enough so to be called a whimsical purchase.  Industrial applications, which have real life uses, can be satisfied with lab grown diamonds that have been around for 60-70 years.  This is quite different from essential natural assets, such as oil, that have produced far worse abuses than diamonds, but the world shades its eyes in order to avoid that problem.  But diamonds are an easy target, with some of its associations - cartel, luxury, ostentation, wealth, capitalism - working against it.

Right from the outset, it was clear that it is way too easy to get around the KP standards.  Anyone having even passing knowledge in the acquisition and distribution of diamonds could see that the KP was more like Swiss cheese - full of holes.  Some countries refused to sign on to KP, a condition that still exists today.  Even among signors, there are cases of human abuse.  Diamonds are passed across borders, and mixed into legitimate extractions.  Illegal goods are transported to countries that issue KP certificates, and then export to other countries. Counterfeit certificates can be purchased in some places.  A couple of years ago, I received a call from someone who would fly me into Sierra Leone on a private plane, arrange a purchase, then fly me back home.  Some NGOs, badly frustrated, have bailed out of any involvement in the process.

Should we be surprised by all this?  Of course not.  Any time there is an opportunity to make big money by circumventing controls, there are people happy to do it.  Just think of arms sales and African ivory as two of many examples. And in the diamond business, in addition to the KP issues, we have been dealing with lab grown diamonds being mixed into natural productions, something that has been going on since long before the conflict diamond issue came up.

Enough said.  But how about the future?  Due diligence is the newest thing, asking for proof of custody all the way from the mine to the store counter.  OK, that can work, but my contention is that all that serves to make honest people even more "pure."  We should not delude ourselves, however, into thinking this will solve the problem.

It is, after all, an issue that, in the end of the chain, primarily confronts retailers and consumers.  How diligent are they going to be, or able to be, in unequivocally verifying that a KP certificate or chain of custody is correct.  Add that to getting total assurance that the grading certificate is accurate, or that no man-made diamonds are not mixed in.  Frankly, I'm glad I do not have to face that issue.

Still, KP should not be abandoned.  The industry must continue to do whatever it can to offer and provide a clean path, in spite of the fact that there are crooks out there.  The least we can do is to make it as difficult as possible for them.  Yes, in time, maybe not more than a decade or so, the issue will fade anyway as diamonds mining fades away.  In the meantime, trudge on.