Rapaport Magazine
Industry

Coming Together

During his annual conference at JCK Las Vegas, Martin Rapaport stressed unity within the jewelry industry and focused on the “last 18 inches” of the supply chain.

By Brian Bossetta
RAPAPORT...

Martin Rapaport
Emotion is the core of our business,” Martin Rapaport, chairman of the Rapaport Group, told members of the jewelry industry at his annual breakfast in Las Vegas during the JCK jewelry show. “Don’t sell your jewelry like it’s a refrigerator or a utility,” Rapaport said. “Don’t sell to the brain, sell to the heart.”
Values — ethics, emotion and love — were the theme of the event and Rapaport, who in an aside encouraged those in attendance to hire soldiers returning from overseas deployments, said every customer was as precious as a diamond. “And love your employees, too,” he added.

Botswana Story
   Before digging into the state of the diamond industry and “the last 18 inches” — the width of the retail counter, representing the end of the diamond’s journey from mine to consumer — Rapaport introduced the Botswana Minister of Minerals, Energy and Water Resources Onkokame Kitso Mokaila. The African country stands as perhaps the best model for how the diamond trade can lift a society.

Onkokame Kitso Mokaila, minister of minerals, energy 
and water resources for Botswana.
   Botswana, which became an independent nation in 1966, had “nothing in the beginning,” according to Mokaila, who added that the country’s forefathers realized that the land’s abundant natural resources were the key to developing a stable and successful nation. Today, diamonds — which account for 30 percent of the nation’s economy — fund free healthcare and education for all Botswanans.
   Mokaila, who described his country’s diamond industry as growing and advancing technologically, said Botswana’s current supply of diamonds could carry the economy until 2050 “as it is now.” The minister added that Botswana would remain a long-term supplier of rough diamonds, a major player in the diamond trade and an investment destination for the industry.
   Rapaport said Botswana was an example of how diamonds can be used for good and urged those from the jewelry industry to not only buy diamonds from Botswana but to visit the country. “It’s a great idea to help Botswana,” he said. “We can support development in Africa with diamonds and have a direct impact on the people.”

India

Vipul Shah, chairman of India’s Gem and Jewellery Export Promotion Council.
Photos: Jeremy Womack.
   Further addressing the potentially positive effect of diamonds, Vipul Shah, chairman of India’s Gem and Jewellery Export Promotion Council (GJEPC), who spoke after Mokaila, said his country was working with the Diamond Empowerment Fund to show “that diamonds can be good for humanity.” India is sharing its technological know-how with African countries, Shah said, by training diamond cutters. He noted the Indian diamond industry was continually growing, which is good news for the U.S. market — the top market for Indian diamonds — because 11 out of 12 diamonds that end up in jewelry in the U.S. are processed in India.

Unity
   Rapaport stressed that a united industry — “unity amid competition” — could accomplish great things. “How can we work together to create a better market for all of us?” Rapaport said. “There’s common purpose.”
Breaking down the diamond trade, Rapaport said rough diamonds create $15 billion of value, polished, $23 billion and diamonds and jewelry, $60 billion, leaving a total of $45 billion after mining profits. “The question becomes, who gets that $45 billion? How does that work? Where is the share of profits fairly distributed in the revenue that comes to the industry?” Rapaport asked, adding that “whoever contributes added value should get fair return for that added value.”

