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Lev Leviev
Jul 16, 1999 3:07 PM
By Martin Rapaport
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Lev Leviev, diamontaire extraordinaire.
Russia’s leading diamond manufacturer, part-owner of a major Angolan diamond mine, 43-year old wunderkint of the diamond industry is no ordinary diamond manufacturer. He took on De Beers with his support of Russia’s diamond industry. After his successful acquisition of Africa-Israel, Israel’s leading billion dollar real-estate development and industrial conglomerate some thought that Leviev had outgrown the diamond business. In this exclusive interview Leviev shares his insider view of the world diamond markets.
Interview: Lev Leviev, May 6, 1999
Martin Rapaport: How is the Russian market? I hear that many of the factories have closed.
Lev Leviev: After the doors in Russia were opened in 1992 – there was an influx of many businessmen. They thought of Russia as a cheap source of rough. Most, though, did not organize professional operations – not many of them took to actually polishing diamonds. This was a mistake as they were only looking for fast profits. Those that established factories for the long term have succeeded.
MR: Are you cutting diamonds in Russia? What is the size of your operation?
LL: We have over 1000 employees with a production capacity of over $500 million per year.
MR: Can you get enough rough?
LL: There is a problem in that there is a lack in the rough supplies. We are working, though, in cooperation with the other factors in Russia.
MR: Is the new 5% tax on rough exports affecting you?
LL: We do not export rough and are not affected, but I think this is a temporary issue that will end in a short while.
MR: What is your opinion about the 10 year $1 billion contract that Lazare Kaplan (LKI) has made with Almazi Rossi Sakha (ARS)?
LL: It was a financial transaction in which all sides benefited. Russia and ARS need the money and the American Import Export Bank financed the deal with the condition that the money be used to buy only American equipment. The loan is to be paid back with diamonds produced in Russia.
MR: What is the situation with ARS? Do they get along with Yeltsin’s government?
LL: ARS is very much appreciated and valued in Russia. It is one of Russia’s largest production firms with $1.5 billion a year in sales. It was in a tough situation before August. Later the situation improved with the great depreciation of the ruble. ARS was able to pay down their debt in rubles with much stronger dollars since its income is dollar based. ARS has overcome the hard times in Russia. Today it is expanding its production and moving beyond Russia into Africa. It is doing good work.
ARS has an agreement with De Beers that Russia respects and upholds. ARS is responsible. It pays everyone on time. I think that it is trying hard to make the deal work with De Beers. ARS today knows that it could sell its rough on the local market and make 5 percent to 10 percent more than the prices it receives from De Beers. Even so, ARS keeps its word and sells to De Beers.
MR: What is the situation with De Beers in Russia? Are they controlling the market?
LL: It is clear to the Russians and De Beers that Russia cannot, within two years, develop local production to manufacture its entire rough output. It is also comfortable to work with De Beers as they regulate the rough prices. It is only natural that they should work together for their mutual benefit. This is especially true as they are interdependent regarding the price levels of rough diamonds.
MR: What about Smolensk?
LL: The large factories in Russia are Smolensk and our factory. Smolensk had a hard time, but it is now acclimating to the new realities in Russia. They are adapting to the western markets and developing very nicely. ARS is also helping them with credit for 60 days. ARS is trying hard to help them to the mutual benefit of both companies. It is very nice and important.
MR: Any other major manufacturing companies?
LL: No. That is it.
MR: There is a very reduced number of players.
LL: There are very many small manufacturers who are not known to the global industry.
MR: How is the situation for Jews in Russia?
LL: When there is a tough economic situation Jews can always expect hard times. However, there is a flourishing Jewish community.
MR: Does this affect the diamantaires?
LL: No.
MR: What is your opinion of the situation in Angola? What exactly do you have in Angola?
