Thursday, May 24, 2012

Man made diamonds: Are they the future?

In the last week we have been reading about hundreds of man-made diamonds (MMD's) that were submitted to IGI for grading without disclosure.  Various observers tried to delve into the sourcing of the stones.  Rob Bates at JCK considered this a serious problem, as it could affect consumer confidence (rightly so), and expressed the hope that there will be some kind of "black box" solution.  Chaim Even-Zohar went into a full story about the history of Gemesis, which is being mentioned as a possible source of the stones, though they totally deny that presumption.

I suggest that the starting point should be a realistic assessment of what has occurred and has been occurring for some time.  And what we need to consider for the future.

MMD's (produced by HPHT and CVD processes) and HPHT treated diamonds have been in the market now for years.  In both cases, the essential fact is that the temptation not to disclose is powerful.  The added profits can be huge.  Leon Tempelsman of Lazare-Kaplan, which markets Bellataire diamonds (HPHT enhanced) has complained in the past that his company markets the stones with full disclosure while others do not.

There is lots of evidence indicating that abuse is fairly broad and constant - GIA has dropped clients that send in MMD's without disclosure; retailers have discovered these stones in their stock, often by accident; even the major auctions houses, who check every diamond, have found such stones.  They are everywhere.  I was not surprised some years ago to hear that small MMD's had been salted into parcels of naturals.  The world has plenty of people who would not think twice about doing that.  "They are diamonds," they would say, "aren't they?"  "So who cares."

It takes time to "grow" diamonds, whether by HPHT or CVD processes. That tilts production and sales towards smaller goods (at least for now).  For the crooks, the fact that larger, better goods are almost always sent to a lab for grading leads them to move smaller goods and find ways to hide the bigger stones.  In the IGI case last week, stones from .30 carat to about .75 carat were identified as MMD's.  The stones being sent to a lab was something the original supplier might not have anticipated.

Common sense tells us that Pandora's box has been opened, and we are not going to stuff MMD's back in.  So what are we really looking at?

  • The major impediment to MMD's having an impact on the diamond business has been production levels.  We know that production will only rise, and at some point it will rise quickly.  As it does, cost will drop, as is the case in every technology.
  • Mine production will tail off in the years to come, according to every informed expert, and the hole could well be filled by MMD's.
  • MMD's have an important edge.  They require power, but are not environmentally damaging; can be produced anywhere in the world (meaning not in conflict areas); and could someday represent a consistent and dependable supply.  Those facts alone will drastically change how diamonds are sourced, distributed and marketed.  Once MMD's take hold in the open market, mining will become undesirable and unprofitable, only contributing to the shift to MMD's.
  • Jewelry manufacturers will support the use of MMD's.  There could be significant reduction in the cost of producing a diamond intensive  piece (maybe offsetting high gold costs to some degree?), and continuity of production will be enhanced.
Synthesizing materials have been a part of the industrial/technological revolution, and in many cases it was for the preservation of natural resources.  We are careful about harvesting coral, minks, lizard skins, and rosewood.  Any product that is a luxury is particularly susceptible to attack if abuse, sustainability or environmental degradation is involved.  (Oil, as an opposite case, has been the cause of great abuses and wars - but it is, unfortunately, an essential product.)  I do not doubt that a strong story could be told about averting abuses related to diamonds in exchange for space-age technology.  Isn't it wiser to foresee the rising prominence of MMD's (even if it takes another decade) and devise a great transition that will assure the long term attraction of diamond jewelry? 

I have felt this way for a long time, and I know that there are many people who disagree.  They say that only billion-year old diamonds forcibly extracted from gaping holes in the earth hold the magic that people want.  There are many vested interests who dearly want to maintain that.  But does anyone really want to rely on that assumption, to base a business on that?  Especially when MMD's seem to be selling just fine?  

One more point.  I am not one particularly inclined to believe in conspiracies, but consider this trend.  BHP and Rio Tinto want to sell their diamond mines.  The Oppenheimers have sold out.  De Beers has announced a major investment in Element 6 (their mmd-producing division).  Is there something they all know that we do not?  Is the old diamond cash cow fading away?

Wednesday, May 23, 2012

The coming storm in regulation

I recently appeared at the first conclave for FJATA (Fashion Jewelry and Accessory Trade Association), which was held at Mohegan Sun in Connecticut.  My presentation was on the blurring lines between fine jewelry and costume jewelry, and maybe that is a subject for another post.  But more important is what I heard as I sat in on the morning's session.

The attendees, or most of them, are producers of the kind of products I only see when walking into a toy store or gift shop in a resort.  Cheap, and lacking any intrinsic value.  The presenters and listeners were all on the tech side, with a few principals sitting in.  The organization is only a few years old and its mission is to deal with the flood of governmental regulations confronting all manufacturers.

From the jewelry point of view, the outlook is very tough, and I am guessing that we on the "fine jewelry" side have only a faint idea of what is going on - and what we are going to have to deal with.

All heavy metals are going to become subject to regulation.  We already know about mercury, lead and cadmium.  Antimony is now on the boards, and we could be facing European style restrictions on nickel.  And then there is arsenic, cobalt, chromium, copper, manganese, and thallium, and probably a few more.  Some are actually needed in human diet, but the issue is in proper production, disposal, incineration and excess intake, especially for children.

