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The Cutter's Edge

Jan 3, 2002 3:13 PM   By Martin Rapaport
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A market-based approach has proven a successful formula for EMA Diamonds Ltd., honored with Israel’s Diamond Exporter of the Year award.

Martin Rapaport presents the perspective of a diamond manufacturer in this interview with Jeremy Medding of Israel’s EMA Diamonds Ltd. The strategic development of the firm as well as an insider view of how they see the current market is provided. An excellent read for those seeking to understand the mindset of a new generation of diamond cutters.

Martin Rapaport: EMA has been awarded Israel’s diamond exporter of the year. What did you do to win this award?

Jeremy Medding: We sold a lot of diamonds with exports to many different countries. We also showed continuous growth over the last nine years and I suppose that’s why the industry recognized us.

MR: To what does EMA owe its success?

JM: The company has two main divisions. The manufacturing division deals with purchasing rough and cutting it into polished. The marketing division specifies the types of polished we should manufacture, sorts the polished based on the needs of our customers and then sells the polished to our clients worldwide. Our success is based on our ability to integrate manufacturing and marketing expertise to meet the needs of our clients. It’s about understanding the rough market, being experts at diamond production and maintaining a keen understanding of the polished markets and the marketing requirements in the various diamond consumption centers. Without the close integration and understanding between manufacturing and marketing, I doubt we would have been able to achieve what we have.

MR: What caused you to develop your marketing potential?

JM: The end of the eighties provided one of the biggest booms the diamond industry has seen. The Japanese bubble economy absorbed huge amounts of polished diamonds at high prices and the diamond business was easy going compared to what it is today. The beginning of the nineties, with the bursting of the Far East bubble and the American recession in 1991 and 1992, brought tough years to the diamond business. Middlemen that used to buy diamonds in the local Israeli market disappeared. When we founded EMA in 1993, we realized that we would have to develop our own marketing efforts overseas and could not rely on buyers in the local Israeli market to purchase our production.

MR: Are you able to cut diamonds to meet the specific demand of clients?

JM: Our approach is marketing based. We adopted the view that we have to be able to market a broad range of diamonds and therefore we must be able to produce a broad range. We coordinate the production division with the polished marketing division in order to develop the capacity to sell many different types of polished. We do not only manufacture for the American market or limit ourselves to specific shapes or sizes. We buy a full range of rough to get the best prices and produce a very wide range of polished of the type the industry calls Israeli and Belgium goods. We do, however, produce all our goods in fine cuts only and this allows us to select out polished that meets the needs of specific clients. In some instances we tailor our production to meet the specific cut requirements of customers or markets.

MR: What type of goods are in demand today?

JM: The last year has been a very tough one. It’s probably the first fully blown simultaneous recession worldwide and obviously worsened in the U.S. after September 11. Demand has dropped across the board for most diamond qualities. The worst hit are probably VS2 to SI2 in medium colors. I wouldn’t necessarily call the high end and lower qualities recession proof, but over the years we have seen inexpensive polished hold up well in recession as have the more expensive goods in better color VVSs, which have been particularly strong lately. The middle-range goods are getting squeezed. Perhaps that’s because middle class consumers worldwide are holding on to their money.

MR: Where do you source your rough?

JM: We source our rough from the full range of suppliers, including De Beers dealer sightholders, De Beers Diamdel offices and from independent rough dealers in Israel and elsewhere. We hope to become a De Beers sightholder when the Supplier of Choice arrangement is cleared with the European Commission. We made our presentation to De Beers in mid-April 2001, and naturally, we are hoping for a fruitful partnership with De Beers that will give us the kind of rough supply we can well utilize.

MR: What is the advantage of being a De Beers sightholder in a market where outside rough prices are cheaper than De Beers’ prices?

JM: If we are talking about November 2001, that might be the case, but if you are a diamantaire running a company with a hundred million dollars of sales a year, you don’t analyze a situation based on the short term. You have to think long term and anticipate the future. Considering the past, present and future, we recognize that current stormy market conditions have created a fall-off in demand that has created discrepancies in rough prices. We are, however, quite sure that the markets will rebound and we would like to have a solid partnership with the finest rough supplier in the world.

MR: What are the advantages of being a sightholder?

JM: The advantage is our capability to sit with our customers and design marketing programs and methods of selling that will match our rough input with our selling requirements more closely. That’s very hard to do on the outside market where you are shown a parcel that may or may not be available next month. While you can decide whether or not to buy outside goods, you can’t build a long-term relationship with suppliers in a free-for-all market.

MR: You’re essentially saying that a consistent supply is a critical factor in seeking to become a sightholder?

