Thursday, August 11, 2011

Roller coasters and Rip Van Winkle

OK!  Tomorrow is Friday and I am ready to have two days off from insanity.  The stock market fully reflects public sentiment, namely confusion, anxiety, fear, amazement, and disgust.  It has been a roller coaster of feelings and money, possibly good for day traders and computer-driven automated transactions, but not for us mere mortals.  Trillions blown and trillions recovered, while most of us stand about with our mouths open in amazement. 

We read reports in the media that the rich (maybe the super-rich) continue to spend lavishly, and some retail sales reports show strong trends.  (Macy's reports that jewelry was one of their strong categories.)  On the flip side, some vendors of high end goods say business is awful.  Mass market retailing in July was weak.  We will see what the reports say. 

We see the stunning rise in diamond prices weakening in some categories.  And gold has become an emotional commodity, as even sovereign states are heavy buyers, hedging against weak currencies.  Down in the trenches, where we live and work, gold prices are killing ranges of product.  Tiffany is using very light 18 karat chains as sort of loss leaders at $175.  How about heavy gold mountings and chains?  Almost prohibitive in price.  Sales, yes.  But a trickle of units.  Will the public accept this season's radically higher prices?  We just don't know.

We approach the fall season apprehensively and carefully.  No matter what, it will be rocky.  With a presidential election next year, and seriously contentious parties, we will see political paralysis just when we need action.

Think we could hibernate through this one, like Rip Van Winkle? 

Monday, August 1, 2011

Tender is the sight

The diamond industry is grappling with an issue that has been looming over everyone's heads for some years.  Moti Ganz, president of the International Diamond Manufacturers Association, just released a statement in which he claims that the rising number of tenders of rough endangers the business.  He says that without some base of established sights, where manufacturers can rely on supply, companies will have increasing difficulty sustaining factory operations, never mind invest in new factories.  He does concede that some companies failed when they lost their sights in the past number of years, but he feels that the problems inherent in tenders are worse.

Perhaps.  But there are some hard facts--and reasonable speculations--that counter his position.  The producers see the realities of the working market.  Boxes are flipped immediately for profits.  Other goods pass through many hands at times before being converted.  And major firms are increasingly dominating supplies of rough, sometimes heavily backed by banks.  Moreover, supply is continuing to fall below demand, even in these strange economic times, with the outlook being the same or worse.  Mines are playing out, and new, large sources are nowhere to be seen, even with Zimbabwe included.  Miners now feel, undoubtedly, that what is in the ground will only accrue in value, so extraction is deliberately constrained.  Add to all that the gradual leveling of the playing field, as De Beers mines decline in output.

What we have is the conditions of a "normal", competitive business environment.  One in which the big players, the miners especially, seek profit, pricing power, and competitive edge.  This is not the environment in which the industry grew and thrived in the days of De Beers dominance, the conditions that Ganz prefers in view of the highly fragmented nature of the diamond industry. 

His position does reflect some real concerns within the business.  For example, companies that deal in small goods (and therefore need to maintain large labor forces to convert the rough) are particularly concerned about continuity of supply.  The recent breathtaking surge in the price of stars illustrates the point.  Cutters, especially in India, are unwilling to open factories and pay high wages to cut these goods without knowing there will be a steady supply, especially after the many closings that occured in the downturn three years ago.  So that is a real bottleneck that has created serious shortages.

The producers, I am sure, think of their own benefit first.  A good case can be made for seeing the industry evolve into a well-structured distribution system, based on efficiency and diversity.  Obtaining rough, whether through tenders or from after-sale, would be based on economic viability, good (or specialized) market position, and downstream outlets or customers.  The present situation, as described by Ganz, is supply driven rather than demand driven, so we have companies seeking rough at "affordable" prices that feed factories the principals want to maintain.

This is going to change whether we like it or not.  Tenders give the producers the ability to maximize profits in a supply-short market.  The bottom line is that they will not want to give that up.  The only reason they have not switched wholesale to it, is their fear that the present distribution is still to frail to handle it.  But they are pushing it to change, even if it is unspoken.