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Rapaport in Las Vegas

In an all-day conference, Martin Rapaport addressed core industry issues, including demand from the U.S. market, future diamond supply, certification and fair trade.

By Avi Krawitz
As the diamond and jewelry industry becomes more complicated and competitive, Martin Rapaport, chairman of the Rapaport Group, urged U.S. jewelers to be more confident in their role in the market and to focus on adding value to the diamonds they sell.
   “The future control of the diamond industry is not about manufacturing, it’s about marketing,” Rapaport told the audience of hundreds of jewelers, dealers and manufacturers attending the annual Rapaport Breakfast at the JCK Las Vegas jewelry show. “He who owns the customer owns the industry. The U.S. is the biggest jewelry market in the world and we need to reflect our strength in the market.”
   Bearing that in mind, Rapaport warned the diamond trade not to buy overpriced rough diamonds and to maintain their own ethical standards when it comes to human rights issues related to the diamond industry.

The Supply Side
The current rough situation is not sustainable. While rough diamond production by volume and value basically moved in tandem with each other in the decade preceding 2008, the market fundamentals changed with the downturn in the fourth quarter of that year. Rapaport showed that production has remained basically steady in the past five years while rough prices have increased by more than 74 percent.
   He suggested that rough prices “went out of whack” due to a combination of mining companies holding back production, dealer manipulation and speculation, and easy bank credit to the Indian industry.

Don’t be a speculator. Rapaport cautioned the industry not to run after the rough market because diamond prices have to be based on demand dynamics. “No matter what happens with rough prices, polished prices are highly sensitive to external economic forces,” he stressed. “You simply cannot expect polished prices to increase based on rough prices.”
   Still, he questioned whether people are buying diamonds because they expect prices to go up and noted that in 2011, the market witnessed its first Chinese speculative bubble.

India and its banks. Rapaport criticized the Indian industry, which, he points out, has absorbed more than $10 billion worth of diamonds in the past five years. As the leading manufacturing center, India should be a net exporter of diamonds. Rather, he suggested that the local industry has been collecting foreign trade while easy bank credit has fueled its buying power and encouraged dealers to finance credit with credit, and re-export diamonds to gain extra credit.

The Demand Side
Expanding populations. By pure demographics, China and India continue to spur growth in the diamond industry, with 2.5 billion people between the two populations, a significant proportion of whom are below age 25. Among the diamond consumer centers, Rapaport reported that China and Hong Kong combined has emerged as the largest net importer of diamonds, overtaking the U.S. for the first time in 2009.

Expanding money supply. Rapaport stressed that diamond demand is being greatly influenced by macroeconomic factors, whereby the biggest tax facing wealthy people today is low interest rates. Low interest rates in the U.S. have created excess money that is being moved to the stock market, giving us the wealth effect, he explained. “I think that is one of the reasons that the U.S. diamond and jewelry industry is doing well at the moment,” he said. “This wealth in the stock markets is the compensation for low interest rates.”

Weaker dollar, higher interest rates. But Rapaport cautioned that this situation can’t last forever and he expects the dollar to weaken and interest rates to rise. He explained that the weaker dollar will affect diamond prices worldwide because the Chinese and Indians who are buying diamonds will be able to pay a higher price in dollar terms. So there will be competition coming from foreign markets and the weaker dollar will affect the cost of diamonds to the U.S. retailer, he added.

Recycled diamonds. While the U.S. has lost some market share and is competing for diamond supply with China and India, Rapaport stressed that the U.S. has a secret weapon in its recycled market. He estimated that about 25 percent of the diamond and jewelry business in the U.S. today is based on people coming into stores wanting to sell their jewelry.

Polished Prices
Expectations. While Rapaport expects there will be short-term volatility in the industry, with a rough price correction and tighter Indian credit, he forecasts that diamond prices will be stable and go up steadily in the medium term.

Added value. But Rapaport stressed that prices shouldn’t really matter. “Polished prices are beyond our control because they are highly sensitive to external economic forces,” he said. “We have to get used to the fact that diamond prices are going to change. But diamond prices don’t matter if you’re adding value.”
   He questioned whether higher prices are good for the industry because diamonds have to compete with other luxury products. He stressed that the assumption that higher prices are needed to make value detracts from what you should be doing to add value.

Investment diamonds. Rapaport suggested that an investment market will help rationalize diamond prices and will help the jewelry industry. “Currently, if you own diamonds and diamond prices go down, there’s no way that you can defend yourself. There’s no market to short diamonds,” he said. “But investment diamond markets are inevitable and demand will grow significantly as macroeconomic events reshape the global economy.”

Retail & Commoditization
Know your customer. Turning to U.S. jewelers, Rapaport’s message was clear. “Know your customer and differentiate yourself and your branded promise to your customer,” he said. “Retailing is about adding value and your job is to transcend the product to the consumer.”

Firm standards. Rapaport urged the U.S. jewelry retail sector to maintain its own identity and not allow industry organizations and mining companies to impose their standards and values on it, particularly when it comes to human rights issues.

People aren’t forever. Rapaport explained that the U.S. population aged 70 to 84 is expected to double by 2030, which will bring a dynamic new supply of diamonds as they retire and pass on.