JM: Consistent supply is correct, stability of supply is correct, and also our company philosophy recognizes that a strong De Beers means a strong diamond market for everyone to enjoy. No one will benefit from a weak De Beers and no one will benefit from weak rough prices. It is in our interest that De Beers be able to promote the well being of everyone.

MR: What is your level of sales?

JM: Last year we sold close to a $100 million. Our export figures were $75 million, of which approximately 50 percent went to the United States, approximately 25 to 30 percent to Japan and the remainder to Europe, Southeast Asia, Hong Kong, Taiwan, Korea, Australia, Italy and other markets.

MR: What type of goods do you specialize in?

JM: We do not seek to limit ourselves to a specialized niche, as that would marginalize our capabilities to buy rough and market polished. We have a very wide range of capacity compared to other manufacturers. We can manufacture 20 points in ideal and also produce heavier made stones in larger sizes. We produce AGS triple zero goods as well as quarters in piqué earring-quality price points.

MR: What’s the hottest item you are selling today?

JM: Unfortunately, nothing is very hot at the moment. Goods are selling decently in the piqué qualities in the lower price points.

MR: What price point in dollars per carat?

JM: In 20 points up to half carats, between $200 to $1,200. In 3 grainers, it’s probably $400 to $1,500. One carat, earring-quality material between $800 to $2,000 has always sold quite well, and is selling well now. That price point range is almost recession proof. Then again in VVS and smaller goods, if you’ve developed and nurtured the markets over the years, your demand eventually rises. So we’re not suffering too badly in those areas. And now with Christmas in mind, certificate goods are generally moving well. The big question, of course, is if retail sales between Thanksgiving and Christmas will clean up the pipeline in the United States and how low retailers, wholesalers and importer inventories will go. The quantity of polished the consuming markets will be able to draw from the cutting centers in the first half of 2002 is of concern to everyone.

MR: Are you able to get all the rough you need?

JM: At this point in time we are able to source without any difficulty. Over the years the markets have recognized our reputation and our capability to market a wide range of goods, so there is no lack of sellers who would like to sell to us.

MR: Have rough prices fallen in the last few months?

JM: Rough prices, and to a degree polished prices, have both shown weakness over the last six to ten months, perhaps even beginning last January. There is recognition that the United States is technically in a recession and has been hurt by a declining stock market. I think that around May or June everyone recognized that we were in a worldwide recession, although no one really knew how severe it was going to be. Christmas last year was not as strong as the previous year, and the beginning of 2001 didn’t open as strong as it did in 2000, so prices started to show weakness in the first half of 2001. Premiums have come down for most of the goods, and so our customers can buy certified goods for lower prices than they could last year. The Rapaport list has also come down this year and that is another few percent entered into the equation. When you mix this all together, polished prices have come down, which in turn has caused rough prices to come down. The high stocks in both the cutting centers and with the wholesale distributors around the world have caused rough dealers and manufacturers to come under financial pressure. This has been a destabilizing factor in the rough market. But you have to see the picture in its entirety. I would, of course, have loved to see rough prices come down more than polished prices, but unfortunately that is not the case. Manufacturers this year are faced with lower sales volume and it’s hard to react very quickly in terms of fixed costs and optimization of our cost structures. So the falling rough prices haven’t been able to compensate for lower prices of polished goods.

MR: Do you think rough is falling because of weak polished, or is polished falling because of weak rough?

JM: Well, that’s the big question. It’s all tied in together. In an efficient market, you would expect one to affect the other, which is, of course, what is happening. A lot of people sometimes say that the rough and polished markets are totally disengaged from each other, but they are in fact a lot more related and efficient than people think. The polished market is affecting the rough market, and the rough market is affecting the polished market. We are in a kind of vicious cycle of mutual cause and effect and it’s basically irrelevant at this stage, what is affecting what. The fact is polished demand from the consumer level through the wholesale and importer level is weak, which is in turn causing rough prices to be weak.

MR: What are your expectations for this Christmas season?

JM: As the old saying goes — “You can have an excellent Christmas, you can have a very good Christmas, or you can have a good Christmas.” I’ve never seen a Christmas when we haven’t sold a lot of diamonds. Any kind of Christmas still sells a lot of diamonds and we are going to sell a lot of diamonds this year as well. The big question still remains — how much is going to remain in the pipeline and how much will retailers in the United States, Southeast Asia and Japan be willing to commit to diamond stocks? We have to consider that many retailers are very savvy business operators with better and tighter computerized financial and inventory controls than your average diamond importer or wholesaler. Retailers have seen dwindling opportunities for sales this year and the accountants have been sitting very tightly on the checkbooks. I have a feeling the accountants have been calling the shots. Regarding wholesalers, they are not always going to consult the computer about how much they should pay for goods and how many they should hold in the safe. The fluctuations in their buying patterns have been less severe.