Were it all up to national standards, the various stakeholders and communities could undoubtedly come to a resolution.  The problem is that states are taking it upon themselves to set their own standards, which will create (and already has to some extent) chaos for manufacturers.  Once confronted with a wide range of requirements (loaded, of course, with paperwork and procedures) the overload will be enough for many companies to abandon the business or stop selling in some states.  Even then there is a problem with selling legally in one state but being subject to suits when buyers move merchandise into other states.

In some cases, states have bills pending that will totally ban certain metals, which is simply impossible.  In Rhode Island, where many manufacturers and distributors of lower priced merchandise are resident, the legislature is considering total bans on lead, cadmium and mercury.  That state introduces 2,500 bills per session on average, and hundreds relate to the production of jewelry, toys, etc.  There are bills pending that will make retailers responsible for recycling paint, batteries, mattresses and other products that are potentially polluting if not disposed of properly.  The logistics for such requirements will be difficult and expensive.

Maryland passed a tough law, but made no provisions in terms of staff 
and financing, to enforce its terms.  Manufacturers who want to comply have no guidance on forms or who to deal with.

New York State, by comparison, introduces about 20,000 bills a year, again with hundreds that could impact the jewelry industry.

The issues can get quite complicated.  The chemistry for each heavy metal is different.  So, for example, cadmium "migrates" (that is where it leaches from an object to a human body) at one-eighth the rate of lead.  So negotiations in some states have centered around "total" content vs "migration rate".  California worked that out.  Other states have not.  If you use feathers in any way, testing has to verify that there is no bird flu present.

One attendant stood to relate that his company is very careful in their factory audits.  In his case, manufacturing is done in China (as is the case for many, if not most, other companies).  That means that independent labs show up unexpectedly at these factories to test and verify.  In the course of a year, this manufacturer spends $1 million on these audits.  (Several auditing firms were present to explain the great care they take to properly test, and to avoid any chance of bribery.)  This manufacturer proposed that a number of companies join together to test factories they use in common, thereby realizing huge savings in the audits.

There was much more discussed at the sessions, but suffice to say that what I heard was enough for me to realize that this is a storm about to break in the fine jewelry business.  Yes, fine jewelry manufacturers have had to comply with with various domestic regulations.  Now we have the Dodd-Frank legislation ahead, and that could very well require companies to audit foreign factories.  The first to react to new regulations will be the major chains, who will impose conditions on suppliers that may be near-impossible to fulfill.

I know from many conversations I have had, that small manufacturers and most retailers are totally unprepared to meet this major challenge. It will take a unified industry effort to assure workable conditions.

Tuesday, May 8, 2012

The big mid-year benchmark

We are coming up to the mid-year jewelry shows, and we will be using those events to measure the state of the industry.  At this point, there are enough signs to make us a bit ambivalent on how the rest of the year will go.

One one side, the top end seems to be holding up well.  It appears that the affluent (and even the super-affluent) are continuing to buy, though at lower average price points.  Some reports from guild stores say that sales are good, though dollars are down.  That sense of caution seems to be supported by the stock markets, which continue to have declining numbers of trades, leading us to believe that people are sitting on the sidelines and holding on to cash.  Charlie Munger, Warren Buffett's partner at Berkshire Hathaway, says that is a bad idea.  The value of cash, he says, is being steadily eroded by inflation, and that will only get worse.

That may be easy for him to say, as he hold billions in assets, but squirreling away cash only illustrates the concern people have for the state of the economy.  Munger compounds his statement by also saying that investing in gold is a bad idea, as it is a static investment, generates no income, and adds value only if the community at large decides that it is worth more.  That, he says, is very questionable, even in view of how gold has performed in the last few years.

Well, gold just hit the lowest price since the beginning of the year, and has not shown any juice of late.  Sure, some say that it is a great hedge against the certain explosion of inflation that is to come.  But are investors getting tired of waiting?  Perhaps.  Sale of gold coins (and silver coins) has dropped considerably in the last months.  The public, which had been buying the metal (rather than ETF's or mining stocks) seems to be pulling back.  The longer the price of gold stalls, the higher the likelihood of prices falling, aided by people rushing in to liquidate the gold they are still holding in the form of old jewelry.  If they have been waiting for the next push up, they may now turn around and sell.

Of course, all of this is speculative.  Other factors may be more important.  Will nations start buying more gold as the euro gets into more and more trouble?  Or, will the dollar gain even more strength in that case, pushing the price of gold down?  There is not an economist in the world that will render an unqualified opinion.  If it was up to our industry to support the price of gold (or not) through sales, we know that the price would be way down.  Down far enough to make gold jewelry far more affordable to many more people.  As we know, we do not hold the cards in this game any more.

In the meantime, silver has taken front and center in the business. No question that silver has become an important, maybe the important, metal for many jewelers.  Gold and platinum still dominate the bridal business and there is no reason at present to think that will change.  Fashion jewelry, however, is the add-on business that builds traffic for retailers and can spell the difference between profit and loss. 

That brings us back to the summer trade shows.  Will retailers be there looking for fashion lines or will they stick to basic diamond goods and bridal lines?  Many continue to do well buying jewelry off the street, and if so, they will have cash to spend.  We saw that effect last year.  Will the improving economy translate into optimism for the fall?  We hope so.