|
|
Restoring Confidence
Editorial
Mar 13, 2015 8:00 AM
By Avi Krawitz
|
|
|
RAPAPORT... The diamond mining companies need to play their part to ensure profitability throughout the distribution chain. Therefore, the trade should be encouraged that a meeting of the top eight miners took place this month to discuss some of the industry’s most pressing challenges.
Rio Tinto hosted the meeting at its London headquarters with representatives from De Beers, ALROSA, Dominion Diamond Corporation, Grib Diamonds, Petra Diamonds, Lucara Diamond Corporation and Gem Diamonds all in attendance.
According to Bloomberg – which broke the news of the meeting – diamond marketing, industry research and the threat to consumer confidence from undisclosed synthetic stones entering the market were the main subjects discussed.
The companies confirmed the meeting in a prepared statement sent to Rapaport News. The statement read, “Preliminary discussions have been held between a number of producers to explore the potential remit and scope of an industry association for diamonds that would seek to better understand, address and protect the needs of diamond consumers. These discussions are at an early stage, they cover many topics and no agreements have been reached. Until these discussions have concluded, no further comment will be made.”
A strong, well-funded association is undoubtedly required to deal with these issues. The industry has long called for a body that will fund a campaign to drive consumer demand through contributions from its most profitable sector – the miners.
The cracks in consumer demand that have surfaced since De Beers shifted its marketing budget to support its own brand-focused campaigns, rather than generic diamond promotion, have become all too apparent. Consumer demand has stagnated and diamonds have lost market share to other luxury products. Furthermore, the increase in undisclosed synthetic diamonds entering the market in the past few years poses a serious threat to consumer confidence and the industry’s ethical standing.
There have been previous attempts to form such an association. Following the 2008-09 crisis, the International Diamond Board, another Rio Tinto initiative, fell apart when ALROSA declined to make a commitment. This new, yet-to-be-named initiative seems to be a more cohesive effort between the miners, even at this very early stage.
The trade leadership is hoping the miners will be equally cooperative with them, although they seemed as surprised as any to learn about the meeting.
The World Diamond Mark Foundation (WDMF), a generic marketing initiative of the World Federation of Diamond Bourses (WFDB), merely cited the Bloomberg article in its response about the meeting. WFDB president Ernie Blom noted that the foundation is in advanced stages toward implementing a comprehensive strategy and program for the generic promotion of diamonds.
“We hope to engage with the producers and get them on board with us, as their participation and stated willingness to fund such efforts will be crucial to the success of generic promotion throughout the supply pipeline," Blom said.
It remains to be seen whether the mining companies will lend their financial support to the WDMF following the London meeting, or even incorporate the WDMF into a new structure of their own. So far they have been hesitant to lend real support to the WDMF beyond their words of encouragement. One feels the mining companies will want to show their own leadership, and channel their 2014 profits, through a campaign or association that they control. They’re not accustomed to following the trade’s lead.
While there is no reason that two or more bodies cannot tackle these issues simultaneously, the WDMF might struggle for longevity without the financial backing it (still) hopes to receive from the miners. For their part, the mining companies are arguably the best placed to drive an effective campaign to promote demand and the fight against undisclosed synthetics. Therefore, one expects that the meeting at least laid the groundwork for a follow-up sooner rather than later.
However, such initiatives need to prioritize easing the load of the diamond manufacturing sector. The industry at large must not allow such programs to be a mechanism to drive up rough prices further beyond the reach of polished. If a generic marketing campaign succeeds to enhance diamond jewelry demand, and subsequently raise polished prices, those improved margins should not be steered into rough prices to the extent that they have been in the past.
The mining companies are surely aware that while they enjoyed stellar profits in 2014, their clients lost money. Such disproportionate distribution of profit is simply not sustainable and 2015 will surely be a tighter year for miners given that manufacturers don’t have the money to buy non-profitable rough.
It’s not only the rough-polished price gap that places manufacturers in an unenviable position. It’s also the manner in which the industry operates. Manufacturers pay for their rough in cash and sell their polished on credit. Considering the manufacturing and grading process, it can take nine months to a year before they make a return on their rough purchase. That’s assuming that polished prices have increased sufficiently to ensure a profit on the rough at all. Manufacturers are also faced with reduced bank credit to finance their rough purchases.
It’s little wonder then that manufacturers are struggling to profit. Consequently, many expect further consolidation toward smaller and fewer operations in the middle of the pipeline (see editorial ‘Business as Usual in Hong Kong,’ published on March 6, 2015).
As the miners mull over the establishment of an association to promote the interests of the industry, they might consider that all these challenges are related. Diamond manufacturers would be less tempted to cheat by mixing undisclosed synthetics in their natural diamond parcels if they’re able to make money in an honest trade. They’ll also be better able to invest in their own marketing and branding initiatives to drive consumer demand.
Therefore, rough price levels ought to have been on everyone’s mind at the London meeting, even if they weren’t able to be discussed.
The participating companies seemed well aware of the sensitivities regarding rough prices at such a gathering. Given that they represent more than 70 percent of global supply, they would naturally guard against any price fixing allegations. In their response to Rapaport News, the miners stressed that, “all the participants are acutely aware of the need to ensure that their discussions, and the activities of any future association, are legally compliant and are therefore being supported by legal counsel,” the statement read.
Therefore, it will ultimately be left to the dynamics of the market, along with tireless promotion, to enable true profitability throughout the distribution chain. That dynamic will have to be dictated by manufacturers, who will need to refrain from buying over-priced, unprofitable rough. For if there is to be any effort to restore confidence in diamond consumption, there first needs to be renewed confidence in the diamond business. The hope is that the mining sector will follow the trade’s lead when it needs to, and help ensure profitability across the supply chain.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz and on LinkedIn.
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.
Copyright © 2015 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
|
|
|
|
|
|
|
|
|
|
Tags:
Alrosa, Avi Krawitz, De Beers, diamond jewelry, diamonds, Dominion, Gem Diamonds, grib, Jewelry, lucara, Petra Diamonds, Rapaport, Rio Tinto, Synthetic diamonds
|
|
|
|
|
|
|
|
|
|
|
|
|