LL: I have a joint-venture diamond mine. I financed the mine with about $60 million and I am a partner in the mine itself with ARS. The mine has already been functioning for over a year and has surpassed all of our expectations with a large output and high profitability. It is a very successful operation. We, as manufacturers, are used to earning 2 to 3 percent. All of a sudden we learned that there is the possibility of earning much more. So this is a very surprising and interesting industry.
With all the stories of wars and the security situation there, the Russians have proven that they can mine diamonds efficiently. They achieved performance levels beyond their forecasts. Usually when you establish a business plan and are told you will earn $2, you earn $1 and when you are told you will have to spend $1 you actually spend $2. Here, though, everything went exactly as planned.
The importance of the diamond mining sector is increasing and I do not understand why more diamond manufacturers do not get involved in mining. In my opinion many of them are making a mistake by not investigating this opportunity.
MR: Who are your partners in the mine?
LL: ARS, Endiama, and a company from Brazil.
MR: What is the output of the mine? How many carats?
LL: Production is rather large. Over the last few months over 150,000 carats per month.
MR: Where do you sell these goods?
LL: I am the buyer for the entire rough production. I produce what I need and sell the rest.
MR: Do you polish all the diamonds?
LL: I produce what I can. What I do not need I sell.
MR: Is the war in Angola affecting you?
LL: We do not feel a problem. We have a lot of security there.
MR: How do you see the market in South Africa? How do you see things developing there – what will happen there? There is the feeling that the absolute control of De Beers is lessening and that smaller diamond mines are developing. What is the future of South Africa?
LL: It is clear that when a business succeeds as our mine does in Angola, there are many competitors that do not want to risk their money — that want to have easy market penetration. De Beers feels the same thing. De Beers has established joint ventures in Botswana and Namibia that have been established for decades. De Beers apparently earns a lot from these ventures. Over time, the partners or governments feel rather frustrated because their diamond manufacturing sector has not been developed.
The problem which has arisen now with evaluating the diamonds in South Africa reflects this frustration. There is an agreement that De Beers pays 14 percent less than the South Africa market value. The question is if it is really 14 percent. Maybe it is 20 percent, maybe it is only 10 percent.
For example, in a place like Botswana where there are about 1 million people and close to $2 billion in annual rough diamond production, if they do the math, they realize that they should gain greater employment opportunities for their people from the diamonds. They ask themselves why they should develop the Indian and Israeli diamond centers? Why not develop their own cutting center?
For years, De Beers claimed that the place where you mine diamonds does not succeed in polishing diamonds. These people are frustrated and in time De Beers will have no choice but to encourage people to open up factories. De Beers opened its own factories in Namibia and Botswana. But the mining countries request a window to test the market value of diamonds. There is no problem with De Beers buying the diamonds at 14 percent less. They deserve the discount because they hold diamond stocks. De Beers also does advertising and has a large overhead. I do not think that there are any complaints about De Beers right to earn money. The mining countries just want to know the market price of their diamonds. We hope that this situation will be resolved for the benefit of the industry.
MR: So you think that the idea of a window is a good idea?
LL: Yes, it is a good idea. Of course, when you sell only 5 percent or 10 percent of a production you will always get a higher price. The market will always give you a much higher price for 5 percent of a production, than it would for the entire production. Aside from De Beers no one can buy hundreds of millions of dollars worth of goods every month. So, of course, if De Beers is going to invest they should make money. But together with this, De Beers is also the one to dictate the price of the rough market. If De Beers wants to topple the market prices, it is not a big problem. If De Beers wants to raise prices, it is also not a problem. We have seen over the past months when De Beers drastically reduced selling rough, suddenly the market began to rise.
MR: So you see the possibility that the African governments will improve their economic growth by establishing local diamond cutting facilities?
LL: It is a question of time but it will definitely happen.
MR: What about the government of Sakha (Siberia)? Are they cutting diamonds?
LL: Many factories were opened over the past five years but they all lost money. The situation is getting better and should improve in the near-to-medium future.
Sakha obviously has an interest in production. I do not think that they can manufacture large quantities as it is the work of professionals. Maybe they will have a joint venture with manufacturers.
