RAPAPORT... The year 2007 had a bit of everything for the diamond industry. Mining juniors consolidated, De Beers changed strategy, and there was a noteworthy shift in diamond demand on the retail front. Economics helped boost diamond sales at the retail level in India and China, whereas consumers in the United States were forced to pull-back spending. The year had its share of twists, strategic moves, and stronger trends at play by the brands.

While it can be debated which stories most influenced change, or generated the greatest interest, there were certainly a few top contenders. We have narrowed it to the following topics that we believe 2007 will be remembered as the year that…

… Beneficiation Took Shape

Southern Africa worked towards claiming a bigger piece of the diamond pipeline through beneficiation and the suppliers really had no choice. South Africa, Botswana, and Namibia each acted to ensure that a minimum supply of diamonds mined in their respective countries will be cut and polished locally. While these processes were a long time in the making, they really took shape in ’07 as South Africa’s State Diamond Trader was established to start supplying in 2008, and De Beers’ Diamond Trading Company (DTC) partnered with the governments of Botswana and Namibia to supply rough at separate sights to local companies.

While it was perhaps politically correct to support this move, the more traditional manufacturing centers of Israel, Belgium and India kept one eye on the beneficiation process, and the other on the scarcity of rough in the market. They adhered to the need to seek rough from different sources outside the De Beers framework and many companies -- Suashish Diamonds, Dalumi and Trau Bros to name a few-- set up shop in the southern African centers to capitalize on the trend.

… DTC Diversified

Manufacturer’s concerns about future sources of rough were enhanced by two decisions by De Beers which were related to its support for the beneficiation process and to its strategy to focus on profitability.

Firstly, the company announced that it would restructure its Diamdel unit, which supplies rough to the secondary or “non-sightholder” market, drastically scaling back operations in Ramat Gan and Antwerp, and closing its offices in South Africa and Namibia, where manufacturers will be supplied via the State Diamond Trader and NDTC (Namibia Diamond Trading Company) respectively, and also closing in Shanghai.

After announcing 11 sightholders in Botswana and 16 in Namibia, DTC then reduced the number of London-South Africa sightholders for the coming three year contract period. DTC preliminarily added six new companies, and dropped 24 existing sightholders to arrive at its list of 75 for the new period.

… De Beers Faced Supply Issues

For the past several years now DTC has been supplying stones from “working stock,” and now claims to have depleted "nearly all" of De Beers’ carried forward inventory. The company claims that nearly all of what it sells at sights are goods mined in its past few mining cycles.

Perhaps more significantly, De Beers bought less rough from Russia's ALROSA as part of an agreement to phase out supply by the end of 2008. Although a European Court overturned the phase-out agreement, giving ALROSA the right to supply De Beers, the European Commission has appealed that ruling. De Beers also claims that it will not purchase more rough from ALROSA after 2008.

… De Beers Divested

In a significant change of focus from maintaining its market share to growing as a profitable concern, De Beers sold off a number of its non-core assets, most notably the famous Cullinan Mine to Petra Diamonds.

… Larger Mid-Tier Diamond Mining Companies Emerged

Petra snatched-up Koffiefontein and Kimberly Underground from De Beers, and  grew itself into a strong mid-tier diamond miner. While Petra targeted De Beers’ properties in the race for that elusive producing diamond mine, others relied upon mergers to boost their positions in the market. Gem Diamonds scored the biggest diamond-related acquisition of the year when it bought Australia-based Kimberley Diamond Company for $263 million. This was fresh after its acquisition of BDI Mining, adding the fifth operating mine to its portfolio. Gem also raised GBP 550 million in the third biggest IPO on the London Stock Exchange for the year.

Also aiming to “fill the mid-tier gap,” Vaaldiam Resources merged with Elkedra Diamonds and Great Western Diamond Corporation to form New Vaaldiam.

Given the high demand for rough in the market, investors expressed their confidence in mid-tier miners saying they were attracted to companies who were actually producing diamonds and had strong exploration prospects, rather than investing in pure exploration.

… BHP Billiton Wanted to Merge With Rio Tinto

One deal that did not go through was the proposed mega-merger between BHP Billiton and Rio Tinto, although BHP seems determined it still may. Rio rejected BHP’s approximate $153 billion offer to create the world’s largest mining company (by far,) and while diamonds are a small aspect of both companies’ businesses and didn’t really feature in the proposal, a merger would entrench it as the No.3 diamond miner. Whether the acquisition eventually happens or not, speculation continued to circulate that Rio may want to divest from its diamond business.

