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.