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Diamond Business Cycle Sets Roadblock to Better Bank Finance
Q&A with Emanuel Namdar, General Manager of Schachter & Namdar Asia
Nov 16, 2014 2:30 AM
By Avi Krawitz
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RAPAPORT... Schachter & Namdar Asia (S.N. Asia) is a diamond manufacturer with cutting factories in South Africa and Namibia that is focused on selling branded diamonds in the Asian market. The company’s brands include the Brilliant Rose cut, its Mine to Mine jewelry collection, its Proudly South African certificate and the De Beers Forevermark program. Emanuel Namdar, general manager of S.N. Asia, recently spoke with Rapaport News about the challenges facing manufacturers, growth opportunities in Asia, and its strategy to add value to its diamonds:
Rapaport News: How are things in the diamond market?
EN: There are different moods in the cutting and trading centers and the consumer markets. The retail markets that are doing well are not consuming the whole range of goods being manufactured. Most people don’t understand the small nuances in demand in these markets because they don’t always make sense. For example, why would a Chinese company buy a VS1 diamond that is more expensive than a VVS2?
The ratio between the goods that sell and the ones that don’t has become so unhealthy that the overall price of diamonds has dropped. So when you get the right goods, which in China are VS-SI clarity stones without a black inclusion in the center, the price is considered too high. The lower-quality stones that have been consistently rejected have taken over the pipeline in terms of quantity because the major consumption markets in Mainland China and Southeast Asia do not buy those goods.
It used to be that 80 percent of available supply was healthy goods that could fetch a strong price, and 20 percent were rejection goods, but today it’s the exact opposite. Most of the goods out there have not sold since April.
This situation came about as many people have avoided manufacturing new goods because rough was too expensive, and because of liquidity issues. Also, companies are focused on trying to sell old inventory before making new goods available as stocks have accumulated.
Rapaport News: Are inventory levels higher than normal for this time of the year?
EN: I don’t think they are higher, but they are less healthy because they are made up of accumulated rejection goods, and the range of clarities available does not match the tastes of the major consumer markets.
For example, in Asia, a black inclusion in the center of the stone is very bad but the GIA might grade it VS, while an innocent feather inclusion on the side will be graded an SI1. But most Asian buyers would rather buy the SI stone.
Rapaport News: How was the October Golden Week in China and Hong Kong?
China is a very big market and the differences in taste and economic growth vary from province to province even more than the different parts of the U.S.
Economic power is shifting from the coastal and southeastern regions to the northern and western areas. The coastal Tier I cities, which were the first areas in China to be open to foreign investment and the buildup of competitive industries, have become expensive. As a result, industries have started moving into poorer areas that are developing faster with local governments offering more benefits.
Whenever a jewelry center is growing, the first stage is not really about selling, it’s about expansion. The growth is not coming from more people buying diamonds, but from more shelves being filled in new stores.
For retailers, Golden Week was better in Tier I cities like Shanghai than in developing cities like Shenyang in northern China. However, I had much stronger orders in Shenyang than in Shanghai because the shelves were already filled in Shanghai. The bigger opportunity for diamond suppliers is in the lower-tier cities where new stores are opening and seeking to develop long-term supply arrangements. For this purpose, having a strong brand helps immensely.
So for diamond people, Golden Week was much better in the Tier II cities than the coastal cities, but the retailers sold better in the Tier I cities.
Rapaport News: What is the strategy behind your branding?
EN: The brand must add value to the pipeline. To differentiate yourself in a fiercely competitive environment you can’t just tell a meaningless story. Consumers have hundreds of diamond rings to choose from when they go shopping. All you have to do is take a 10-minute walk in any Chinese city to see that.
I have a factory in Johannesburg and saw an opportunity because when you ask a jeweler in China or Hong Kong where the diamond is from, inevitably the answer will be South Africa. So I approached the Proudly South African initiative, which is endorsed by the South African government, and received the exclusive rights to inscribe the logo and wording “Proudly South African” on the girdle of my diamonds. This is accompanied with a certificate which certifies that this diamond was made from rough purchased and polished in South Africa.