… The Rough Supply-Demand Gap Widened

The rush to find diamonds was made all the more attractive as demand for diamond jewelry soared in emerging markets. Global production was outpaced by diamond jewelry demand causing rough prices to rise. While polishers felt the pinch, active diamond miners were pleased and expressed confidence to attract investors.

Supply shortages were evident in De Beers’ marketing company DTC sights, which supplied an estimated 8 percent less rough by value to the market in 2007 than the previous year at around $6 billion. ALROSA auction sales, on the other hand, rose 14 percent to $247.2 million, according to Rapaport records.

…Troubled Times Dawned on Jewelry Retailers

Despite a strong start to the year, when retailers were still riding the consumer wealth wave, jewelers in the United States became less optimistic as the year progressed.

Of the larger public companies, Zale Corporation sales were flat for its fiscal year and prepared for much of the same in fiscal year 2008. Finlay, while investing further in its future by acquiring Bailey Banks & Biddle, reported quarterly losses in 2007. Signet Group's profits dropped a near 70 percent during its quarter ahead of Christmas season and warned of a weak fourth quarter.

Retail sales and profits fell at Harry Winston too during third quarter (ending October 31.) The company, formerly Aber Diamond Corp., changed its name to Harry Winston Diamond Corp. and listed on the New York Stock Exchange.

Retailer Alpha Omega Jewelers ran into financial difficulties in fourth quarter, the company's CEO left the United States for India, and the company filed for Chapter 11 protection on January 2, 2008. California-based Derco Fine Jewelers also ended the year by filing for Chapter 11 protection.

Smaller private jewelers reported a slowdown in 2007 trade, some showing double-digit drops in sales.

… Online Buying Was All the Craze

Online retailers however reported solid sales gains, some as much as 20 percent.

Blue Nile, the largest online diamond retailer, reported a 29 percent revenue growth in the first nine months of the year, and the company has forecast 25 percent growth on the lower end to $316 million for the year. Profits for the first nine months rose 45 percent to $10.6 million.

During the most important spending season in November/ December, jewelry failed to feature as a top contender for gifts. In fact a drop in jewelry sales was main catalyst for a 3.7 percent decline in the luxury goods category, during the period Thanksgiving to Christmas, according to researchers at MasterCard.

… The U.S. Economy Took a Turn for the Worse

Consumer lenders in the United States allowed for unprecedented borrowing in 2007, but lent money on terms nearly 2 million consumers could not afford. As the year wore on the sub-prime mortgage crisis became a hot topic, and subsequently filtered across world financial markets in August. With many major lenders facing write-downs due to wave after wave of home foreclosures, the Fed lowered its benchmark interest rate in second half and printed more cash to sooth fears on Wall Street.

These actions however fed into a weakening dollar. The greenback lost value against most currencies, losing around 10 percent against the euro, more than 6 percent against Japan's yen and about 2 percent on the British pound sterling. The dollar index, which tracks the unit against a basket of six major currencies, was down more than 8 percent for the year.

… Gold and Oil Surged

As uncertainty grew against the dollar investors moved into gold,  causing the precious metal price to rise 30 percent during the year and move into 2008 approaching new record levels of around $860 an ounce (which it has since surpassed.)

Oil prices rose nearly 58 percent during the year, the biggest annual gain this decade, rallying strongly in the fourth quarter to touch a record $99.29 a barrel in November before sliding back into the low $90s.

… China & India Grew and Grew

To hedge sluggish activity in the United States, international diamantaires increased their efforts to enter China's consumer space and did so with relative success reporting high sales volumes in the Far East market.

As consumers in China and India felt more comfortable spending their cash there was a noticeable shift in polished imports to China and India during 2007. India's polished diamond imports soared 119 percent through November.

Although the weaker dollar affected India’s diamond exports, the country’s enormous consumer market made up for the losses. However, the strong rupee and a net reduction of five Indian DTC sightholders caused a slight panic among manufacturers there.

China forecast that its trade in polished diamonds (imports and exports) would rise 50 percent to $900 million in 2007, while jewelry sales grew 39 percent.

… China Upped the Stakes in Africa

The government of China also clearly recognized the future needs for natural resources and turned to Africa for its long term strategy. But unlike western democracies that tie trade with political reform, China sets-up partnerships independent of politcal issues. The country pledged a cool $5 billion to development projects in the Democratic Republic of the Congo (DRC,) and will pay for new rail lines, roads, 31 new hospitals, two new universities, and some 5,500 government housing units. In exchange, China stands to gain access to the world's richest assortment of minerals, from copper to cobalt to uranium to diamonds and gold and the list goes on.