MR: Tell us about your diamond and jewelry companies.
LL: LLD is an Israeli company that specializes in marketing and selling. Last year, LLD sold $300 million and this year we project sales of $400 million. We have other companies all over the world. The annual production and sales of the Leviev group is close to $1 billion. This includes rough and polished which is sold through a network of international offices. We also have diamond manufacturing operations in Israel, Ukraine, China, and South Africa.
In Russia we have a jewelry company which owns the largest jewelry factory in Russia. We use the most advanced equipment and have the strongest position in the Russian jewelry market. Currently, we do not export from Russia as there is a relatively large local market. Now that Russia has cracked down on smuggling into the country our local marketing conditions are improved. If you have nice designs and models, you can sell in Russia. There is demand. We have thousands of jewelry workers there.
MR: What is your opinion of diamond demand in the world today?
LL: I think that the Far East went through a trauma over the past few years and is having a hard time. Japan is still not recovering and there is continued resistance to prices. It could be a year or more until we begin to feel a recovery. Hong Kong is relatively active. Today, whoever builds his business on the Far East is unhappy.
What saved the global market is the United States where there is good demand and economic expansion. The good thing about America is that growth is steady and stable. Historically, U.S. demand goes up and down by a few percentages. There are no sudden dramatic leaps and falls as there have been in Japan and the Far East. Markets that are focused on very specific items are susceptible to sharp rises and falls. This is not the case in the U.S. market and we must appreciate it.
The possibility for large profits which was the case in the Far East is not the case in the U.S. so that the manufacturers have learned over the years to live with 3 percent or so. I do not know if this is good or bad, but this is the way it will be for as long as De Beers dictates diamond prices.
MR: What is your view of De Beers Millennium Boxes?
LL: De Beers provides a brand name and people are talking about prices like Rap List plus 15 percent because of the De Beers Millenium 2000 inscription. This would translate into an increase in value of something like 40 percent for the millennium boxes of rough. I think it is too early for the diamantaires who have received the boxes to rejoice because in two to three months the rough supplier will raise prices gradually. As we have seen in the past over many years, every box which gave a premium of say 5 percent, De Beers "fixed" right away by increasing its price or lowering the quality of rough.
I believe that it is important that there should be a better relationship between the rough supplier and his clients. The rough supplier must protect the manufacturers and the manufacturers must protect the rough supplier. In my opinion, it does not look like diamond manufacturers will be able to grow very rich under the current system. But at least they should be able to earn a reasonable income.
MR: So De Beers has become more responsible. There is a little more profitability. They leave crumbs for the diamantaires.
LL: This decision was made by De Beers last year when the situation was very bad. Manufacturing nearly ceased totally in Israel and India was in trouble. Now we suddenly see an improvement. The assortments are improved and De Beers allows profitability. I think it is in the interest of De Beers that the manufacturers and those that work in the diamond industry should be financially strong so that they can weather difficult times. And so that they can support the polished and not drop prices during difficult times.
MR: Is De Beers under pressure because they are giving better prices to the industry?
LL: Most of the De Beers rough comes from its mines. So actually De Beers large profits remain. There is a problem however with the rough De Beers buys from other independent mines — they can only profit 15 percent and are then under pressure. When they buy from outside sources to balance the market. I do not think that they have big profits.
MR: Do you think that there could be a situation where De Beers is pressed and has problems within the next 5 years?
LL: I am sure that De Beers is planning its future carefully. There is a problem since world rough output is rising. In 1991 and 1992, Russia was $1.1 billion. Today it is $1.5 billion. In five years the output may be increased significantly by Russia, BHP, DiaMet, Southern Era and others. We see mining interests and infrastructure companies growing – with firms not necessarily from the diamond industry entering the field.
Previously, information about the profitability of mining production was mostly undisclosed by De Beers since it is a monopoly. Today things are different – facts are known – there are companies larger than De Beers that deal with copper, cobalt, minerals or gold looking at diamonds. When you see these large companies moving into the market you know that competition is rising.
