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The Year Trust Returned to the Diamond Trade


Dec 28, 2016 4:30 AM   By Avi Krawitz
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RAPAPORT... There was little surprise when Time magazine named Donald Trump its ‘Person of the Year.’ Love him or hate him, Trump left his mark more than any other individual on 2016. Notably, the choice says as much about the impact he will potentially make as it does about his historic election.

When deciding the most important story for the diamond industry in 2016, we’ve used a similar criterion. Among the many milestones, controversies and inspiring stories that headlined during the year, the most significant will surely be the one with a lasting influence on the trade.

In that sense, Trump’s election could well be considered. Diamond dealers are certainly most optimistic about U.S. demand. Not only has the U.S. supported global demand while other markets remained subdued, but Trump’s policies are largely expected to improve trading conditions. We’ll have a better indication if he delivers on his promise to lower taxes and create jobs – and consequently raise diamond purchases – after he takes office.

Demonetized Indian Demand

Still, when considering political developments that influenced diamond trading this year, the U.S. election is overshadowed by India’s demonetization policy. In fact, if we embarked on a Time-like search for the person who most impacted the trade in 2016, Prime Minister Narendra Modi would be the likely choice.

His bold decision to eliminate 500 and 1,000 rupee notes, taking about 85 percent of currency out of circulation, had an immediate dampening effect on India’s influential diamond trade. Sales in the cash-driven domestic jewelry market fell, as did demand for lower-quality rough and polished diamonds.

Demonetization is expected to keep demand in those specific categories muted for at least the first half of 2017. But India’s move to being less cash-dependent makes a tremendous contribution to the legitimization of the diamond trade and will surely result in a healthier market in the long-term.

Banks are naturally put off by the industry’s informality. And as India combs out the high-volume of fake currency in circulation, and tackles money laundering that is endemic to its economy, its diamond trade will be forced into more structured and compliant business practices. For that Modi should be applauded.

Then again, his attack on cash is in line with a collective move toward greater compliance across the industry.

Financial Compliance

About half of De Beers sightholders are now meeting international financial reporting standards, while the rest will need to reach that point in 2017. New tax deals in Belgium and Israel have also lifted a cloud of uncertainty surrounding the trade and are projected to raise compliance, trading and liquidity levels in those centers.

Those factors are expected to somewhat ease the industry’s high-risk profile in the eyes of the banking sector. Significantly, the industry started to de-risk in 2016, aiming to be more palatable for lenders who continue to reduce their exposure or are exiting the sector completely.

For some time, the banks have been preaching the virtues of profit over turnover to the diamond industry, which has historically focused on stimulating growth by raising polished production levels. Diamantaires appear to have learned their lesson from the events that unfolded in 2014/15 when they continued to buy rough despite prevailing high prices.

Profitable Rough

This year, there was a shift to buying rough that is profitable. Miners also seemed to be more mindful of their clients’ ability to profit. The fundamental business principle that you can only sustainably make money if your clients do too, seems to have sunk in.

Rough trading was cautious, with the industry careful not to bring about an over-supply of rough or polished. As the jewelry retail sector continues to consolidate and work with less stock, the rest of the pipeline is starting to catch up by streamlining its inventory.

There is concern the demand-supply balance will be compromised as three new mines – Renard, Gahcho Kué and Liqhobong – came on stream in late 2016. While those production launches were relatively low-key, they were significant, and will result in an additional 7 million carats entering the market next year.

It’s not clear if there is sufficient short-term demand to warrant the additional supply. After all, the industry is still struggling to stimulate demand amid a slowdown in China, an oil-related drop in Russian and Middle Eastern demand, and general caution in Europe.

The renewal of generic marketing – our story of the year in 2015 – is still in its infancy and will likely take a year or two to gather momentum. The campaigns are also unlikely to be as influential in swaying brand-conscious millennials as category marketing was on generations before.

Branded Guarantees

We believe diamond branding will continue to strengthen as consumers increasingly look for authenticity and ethical assurances. Diamond and jewelry brands recognize they need to provide those guarantees and can only do so by accounting for their supply at every stage of the distribution chain.

More companies displayed an ability and willingness to show where their diamonds came from in 2016, be they jewelry retailers, miners, and, most significantly, manufacturers. Whereas separating diamonds in the manufacturing process was considered too costly and logistically difficult before, it’s now becoming a requirement.

More source verification programs were tested and implemented at the retail level, requiring diamond suppliers to assure their diamonds are ethically sourced – conflict free, not blemished by human rights violations, and clean of synthetics, to name a few potential stains.

By nature, know-your-client and supplier programs are designed to restore trust in diamond trading and, more so, in consumer behavior. Diamond tracking will be a vital element to any branding message, and to the industry as a whole, that aims to raise its profile in the retail space. And, as it gains traction, providing those assurances will be essential to the sustainability of companies operating in the midstream diamond segment.

This year saw an acute awareness of that fact. We expect the trend will continue with more companies coming on board in 2017 so that a diamond and jewelry company’s ability to track their supply becomes an integral part of how the diamond industry operates. For that reason, source verification is our choice for story of the year in 2016. It will define how we do business moving forward.
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Tags: Avi Krawitz, De Beers, diamonds, Donald Trump, Jewelry, Narendra Modi, Rapaport, Signet
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