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Israel at a Crossroads
Editorial
Aug 23, 2013 3:45 AM
By Avi Krawitz
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RAPAPORT... The U.S. & International Diamond Week taking place in the Israel Diamond Exchange (IDE) next week could not come at a better time for the local trade. After all, the mood in the bourse has been one of frustration in the past few months, if not years, due to volatile global demand for polished diamonds.
The Diamond Week is therefore considered a coup for an industry that finds itself at a crossroads. Approximately 500 foreign companies from 22 countries are expected to attend, with the bulk coming from the U.S., but also including high-level Far East, Indian and European delegations. The event is well-timed to create some trading momentum before the Jewish holidays, the September Hong Kong show and ahead of the fourth quarter retail season.
But there remains heated debate in the bourse regarding the state of the local diamond industry. Israeli polished suppliers are facing sluggish global demand, rising competition from emerging trading centers, a cautious banking sector, continued “raids” in the bourse by the Tax Authority, and tension between its political elite.
Even as the industry is relatively well structured, the perception is that personality and organizational clashes are clouding the long-term development of the industry. It’s four bodies –IDE, the Israel Diamond Manufacturers Association (IsDMA), the Israel Diamond Institute Group of Companies (IDI) and the Diamond Controller – govern its trading, manufacturing, marketing and regulatory operations respectively.
So while there are many projects in the pipeline, there is no centralized strategic review of the future of the Israeli diamond industry.
Manufacturing Dreams
Among those disagreements is regarding an ambitious project to create a new diamond manufacturing center in the country and attempts to procure funding for the venture.
Israel lost its manufacturing market share in the late eighties and nineties, as India emerged as the industry superpower with its cheap labor providing a clear competitive advantage for mass-produced diamonds. Many Israeli cutters moved their factories abroad, primarily to China, and some into southern Africa, while maintaining their headquarters, and marketing and distribution activities in Ramat Gan.
So while there remains some manufacturing in Israel, the bulk of the work is in niche products such as large diamonds, better-quality fancy shapes, or re-cutting existing polished.
Avraham Traub, IsDMA’s president, is leading a plan to establish a new diamond manufacturing center in Elad, a town located about 25 kilometers from Ramat Gan. Traub argues that Israel’s opportunity lies in manufacturing diamonds larger than 0.50 carats since the labor costs involved in cutting those goods is negligible and does not provide the same advantage to low-cost centers as smaller diamonds do. He envisions tapping the under-employed ultra-religious community for the project and foresees potential for around 1,500 new jobs being created by the project.
However, others argue that now is not the right time to pursue such a large-scale project, given the challenges facing the global diamond manufacturing sector. The inflated price of rough, tight liquidity and sluggish polished demand has squeezed manufacturers’ profit margins in 2013. “No one is opening factories at the moment. If anything they’re closing,” said Moti Ganz, president of IDI. “The market is very tough and we just don’t know where it is heading in the next two years. So it’s a nice dream to open up new manufacturing in Israel but the question is if it’s the right time.”
The differing philosophies are well known within the Israeli industry and have even garnered some mainstream attention recently. This week, the business daily Globes reported that there was a move within the IsDMA to use its 25 percent vote at IDI to remove Ganz from office since he has blocked the transfer of $900,000 previously allocated in the IDI budget for the Elad project. Traub subsequently canceled a meeting that was planned at IsDMA to discuss the matter in order “to maintain stability in the industry structures, at least until the IDE elections in October,” Globes reported.
Trading Hub
The IDE leadership, meanwhile, is focused on enhancing Israel’s position as a rough and polished trading hub. Yair Sahar, IDE’s president, stressed that Israel needs to focus on strengthening its current position by ensuring greater rough supply and attracting more polished buyers to Ramat Gan.
He therefore counts the biannual Diamond Week among his crowning achievements during the past two years of his term of office. He points to the upcoming rough sales by ALROSA, De Beers, Rio Tinto and I. Hennig-Fusion during the diamond week as contributing to that end. In fact, ALROSA has held three rough tenders and one polished tender in Israel in 2013 and IDE this week announced that it is in negotiations with Dominion Diamond Corporation to conduct future sales in Israel.
Sahar is hoping the Diamond Week will provide enough momentum to help him get re-elected when bourse members vote for a new committee in October.
He’s being challenged by Shmuel Schnitzer, himself a former IDE president, who is pitching five talking points in his campaign. Schnitzer is pledging to enhance manufacturing levels in Israel; intensify lobbying for bank financing; include more women in the IDE board of directors; expand the Diamond Week concept to enhance both rough and polished trading; and to work more efficiently to reach an agreement with the Tax Authority – expected to be the most contentious issue in the IDE election campaign.
Taxing Issues
The Tax Authority has cracked down on diamond businesses reporting practice and tax payments, with the investigation being the main source of discontent among bourse members during the past year. While the overall investigation was suspended in 2012, there have been sporadic raids on individual companies in the bourse this year, which has increased tensions.
Local dealers – very few of whom are prepared to comment on-record about the issue – have noted that the investigation has impacted buyer confidence to do business in the bourse, and continue to vent that a quicker solution should have been reached.
Sahar contends that the industry leadership has hired the strongest possible team of professionals to negotiate on behalf of the industry to reach an agreement with the authority. IDE stated that negotiations to reach a final agreement with the Tax Authority are ongoing and will hopefully reach a conclusion in the coming months.
“Our objective is to return business to the industry and negotiate to create a win-win situation for Israel and the bourse,” Sahar said. “But these things take time.”
Banking on Credit
Whatever direction the industry leadership takes, there is one element that all agree is vital to ensure industry growth as bank credit has been relatively tight in the past five years.
While the Israeli banks are generally considered to be very well run among their global peers, they are regarded as quite conservative by the industry. Many manufacturers note that the banks have limited their ability to compete against their Indian peers, whose lenders have been comparatively liberal. In fact, while the market has grown, and rough prices increased in the past five years, bank lending to the Israeli diamond market remains stable at around $1.5 billion, which is significantly down from $2.5 billion credit available before the 2008 downturn.
As a result, many businesses in the bourse have shifted their operations from buying rough for manufacture to dealing in polished.
Strategic Vision?
Diamantaires are therefore left to innovate and be creative in order to survive. In fact, many note that it is Israel’s ability to adapt that provides its competitive edge, and that has left the industry with a relatively broad skill-set. When determining Israel’s added-value, it can well be defined as a trading/marketing/niche-manufacturing center.
And all these aspects of the Israeli industry will be on display during the Diamond Week. As anticipation is high, locals will be hoping the hype translates to sales, and those sales build some long-term momentum. For amid all the political wrangling, ultimately the industry is most interested in selling diamonds. And it is yearning for a centralized strategic vision that will enable that goal. Let’s see how this coming week goes.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz
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 © 2013 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.
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Tags:
Alrosa, Avi Krawitz, De Beers, diamonds, Israel, Rapaport, Rio Tinto
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