As a result, I am able to charge a small premium and my clients can charge a larger premium to their customers because they can guarantee that the diamond is from South Africa.
Rapaport News: Do you brand all your diamonds?
EN: Not all of our diamonds fit the quality of our brands. Sometimes the small percentage that doesn’t meet our standards, I sell cheaper than market price because I want to get rid of it. Our strategy is to sell diamonds. I hate stock and don’t believe in holding inventory, because every dollar I receive from a sale I invest in rough. I don’t believe in any action in our industry whereby I don’t add value.
Rapaport News: What added value does the De Beers Forevermark brand provide you?
EN: Forevermark is exclusive since not every diamantaire can have it. It’s supported by marketing and an advertising buzz that I would never be able to do myself. Also, because it’s such a strong brand, people care less about the four C’s which enables me to brand goods that I might not be able to otherwise.
Rapaport News: How is the manufacturing landscape in South Africa given that many companies are closing their factories there?
EN: Botswana has the priority of good supply, so companies like Tiffany & Co., which was in South Africa even before us, have moved to Gaborone. The other issue is that the tenders of the medium-sized mining companies Trans Hex and Petra Diamonds are very competitive for local manufacturers.
Today, the cost of manufacturing in South Africa is among the highest in the world. When you buy rough in South Africa you pay value added tax (VAT) and have to apply for a refund. So as a manufacturer, around 25 percent of your capital is tied up in VAT refunds, which means that your starting point is negative 25 percent in financial capability.
Rapaport News: So why have you invested in South Africa?
EN: The investment was done already. We have downsized because rough prices are high and we face the same difficulties as everyone else in South Africa.
There is a triangle of stakeholders between the rough producers, government and local manufacturers. In South Africa, each blames the other two for the lack of industry growth. I fully understand that many fingers are also pointed at me.
Everything each side says is true. On the other hand, I see that there are companies that are growing. Chow Tai Fook still has its main facility in South Africa, which is the biggest factory in Africa.
The bottom line is that you can’t run away from market forces, and manufacturing diamonds in South Africa in the current atmosphere is not sustainable. It’s too affected by market conditions while the commitment from all three parties – rough producers, government and manufacturers – is the lowest of all the beneficiation countries.
Rapaport News: What are your biggest challenges and concerns for the industry at the moment?
EN: The main challenge is financing. People say this is a result of the banking sector losing confidence in the industry, but I think this is a complete misunderstanding. The banks haven’t lost confidence in anyone, but they’re also a business and have to do what’s best for them. At the moment they have better options than lending to diamantaires.
We have to realize that the economics and cycles of the diamond business work contrary to measures that the banks have committed to in the Basel Accords. As an industry we are not able to match the new standards that are required because of the long credit terms we have to offer our customers.
A diamantaire cannot ask his client to give him an advance on the 250 H, VS1 diamonds he will produce with the rough he’s about to buy at De Beers and that the client will only receive in four months. Instead, I need to give a substantial discount if I ask my client for cash when the goods are ready.
Even the best and most transparent diamantaires today face a problem with their banks because it’s not possible to have enough turnover against the money that they want to borrow. No one can manufacture in large numbers and collect the money within three months, but yet we’re expected to move our stock four times a year.
From the moment you buy the rough, it can take six months to collect money for those goods when you consider the manufacturing time, the GIA turnaround, shipping, etc.
Also, most good relationships between diamantaires and retailers are not on a cash basis. Only the least committed relationships selling at the cheapest price, deal in cash. They sell faster but you cannot build a business on that.
Rapaport News: How do you expect the market to develop in the next decade?
EN: If we work very hard, our diamonds will not lose value. I predict that 10 years from now, the average price of diamonds will be 30 percent to 40 percent higher than today. We can achieve that if we work very hard.
People will work hard because those that don’t will not be around in 10 years. There will still be an industry and many good companies here today have a roadmap to achieve that 30 percent to 40 percent higher value.
For us, branding is not our goal, it’s the instrument. Our goal is to continue to add value to the diamond pipeline.
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Tags:
Avi Krawitz, S.N. Asia
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