Analysts speculated that China was looking to stamp its presence on the continent by linking the copper zone in the DRC south with the country’s ports, and redirecting other portions of the DRC’s huge mineral potential to Chinese-built networks in Zambia and Angola.

… Africa Gained Relative Political Stability

Africa also caught the attention of corporate investors, which had previously shunned the continent. Investment fund group, New Star, launched its high risk ‘Heart of Africa’ fund consisting only of companies operating in Africa – diamond miners Petra Diamonds and Mwana Africa among them.

All this interest was stimulated by an estimated 7 percent economic growth in sub-Saharan Africa in 2007 (excluding Zimbabwe,) fed by the hunger for commodities in India and China. Another factor was the wave of democratic reform sweeping the continent. A new government was elected in Sierra Leone, on an anti-corruption and poverty reduction ticket, and Liberia was accepted into the Kimberley Process and started exporting rough diamonds again.

There were of course exceptions, notably the economic disaster that continues in Zimbabwe (despite it passing a KP review visit); Cote d'Ivoire, which remains the only source of conflict diamonds in the market; and the DRC, where violence in the diamond territory of Goma has brought unpleasant reminders of the diamond-fueled wars of the past, and the fragility of peace in the region.

… Blood Diamond Fades in Hollywood

The world was given a glimpse of the atrocities of Africa’s conflict diamond past when Ed Zwick’s ‘Blood Diamond’ hit the silver screen in late 2006 across the United States, and early 2007 in Europe, India, and Australia.

Illustrating how diamonds were used to fuel the war in Sierra Leone, the movie had potential to hurt the diamond trade and the industry took note. The World Diamond Council went on an education and media campaign to explain the work of the Kimberley Process and counteract any negative message that may have influenced consumers.

The bigger drama, however, took place in the court room with the start (and subsequent delay) of the war crimes trial of former Liberia President Charles Taylor. Taylor faces 11 charges of war crimes for his role in fueling the civil war in Sierra Leone by providing militias with weapons in exchange for diamonds. The Special Court for Sierra Leone also made its first sentence of three former rebel commanders for their role in the war.

… Records Were Set in Stones

Africa continued to produce the goods, both in size and quality. Gem Diamonds mined the 15th and 18th biggest diamonds in history at its Letseng mine in Lesotho, selling both to the Laurence Graff-SAFDICO partnership for $20,497 and $21,095 per carat respectively.

Diamonds also fetched record prices under the hammer and were hailed as the new art of the auction circuit. Sotheby’s took the cake, selling a 6.04 carat internally flawless, emerald cut, fancy blue diamond for $7.98 million - an all time high price of $1.32 million per carat.

Graff was also active on the auction scene snapping up a 4.16 carat fancy blue pear-shaped diamond for $4.72 million at Sotheby's, and paying $2.26 million for a fancy purplish-red diamond ring at Christie's Geneva.

French auction house, Guizzetti-Collet, also joined the party selling a 6.5-carat blue diamond for EUR 2.43 million ($3.56 million.)

… Diamonds Became Bizarre Art

Some of the more odd diamond items during the year included artist Damien Hirst’s ‘For the Love of God’ – a skull covered with 8,601 diamonds which sold for GBP 50 million ($99.1 million) making Hirst the richest living artist in history – though some suspected the sale to be nothing more than an extravagant marketing ploy.

Dalumi auctioned its diamond-studded top in Dubai, which was designed in partnership with the late Gianfranco Ferré. The women's top was covered with more than 900 diamonds mounted in white gold, (more than 300 carats in total) the top had an estimated retail price of $1.42 million.

Diamond jewelry manufacturer, Lazare Kaplan International, made a diamond studded ice cream cone valued at $1 million, to help Bruster's Real Ice Cream promote its brand. Bruster's commissioned Lazare to design the piece, which it said it would sell and donate the proceeds to a charity which the ice cream company sponsors.

… The Great Green Plastic Fooled

Perhaps the biggest oddity of the year was the so-called 7,000 carat “diamond” found in northwestern South Africa – not a renowned diamond area – which turned out to be nothing more than a giant blob of green plastic. Though few will admit it, the diamond world was taken in, albeit for a brief moment, and the hoax made for a great story.

Looking back, so did the rest of 2007.