MR: Are you concerned about liquidity and the ability of your customers to pay you?

JM: If I was concerned about my customers’ ability to pay me then I shouldn’t be selling to them. The diamond world is a very real world and if anyone has ever lost a debt, they know how careful one has to analyze these things. So naturally, every one of us in the diamond community has to analyze their receivables very, very closely and make sure that they are only selling to people who can honor their commitments. After working with people for awhile it is very easy to tell who is going to pay on time. By reviewing their receivable patterns, I can even tell you what kind of a business they are running. I don’t think I would discount my receivables for even a small margin.

MR: How about the general market? If there is not much money coming through the retail sector, won’t that create problems?

JM: I think your premise is a little mistaken because you’re saying there’s not much money coming through the retail sector. I think the retail sector sales haven’t fallen as much as their purchases have fallen. I think what we are seeing, is that at the end of the big American bull market, the accountants would like to see dwindling inventories and dwindling inventory financing costs. Hopefully, if inventories drop to low enough levels after this Christmas, retailers will open their checkbooks again and place bigger orders in 2002. Again the key question is how much consumers will spend on jewelry this Christmas, and we all hope it is going to be a good season.

MR: Where do you manufacture your diamonds?

JM: We manufacture our diamonds in two main plants. Our biggest plant is in China’s Guangzhou province where we employ close to 300 polishers. We opened there close to five years ago in close cooperation with a Hong Kong based manufacturer. We trained our own staff to our high standards and have two full-time Israeli managers. Our basic premise when we moved to China was not to compete with low-cost cutting centers like India, but to produce very fine cut stones at the most efficient cost levels. We realized that as the diamond market grew evermore efficient and our business grew, we needed to search for increased efficiency and be able to offer merchandise we couldn’t offer from our Israeli factory.

In Israel, we employ approximately 60 workers in our Ramat Gan factory, where we manufacture higher polished price points that enable us to justify the higher manufacturing costs. We analyze things on a polished sale price rather than on a size basis. If the polished sale price of a stone will justify manufacturing at Israeli costs, we manufacture it in Israel, even in smaller 0.30 to 0.50 sizes. However, cheaper price point goods are manufactured in China even if they are larger 3 grainer or even 1-carat sizes.

MR: Are polished prices very volatile?

JM: Polished prices tend to react with less volatility than rough prices. There is a lot more speculation in the rough market. Polished diamond dealers, even retailers and wholesalers, don’t have the mentality that if they don’t buy this item, there won’t be any of it available tomorrow. If we look back at the last five years where we have seen very hot rough markets for some periods, premiums were paid on rough boxes by manufacturers who thought that if they didn’t buy a specific box, the goods would not be available. The rough markets still have a mixture of speculation, illusion or whatever that the polished markets have tended to iron out over the years.

MR: What is your view of the Japanese market?

JM: We’ve been very lucky over the past ten years to have very close and good relationships with some of the finer companies in Japan. This has contributed to our export growth and our success as a company. The 1990s showed a rapid drop in Japanese imports and consumer purchases. Japan is much less of a gravy market than it was it in the 1990s and so many in the diamond market have ignored it. We have enjoyed a good understanding with all our Japanese customers and we’ve been able to continue to supply them. It just became a lot tougher to work there. Japan is a very different market than the others with significant real or perceived barriers to entry. It is not as easy to send a young salesman to Japan and write invoices the way you can in the United States or parts of Southeast Asia, where you have planeloads of Israeli, Belgian, South African and Indian salesman walking out of the airports with bags full of goods, ready to write invoices.

MR: What makes your company special?

JM: A lot of people have asked us over the years what the magic ingredient is, and I suppose it’s not one magic ingredient. I would have to say there are several key factors. Our thorough expertise in both the rough and polished markets is a key factor. The very close relationship between the rough and the polished divisions and our ability to work together to tailor our inventory and production to what the markets need is important. You must have a very keen understanding of the polished markets in order to be able to manufacture properly. Our decision not to limit production to niche areas, but produce a broad range of goods to meet a broad range of demand has also helped us. I would also say that over the years, everything I have learned about the polished diamond business I have learned from our customers and this knowledge has been passed on to our rough division. Finally, a most important factor is the fine people that work for us in Israel and our very strong sales team across the world who work tirelessly to promote our business.
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Tags: Australia, Belgium, China, Consumers, De Beers, Diamdel, Economy, Hong Kong, India, Israel, Japan, Jewelry, Manufacturing, Production, Sightholders, United States
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