The Millennial Me Generation. Meanwhile, the industry needs to focus on selling to the population aged 15 to 30, the so-called Millennials, who will be the premier customer in the next 15 years. But Rapaport recognized that they’re a different type of customer — idealistic, narcissistic, selfish, resourceful, adaptable, entitled and in need of constant peer approval. So, he urged jewelers to get to know them.
   The way we sell to them has to be different, Rapaport noted, but the opportunity is tremendous. This age group represents “the greatest opportunity for jewelers to change and you can only grow in a changing market,” he said. “The greatest opportunity for the U.S. jeweler in the next 15 years is to learn how to buy the goods from the Baby Boomers and sell them to the Millennials.”

 

Certification Conference
   The fourth annual Rapaport Certification Conference tackled the challenging issue of inconsistent grading among the various laboratories. A survey by RapNet-the Rapaport Diamond Trading Network found significant differences among the laboratories grading the same diamond.
   “While there is a common language used in the grading of diamonds, there are clear inconsistencies in the use of that language,” concluded Saville Stern, chief operating officer (COO) of RapNet.
   The RapNet team sent ten diamonds, ranging in size from .33 carat to 1.62 carats, and of varying qualities to six different labs for grading to assess the consistency, or lack thereof, of their respective reports. The diamonds were sent to the Gemological Institute of America (GIA), International Gemological Institute (IGI), HRD Antwerp Diamond Lab, EGL USA, European Gemological Institute (EGL) Israel and European Gemological Institute (EGL) Hong Kong.
   While one color or clarity grade variation would be considered reasonably acceptable in the market, Stern reported that the labs were fairly consistent on some of the diamonds, providing only slight variations in rating color and clarity. However, more dramatic differences were apparent in other stones, resulting in a difference of up to four color grades and two clarity grades.
   Stern suggested that the differences in quality of grading might already be factored into the manner in which the market prices the diamonds from each lab. A stone with certain parameters given by a lenient lab might demand a higher discount than a stone with the same parameters given by a stricter lab.
   To assess the price rankings of the various labs, the RapNet team took each of the diamonds graded in the survey and searched for diamonds with similar parameters by the same lab on RapNet. For each of the diamonds, the survey checked the average price that similar diamonds were selling for on RapNet and averaged the results. However, the survey found that while there were differences in the prices commanded by the various labs, they were not sufficient to justify the large differences in grading.
   Panelists at the conference were all retailers and stressed that the differences in lab grading results have impacted their sales pitch and overall consumer confidence in the diamond industry. Particularly in today’s information age, retailers increasingly have to explain to customers why a diamond viewed online with certain specifications is not the same price as a diamond in his/her store with the same grading done by a stricter lab.
   Sean Moore, of Borsheims Fine Jewelry and Gifts in Omaha, Nebraska, reported that his company had decided as long ago as the 1990s to deal only with GIA certificates to avoid any such confusion or conflict. Daniel Gordon, of Samuel Gordon Jewelers in Oklahoma City, suggested that customers are primarily concerned about price and are confused that diamonds with similar grading but by different labs have different price points. Christian Sterling, of C Sterling and Associates in Perrysburg, Ohio, agreed and stressed that jewelers need to sell their expertise to counter these differences.

Fair Trade
   As new programs are launched to promote more ethical sourcing practices in the industry — including Rapaport Group’s own source certification initiative — the Rapaport Fair Trade Conference asked some pertinent questions about responsible sourcing in the diamond industry:
  • How can the diamond and jewelry industry be sure that the products they sell are legitimately sourced?

    How do we move forward on the development of standards to the implementation of source verification, auditing and verification programs?
  • Can existent gold certification programs be extended to diamonds, gems and other metals?

  • What about products sourced from areas where source certification is impossible or too expensive to implement?
  • Is there a line to be drawn in implementing ethical standards?

  • How can source certification be identified at the consumer level?

  • What impact will source certification have on the marketing and sale of noncertified products?
   The fair trade panel included David Bonaparte, president and chief executive officer (CEO) of Jewelers of America (JA); Eric Braunwart, president of Columbia Gem House; Larry Drummond, president of Metalor USA Refining Corporation; Benjamin Hackman, president of International Colored Gemstone Association (ICA); Ngomesia Mayer-Kechom, manager of international programs for the Diamond Development Initiative International (DDII) and Toby Pomeroy, board member of the Alliance for Responsible Mining (ARM).
   Michael Rae, CEO of the Responsible Jewellery Council (RJC), noted that businesses and stakeholders are increasingly focusing on the issue of responsible sourcing and how to leverage these issues for change. “It gives better controls over supply chains, helps manage and identify corporate risk, allows for a proactive corporate social responsibility strategy to enhance reputation, opens new markets and meets consumer expectations,” he said.
   Rapaport stressed that jewelers are still under the impression that the Kimberley Process (KP) ensures that their diamonds aren’t involved in human rights abuses, when, in fact, it doesn’t. He suggested that RJC’s chain of custody (CoC) and code of practices should be a good foundation for responsible sourcing initiatives. Rae reported that RJC has 450 members across the industry pipeline and 260 companies that have been certified by the RJC.
   The panel questioned whether the scope of certification should be enlarged to include certifying companies, as the RJC does, or specific products, which is the basic premise of Rapaport’s source certification.
   Rapaport outlined three areas of product development that would have to be monitored in any responsible sourcing program: the rough production process, the conversion of raw material to polished or refined gold and then taking that finished product and putting it into the jewelry product. He concluded that “Legitimization of the diamond and jewelry industry supply chain is the most important issue facing the industry. The industry must be proactive in protecting our business and, even more importantly, doing what’s right.” 

Article from the Rapaport Magazine - July 2013. To subscribe click here.

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