Rapaport Magazine

An Industry in Flux

Commoditization, synthetics and the unprecedented changes in the diamond market were some of the topics discussed at the Plumb Club’s first Forum.

By Margo Leab
RAPAPORT...  The Plumb Club’s first forum, “The Changing Landscape of the Jewelry Industry,” gathered manufacturers, retailers and industry insiders at New York City’s Fashion Institute of Technology (FIT) on March 2 and 3 to focus on the future of the diamond industry, a subject that conjures equal parts excitement and uncertainty.

A noteworthy speaker on opening day was John M. King, the technical director of the Gemological Institute of America (GIA). King opened with the reality that “Not only are [diamond] treatments more common today, in many ways they present bigger problems for the industry than synthetics do. I’ll give you an example. We’ve seen at the laboratory 2-, 3-, 4-, 5-, and 10-carat diamonds that have been treated. We have not seen at the laboratory 2-, 3-, 4- 5-, and 10-carat diamonds that are synthetic.” King singled out stones that have been irradiated to take on a green color as “very, very challenging,” since natural green diamonds receive their color from radiation in the earth, which can make spectroscopic testing difficult.

Apollo is test-marketing Chemical Vapor Deposit (CVD) synthetics in the Boston area, and King confirmed that the company’s products represent a change and advancement in the quality of goods. “It’s going to be very interesting to see if Apollo does make a push, and if there is some success there, it would make sense that this could begin to stir others,” he observed. Regarding the more common high-pressure high-temperature (HPHT) synthetic diamonds, he pointed out that GIA works closely with some of the companies creating them. “We sometimes hear that there could be quantities of very small [HPHT] treated diamonds that are sold into the diamond market, because these smaller sizes often don’t go to laboratories for testing,” King warned. GIA estimates that about 100,000 carats of laboratory-created diamonds entered the market in 2007, about double the number in 2006. “It’s an aspect of our industry that’s gearing up significantly,” King stated.

GIA handles the identification of treated or synthetic diamonds based on the permanence of the change. Stable treatments can receive a grading report, while less durable treatments are described on the company’s identification reports. Though King stated that no one can identify all synthetics without the use of spectroscopy, he was quick to explain that for retailers in stores, “Some of the visual tests are still very valuable indicators, like looking for the difference in color zoning patterns that would typically be seen in natural stones, unusual-looking inclusions… as well as hourglass pattern graining.”

In the end, King isn’t overly concerned about the effect of synthetics and treatments on the demand or value of natural diamonds. “If we look at what’s happened in the colored gemstone community, with the rise of synthetic colored gemstones, we’ve seen that it can offer a slightly more affordable alternative, and create some very attractive gemstones. It can create a whole new level of market that doesn’t necessarily have a negative impact on natural diamonds at all,” he declared.

Martin Rapaport, chairman of the Rapaport Group, in a talk called “The Commoditization of Diamonds,” emphasized jewelry retailers’ need to develop their “strategic sense” in the face of unprecedented changes that are creating interactions throughout the diamond distribution system. Soaring commodity prices, increasing demand, the weakening dollar, African beneficiation and rapidly expanding emerging markets are among the dozens of factors. “I don’t think there’s been this much uncertainty about the diamond industry or about the jewelry business in general as what we see today,” he declared. With all the challenges, Rapaport emphasized expanding opportunity as well, noting “There are about 11 million millionaires in the world today, growing at about 8 percent.” But he also cautioned that the same things driving new global wealth, like rising oil prices and interest rates, are hurting the American consumer.

Rapaport went on to explain why he feels the commoditization of diamonds will benefit the industry, stating that prices driven by speculation are dangerous when they have no support outside the trade. “It’s a bunch of people trading tulips,” he quipped. Rapport stated that fair, competitive and efficient markets aren’t actually a major adjustment for the industry. “The cat’s out of the bag with Blue Nile and friends, anyway,” he noted. “The question is not if diamonds are a commodity. The question is are diamond prices legitimate?” he declared.

During the panel discussion “It’s a Rough World,” Jean-Marc Lieberherr, general manager of Rio Tinto, stated he sees an industry with “too many actors in the pipeline,” especially between retailers and miners. “There will be a lot of casualties,” he said. Lieberherr also believes “retailers are not taking a share of the risk” that mining companies have traditionally absorbed. He predicts this aspect of the business must change if mining companies are to survive.

Also participating in the panel was Richard Lennox, an executive vice president at J. Walter Thompson’s Diamond Promotion Service (DPS). Lennox spoke to Plumb Club members about a category of shoppers he calls “heavy owners,” those buyers who collect eight or more pieces of diamond jewelry in their lifetime. Interestingly, these shoppers come from both low-income and high-income households. Lennox explained that heavy owners will drop other luxuries in order to keep buying diamonds. Lennox stated that the field’s biggest challenge will be to evolve from the old marketing model of “coercion” to a model of “collaboration.” “The best marketing is when a woman tells her best friend,” he asserted.

The last person on the panel to speak was Jeffrey Fischer, the president of International Diamond Manufacturers Association (IDMA). Fischer opened with general remarks about diamond prices, stating that speculation was fueling prices rather than a lack of rough supply. Fischer announced, “Independent manufacturers and sellers are all endangered species.” But what earned him the biggest reaction was when he turned his attention to Martin Rapaport. “His claim to fame has been successful not because he was the first, but because he continues to do it better than anyone else,” he said of the Rap price list. Stating that he was speaking as “diamond guy Jeff” and not as IDMA president, he urged Rapaport to repeal the reorganization of his list, which Fischer claimed was done to make room for prices of 10-carat stones. “Watch how an entire industry meekly reconfigures itself to accommodate the graphic layout of a list,” he predicted. He also remarked that Rapaport seemed bent on the commoditization of diamonds, whether his peers want it or not. The panel ran over its time limit and there was no time for comments from the audience.

The next day, in a conference call with reporters, Rapaport denied that the merging of three categories — 0.30 to 0.37, 0.38 to 0.45 and 0.46 to 0.49 — into two categories — 0.30 to 0.39 and 0.40 to 0.49 — was done to clear space for prices of 10-carat stones. “That is false. We would never do that.

We are relating to a consumer issue,” Rapaport declared. “There is no way we would make such a change without an ethical underpinning.” Regarding commoditization, he said “This is a way forward and we want to communicate this to the industry. That’s why I went to the conference. I am communicating ‘Let’s figure this out.’”

Article from the Rapaport Magazine - April 2008. To subscribe click here.

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