The picture may change because suppliers will have to run after buyers. Not the way it has been for years when buyers have gone after the suppliers. The prices will be lowered accordingly. It will be very smart for De Beers to make a joint venture with these companies, or to buy their stock because it is very important for De Beers to preserve its exclusivity in this market.
MR: Do you think this will actually happen? Are they capable of doing this?
LL: Difficult question. I am sure that they are thinking about this.
MR: What percent of the market does De Beers need to control in order to be a monopoly?
LL: 80 percent.
MR: That much?
LL: Let us say that they produce 60 percent, but they also buy in the market and dictate to the market so that the prices are held strong. But if in the market there are increasing supplies from more rough producers, who will run after the manufacturers? This will certainly affect everyone’s profitability. So I think that De Beer’s needs 80 percent. If they drop below 60 percent then it should concern everyone with diamond inventory.
MR: You have not been a sightholder for many years, yet you still benefit from De Beers.
LL: I benefit from De Beers and they benefit from me by the fact that we do not dump rough onto the market. We manufacture most of our rough and we are known as one of the better manufacturers. We do not deal with Indian goods. We manufacture top quality and unique goods. We are Japan’s largest supplier of excellent makes. We manufacture in quantities. If De Beers wants to hold prices steady, of course, it is good for us and the other manufacturers.
MR: Someone who buys from De Beers benefits a little. Someone who competes with De Beers in mining benefits a lot more than the sightholder. You benefit from De Beers protecting the rough prices.
LL: Definitely. If I had sold my rough, there could have been trouble with De Beers. But I rarely sell rough. I manufacture and we hold polished prices strong. There are no miracles. We manage to succeed and to sell large quantities of polished. We have lines waiting for our polished like De Beers has for rough. We are realistic in our prices.
MR: Do you think De Beers is going to get involved with polished as well?
LL: I think that with the prices they give for rough they cannot be profitable in polished. The proof is that until today De Beers has not had a profitable factory. We as manufacturers have gotten used to working with minimal profits — stale bread and water — not even juice. De Beers has no room to profit. When it opens a factory it has great expenses. And of course it cannot survive. De Beers can only enter the world of manufacturing polished diamonds through the brand name that it creates.
MR: LLD, or your group, works on very good cuts. Tell us what you sell and how you sell.
LL: Our production’s average size is 70 points. In value terms, 60 percent of our goods are in carats and up, 25 percent is in 50 points to a carat and the rest down to 20 points. We do not manufacture sizes below 10 points.
MR: What is your method of selling – credit, memo, cash?
LL: We do not sell on memo or consignment. We have no small buyers. Some buyers buy $10 million in a month – others $5 million. All must buy at least $10 million per year. Credit terms depends on the customer. Our factories sort the goods very carefully and efficiently so that they are ready for marketing and selling. We have a limited number of salespeople. I prefer to give a discount to our customers rather than maintain a large selling organization which is expensive and hard to control. I think that one must be cheaper than your competition by 2 to 3 percent. If you do not have a large production – you have great expenses, and you do not sell quickly, then of course you will not achieve satisfactory results.
MR: Are your credit terms 30 days?
LL: We also have 120 days. But it is not memo. It is a buy.
MR: What kind of buyer are you looking for?
LL: Stable buyers. Our policy is not to look for a one-time buyer who will pay 5 percent more. We are not trying to reach the retail store. We want clients who have been working for years and who have their own clients. I feel that this is a problem that has toppled many manufacturers. They try to reach the retailers. They do not take into account that salesmen are needed to run all over and are expensive. The price of rough is standard, but then you have to be very cost effective in your production and marketing. Many manufacturers do not do this today. Not many use the best technology in their production. With us — 75 percent of our production is at a high technological level.
MR: So you have your own marketing philosophy?
LL: Yes. You must let others profit and then everyone profits.
MR: De Beers must learn this as well.