Supply/Demand
   According to Rapaport, the industry will likely experience a 2 percent growth of supply of rough diamonds over the next decade — “it might be more” — coinciding with a 7 percent climb in demand. But between the supply side — mining companies — and the demand side — consumers — what happens to those in the middle? Can they survive within this model of supply and demand?
   The control of global rough diamonds is highly concentrated, Rapaport said, with Botswana and Russia accounting for 47 percent of the rough supply, with 80 percent of diamond production in the hands of two companies, De Beers and ALROSA. The bulk of the rough supply controlled by these two major players, Rapaport said, means that rough diamonds can’t just be purchased anywhere due to the “very few suppliers, a very controlled environment.”
   According to Kimberley Process (KP) data, more money was spent on diamonds in 2011 than in 2010, although the supply of diamonds remained flat — causing a tremendous price increase in rough diamonds. In addition, rough prices have been higher than polished, resulting in a tighter profit margin and less profit overall.
   “Now I don’t blame the mining companies for selling diamonds at market value,” Rapaport said. “I don’t expect them to sell their diamonds for less money than they can get.” However, he questioned whether this scenario is sustainable. “We see a lot of pressure coming down the pipe for higher prices.” Yet, the mining companies claim that prices of rough are increasing to compensate for rising operating costs, such as gasoline, energy and labor.
   The imbalance between rough and polished has created a great stress on the industry in Rapaport’s view. “Having a long-term situation of rough ahead of polished ‘decapitalizes’ the industry.” For the sustainability of the industry, he said, the rough mining sector has to take into account the entirety of the distribution system “because if people downstream don’t make money, they can’t market, they can’t sell, they can’t even remain in business sometimes.” Rapaport added that if those players downstream don’t make money, then the mining companies will have no one to sell to. “Higher mining costs cannot automatically be passed on to the retail sector,” he said. “The mining sector has to dig more into the retail side and make sure that their customer’s customer’s customer is taken care of, happy and eager to buy more diamonds.”

What Can Be Done?
   Global growth rates are slowing, Rapaport said, which means the industry can no longer rely on extended world growth to fuel higher diamond prices. “So we have to find ways to broaden and deepen U.S. polished demand,” he said. Figuring out what can be done at the retail sales counter — which Rapaport called the last 18 inches of the supply chain — to increase diamond prices and allow retailers to sell more diamonds is the key question facing the industry. “If we can do that, then we’re all winners,” he said.
   To that end, Rapaport said that jewelers are the most important cogs in the industry wheel. “Jewelers are more important than miners and manufacturers. They bring home the money, they turn that beautiful diamond into cash,” he said, adding that jewelers could survive without diamonds. “They can sell synthetics, rubies, sapphires, watches.” But the diamond industry cannot survive without jewelers. “If mining companies and manufacturers want higher prices, then they are going to have to get them from jewelers who make higher profits at the counter.”

Added Value
   But higher prices, Rapaport said, are not the same thing as increased sales. “We have to think deeper about what we are doing and what we are selling.” Adding value to their products is the only way for jewelers to sustainably increase their profit margins, he said.
   Adding value — how to add it, where to add it and for whom — is the “trick” that jewelers have to master. Charging a fair, transparent price for that added value is how jewelers can increase their revenues, Rapaport advised. To illustrate this point, he quoted Warren Buffett: “Price is what you pay, value is what you get.” The price is not the most important factor to the customer, Rapaport said. “Transcend the product to the customer. Love your customer.”
   Rapaport said jewelers should build their own brand and not rely on other parties’ established brands to boost business. “You have to have a ‘me’ brand. You have to have guts, personality, relationships,” he said. “You have to say ‘this diamond is from me, I am the selector, I am the expert.’ The real brand should be you.”
   Social responsibility, Rapaport said, is about individual jewelers taking responsibility for what they buy and sell. “When you buy something, make sure it’s not involved in human rights abuses,” he said. “Ask the questions, talk to your suppliers.” Meeting the needs of customers and being honest with them, especially Millennials —“because they are more interested in social responsibility, they want to know where their products come from” — are a jeweler’s ethical obligations, Rapaport said.

Level Playing Field
   Rapaport emphasized the need for a level playing field through documentation and certification of diamonds. “If someone bribes someone in Africa and gets his rough 30 percent cheaper and I in America have the Patriot Act, and other compliance issues, I can’t legally do that. But the other guy can write it off as a tax expense,” he said. “How can I compete and have an honest, decent business if the other guy doesn’t have to?”
   Such a scenario, Rapaport explained, is why he supports source certification. “We can create a path of goodness, a legitimate supply chain, with source certification.” However, such action would likely bifurcate the market, which he said he would like to see. “I’m a big proponent of separating the markets between legitimate and illegitimate products,” he said. “And I think legitimate goods should be worth more money.”
   Rapaport added that success of social responsibility initiatives would come down to dollars and cents. “If you can make more money selling a socially responsible product, then the industry will do so,” Rapaport said. “Society will get the level of ethics it’s willing to pay for.”

