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RAPAPORT... Martin Rapaport, the chairman of the Rapaport Group, challenged manufacturers to refrain from buying high-priced rough diamonds as he contended during the Rapaport International Diamond Conference (IDC) that current market conditions are unsustainable.
“Miners are raising prices and rough is ahead of the polished. So why manufacture diamonds when it is so hard to make money? It seems better to just buy polished,” Rapaport said at the event that took place in Mumbai on Wednesday.
Russell Mehta, the managing director of Rosy Blue India, a diamond manufacturer, stressed that manufacturers have a responsibility to their workers to keep the factories operating with sufficient output. However, he added that factories are questioning how much rough they need and suggested that the time will come when manufacturers refuse rough supply if the recent rough price uptrend is maintained.
Vishal Doshi, a director at Shrenuj & Co., a diamond manufacturer, argued that manufacturers can make money but companies need to work more efficiently and change their mindset that there is easy money to be made. Doshi estimated that gross margins achieved by mining companies have grown by 4 percent -- approximately $700 million worth-- in the past year, while manufacturers have recorded a decline in gross margin of about 2 percent – also estimated at $700 million.
“Rough consumption is down and the resulting excess capacity creates additional pressure on margins,” he said. “Furthermore, the diamond content of retail jewelry sales has declined from 33 percent to 30 percent. So it’s quite evident who’s making the money.”
Doshi listed the main challenges currently influencing the manufacturing sector to include margin pressure, beneficiation in Africa, skills transfer and research and development. He added that the growth of synthetics and recycled diamonds are adding pressure to the sector.
From left to right: Martin Rapaport of the Rapaport Group; Russell Mehta of Rosy blue India; Vishal Doshi of Shrenuj & Co.; Arnav Mehta of Blue Star and Ezriel Rapaport of the Rapaport Group.
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Ezriel Rapaport, the director of trading at the Rapaport Group, acknowledged that recycled diamonds are an emerging segment in the marketplace with more diamonds available for resale in the U.S. than there are being mined in South Africa today. “Retailers have found a new source of supply through recycling,” he added.
Panelists agreed, however, that the greatest pressure is coming from the rough supply side. Arnav Mehta, a director at Blue Star Diamonds, a diamond manufacturer, explained that the rough supply scenario is changing as mining companies are increasingly focused on driving short-term profit. He noted that mining companies have become quick to respond to increasing prices and are reluctant to reduce prices in order to protect their bottom line.
Mehta said he expects rough production to increase in the coming years, after a decade of declining supply, and reach pre-2008 levels by 2020. He noted that there are new mines coming online and an increasing number of mining companies operating, which is resulting in more production. Mehta added that mining companies are also changing their selling strategies with more goods being sold by auction than ever before.
Martin Rapaport argued that manufacturers are enabling mining companies by paying higher prices for the rough. He theorized that there is a ''three-ringed circus'' of rough buyers consisting of the ''peacockers,'' the Ponzi players and the down-streamers who are buying rough at any price.
Rapaport explained that the peacockers want to prance in front of the miners and pay anything they can to show off their ability to buy rough, while the Ponzi players pay higher prices as a means to protect their inventory. The down-streamers pay the rough prices and make money by tying the rough to the polished that they have exclusive access to, he added.
“The three-ringed circus is unsustainable because it will run out of money,” Rapaport said. “Less profit will result in less credit and less liquidity.”
India Bank Compliance Nightmare
The IDC was attended by approximately 300 people and began with a morning discussion focused on India’s regulatory and banking environment. Suresh Surana, the founder of RSM Astute Consulting, cautioned that India’s gem and jewelry industry should expect to face tighter credit and liquidity due to recent banking and capital market defaults.
“The banks are reviewing the quality of companies’ asset cover, collateral and balance sheet,” he explained. “Due to the lackluster performance of gem and jewelry companies in the capital markets and tighter bank credit, fund raising will be more of a challenge and companies will be required to seek out innovative instruments.”
Surana presented an update on regulations that will affect India-based diamond and jewelry companies, including the Companies Act 2012, which is set to pass in Parliament, as well as an update on transfer pricing regulations in the country, rules governing foreign direct investment and anti-money laundering legislation.
Rapaport called upon India's government to pay closer attention to the diamond industry and to work to stop foreign exchange losses, put an end to transfer pricing and for banks to stop fueling the fire with credit for unprofitable manufacturing. “The government must let free market forces develop by creating an enabling environment and then get out of the way,” Rapaport said.
Transforming Jewelry Retail Markets
The afternoon session at IDC featured keynote speaker Kent Wong, the managing director of Chow Tai Fook Jewellery Group. Wong outlined some of the trends affecting China’s jewelry market and described Chow Tai Fook’s partnerships with Forevermark and Rio Tinto to better understand the market. Rapaport News will feature Wong’s comments in the coming days, along with a review of diamond demand in China as presented at IDC by Michael Huang, the managing director of Diamond Index Group.
Focusing on diamond jewelry retail trends in India, Sachin Jain, the managing director of Forevermark in India, a De Beers retail brand, stressed that the diamond industry is not doing enough to engage with the consumer. Sandeep Kulhalli, the vice president of marketing and sales at Tanishq, India’s largest diamond jewelry brand, agreed and noted that consumers in India typically don’t understand diamonds and that it is up to the industry to educate the public. Ghanshyam Dholakia, the managing director of Hari Krishna Exports, a diamond manufacturer and wholesaler, stressed that companies need to build a brand by inspiring trust among its clients, bankers and suppliers.
B.S. Nagesh, the founder of TRRAIN, Shoppers Shop, a foundation working in the retail sector, reviewed trends evolving in India’s general retail space that suggest the 35-year-old to 55-year-old consumer is the new and emerging target for retailers since that age range has money to spend. Nagesh stressed that Indian retailers need to focus on building capability rather than capacity as a means to spur growth.
Colin Shah, the managing director of Kama Schachter, a jewelry manufacturer and wholesaler, provided an overview of the factors affecting demand in India suggesting that growth will remain moderate in the medium-term and will depend primarily on macroeconomic factors. He added that organized retailers are expected to grow at a stronger pace than India’s unorganized sector.
Sin-Thetics
The final session of the provided the opportunity for IDC participants to learn how the growth and penetration of undisclosed synthetic diamonds are affecting the market.
Marc Brauner, the co-chief executive officer of International Gemological Institute (IGI) Worldwide, observed that the initial panic that emerged when IGI found over 600 undisclosed CVD synthetic diamonds in one of its labs in early 2012 has subsided. But he cautioned that production of synthetics has increased and the threat of non-disclosure will continue to grow.
Brauner estimated that the value of production of man-made diamonds is projected to grow from $500 million in 2012 to more than $1 billion in 2014. He urged the industry not to fight this development but to embrace it in order to ensure that these goods come to market with full disclosure.
Mehmet Can, the general manager of HRD Turkey, agreed adding that it is becoming increasingly difficult to protect the retail market from undisclosed synthetics. He suggested that the industry must work to introduce certification of goods below 0.30 carat sizes to help secure the largest part of the market.
Long Term Opportunity
Martin Rapaport concluded the conference by stressing that there are great opportunities for the development of legitimate, transparent, efficient and competitive markets. “While short term market outlook is problematic, there is great long term opportunity of firms that legitimize their operations, avoid unsustainable subsidies and diligently cease unprofitable activities,” he said.
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