LL: Everyone has their own philosophy.
MR: Where will the industry be ten years from now? You said that the industry has changed drastically in the past two years. What do you predict for the future?
LL: The industry will be more specific, more technologically advanced and more professional. The industry will run after brand names – strange and different ones. There will be no choice but for people to join this craze. I think that many diamantaires will make the mistake of going into jewelry manufacturing without first learning the field. They will lose a lot of money. Just as the diamond manufacturer knows how to cut diamonds and earn every percent, so the jewelry manufacturer knows his business and knows how to profit.
As for polished marketing, there is the internet today. Everyone wants to be connected. There are computers in jewelry stores. Everyone wants everyone else to see their stock. This may confuse many customers so that there are many who move towards the brand names. The consumer will see the name of a firm they know and they will buy from them even if it costs 30 percent more. There will be more pressure to make brands and many brands. There will also be a continuous rise in memo sales and services to the jewelers.
Demand for better-quality, larger stones will keep pace with demand for inexpensive Indian goods. Prices in the U.S. will also remain internationally attractive. We sell goods at 10 percent more in the U.S. than what we sell them for in Japan. This is new. We thought that the Japanese paid the best price. Buyers in the U.S. are willing to pay excellent money for excellent cuts when there is not much on the market.
MR: What about China?
LL: I see a slow development. After the recession and hard times in the Far East subside, there will be a rise in China and strong demand for inexpensive Indian goods.
MR: Will Israel take over production from New York and Belgium?
LL: The production and professionalism methods are similar. The only difference is the cost of manufacturing which is 50 percent cheaper in Israel. Today the Israelis are moving into this area very strongly. The Israelis are the ones who have invented all the new technology and machinery.
MR: What about India? It seems that De Beers is expecting a lot of demand from India.
LL: With regard to diamond manufacturing, India can never take over the top Israeli goods. There are very few in India who can do the fine work. They are very good in inexpensive goods, melees and inexpensive fancy shapes and have taken over these markets from Israel, but those who are looking for fine cuts know to go to the Israelis. Israel worries about the quality of the work and also cuts the larger sizes.
Regarding polished demand from India, we are not experts in Indian polished demand. When the Indians buy good makes from us they pay better prices than the Japanese. In polished there is apparently an elite that use only very special makes. What is funny is that they buy from us the Russian full cut, they buy it at $560 and then they sell it in India. They buy 50 points and up – top color – best makes.
MR: What do you think of the internet? Will it help or hurt?
LL: More and more people are getting into the internet for all kinds of products. They can find the best deals, do comparative shopping, get all available information. This will be the same situation in diamonds.
MR: You are not only in the diamond business. Tell us about your other companies.
LL: As far as the Leviev Group, there is hardly any area where we do not have an influence; fashion, energy — oil and gas —platinum, builders, contractors; infrastructure — the trans-Israel highway, hotels, country clubs, spas, investments in Eastern Europe, shopping centers.
MR: Where is the "lev" (heart) of Lev Leviev?
LL: In diamonds.
MR: To what do you attribute your success?
LL: G-d’s help. I am a first generation diamantaire. I do not think that I am a super-smart, super-sophisticated person. There are many smarter than I am. It is a dedication to the manufacturing itself — maximal use of the rough which gave us the original push. In 1986 I was already an outstanding exporter. In 1986 I had already received a sight. I was 29 years old.
MR: You were starting to tell me about your charities. Do they help?
LL: Of course. In memory of my father I founded a charity "Keren Or Avner and Hanna." On the suggestion of the Lubavitcher Rebbe. We target areas in Russia and established 60 kindergartens, put 30,000 Jewish children in summer camps, and established schools and seminaries in 264 communities.
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Tags:
Angola, Belgium, China, De Beers, ENDIAMA, Government, Hong Kong, India, Israel, Japan, Jewelry, Lazare kaplan, Leviev, Manufacturing, Namibia, Polishing, Production, Russia, South Africa, United States
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