Certification Conference
   After the breakfast, Rapaport hosted a conference on certification. The bottom line is that the burden for selling synthetic diamonds as naturals or for selling stones with inaccurate lab reports falls on the retailers. End of story, according to Cecilia Gardner, president and chief executive officer (CEO) of the Jewelers Vigilance Committee (JVC). “Jewelers are the first line of responsibility,” she said. “That responsibility can’t be passed along.”
   Gardner emphasized that even if a retailer receives a stone with an inaccurate grading report, or receives synthetic diamonds mixed within a parcel of naturals, it is still incumbent on the retailer to stand behind the sale and the authenticity of the product. “‘I don’t know’ is not good enough,” she said.
   There is some leeway in grading reports due to the nature of subjectivity and the reliance on the human eye, according to Gardner. “Opinion can vary within one grading point,” she said, adding that there is no legal standard for diamond grading as there is for gold. However, beyond a one-grade variance, Gardner noted, the question arises as to whether the variance was purposely done, with suspicion growing as the variance in the grade increases.
   Gardner also explained that under Federal Trade Commission (FTC) regulations, “diamond” is understood to mean “natural” and anything other than a natural diamond must be labeled as such.
   Opinions varied at the certification conference as to the extent of the synthetic problem, but there was universal agreement that synthetics are not going away. Dr. James Shigley, distinguished research fellow at the Gemological Institute of America (GIA), said the technology exists to positively identify and distinguish synthetic diamonds from natural diamonds, which could mitigate the problem of undisclosed synthetics entering the natural pipeline. GIA recently unveiled a synthetic detecting device aimed at doing just that.
   Ben Gordon, a jewelry appraiser in Houston, Texas, summed up the legal jargon and the question of culpability regarding synthetics and grading reports. “Customers have to get what they are paying for,” he said. “You can’t sell ‘maybe.’”

Fair Trade Conference
   Members representing various sectors of the jewelry industry also met in Las Vegas at the Rapaport-hosted Fair Trade Conference with the goal to improve social responsibility practices within the industry. They agreed on a set of general principles as a blueprint.
   The panel informally adopted the guidelines, which were formulated by Eric Braunwart of Columbia Gem House along with his partners in Africa. Based upon the United Nations (UN) Millennium Goals, Braunwart’s “Vision 20/20” underscores the importance of every human being “from mine to consumer” and aims to make the supply chain a “human system.”
Vision 20/20 also aspires to:
  • Encourage the industry to support every person along the supply chain.
  • Identify health standards and health hazards in the industry — in particular, silicosis, a potentially deadly lung condition prevalent in gem cutting caused by inhaling too much silica, a crystal-like mineral found in sand and rocks, such as granite.
  • Commit to supporting sound environmental stewardship across the supply chain.
  • Encourage and support educational initiatives in areas where gems are a natural resource. 
  • Develop a minimum set of basic safety standards. 
  • Support the concept of job diversification — such as promoting agriculture — in mining areas so residents there will have other industry and jobs when mining operations shut down and leave. 
  • Enhance the idea of gemstones and jewelry as a tool for alleviating poverty.
  • Encourage and promote the beauty and promotional value of a humanitarian supply chain — or, as Braunwart put it, “a boots on the ground, people to people understanding of what we do.”
   Rapaport referred to the list of principles as a template of “aspirational values, not government regulations” broad enough for the industry to adapt to and a compass of sorts to get the industry moving in one direction toward substantial and positive change. 

Article from the Rapaport Magazine - July 2014. To subscribe click here.

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