Rapaport Magazine

Meeting a Higher Standard

2016 has been better than 2015, even as polished trading slowed in May. But the industry needs to meet a host of challenges to ensure long-term growth.

By Avi Krawitz
Public opinion matters in every industry,” cautioned Geert van Reisen, global head of strategy and portfolio management at ABN AMRO. “The diamond trade must therefore embrace initiatives to increase pipeline integrity and sustainability.” Speaking at the World Diamond Congress (WDC) in Dubai, van Reisen stressed that as banks and regulators are increasing their compliance requirements, so must industries raise their game in that area — especially those with a “high risk” profile such as the diamond trade.
   Participants at the WDC, a biennial joint meeting of the World Federation of Diamond Bourses (WFDB) and the International Diamond Manufacturers Association (IDMA), appeared to take that message to heart and outlined the tasks that lay ahead. Ernie Blom, WFDB president, said the insistence of governments and enforcement agencies to meet a higher standard in “how we conduct our business” is the biggest challenge facing the industry. For that reason, he explained, it was decided this year’s congress would focus on “Transparency, Responsibility, Sustainability” as its central theme.
Improving Bankability
   Howard Davies, head of commercial development at De Beers, explained the company’s approach toward transparency: De Beers requires clients to present a consolidated corporate structure, proper bookkeeping, transactions they’re able to vouch for, and they must adhere to third-party scrutiny. Sustainability, meanwhile, encompasses maintaining a profitable business model and a strong equity base, according to Davies. The combination of transparency and sustainability leads to bankability, and you can’t have one without the other, Davies stressed.
   David Bouffard, vice president, corporate affairs at Signet Jewelers, added that maintaining a responsible supply chain, in which companies can guarantee their diamonds are ethically sourced, further improves the industry’s reputation when dealing with the banks and consumers.
Signet recently launched its Responsible Sourcing Protocol for diamonds, through which the jeweler works with suppliers to meet its compliance standards. A similar program was implemented by Signet for its gold suppliers and today some 99 percent of its gold suppliers meet Signet’s compliance requirements, Bouffard reported. Doing so improves a supplier’s standing in the industry, he claimed.
   “I can assure you that the banks look at Signet’s suppliers differently because of the compliance requirements they’ve adhered to,” Bouffard said. “We truly believe that such programs will lead to a more profitable business.”

Banking on Credit
   The difficulty to procure financing and the lack of profitability were recurring themes in the Dubai discussions, particularly among manufacturers participating in the IDMA deliberations. Maxim Shkadov, outgoing president of IDMA, stressed that stability in the diamond manufacturing sector can only be achieved through profit, and the industry cannot return to profitability without a healthy and reliable financing structure.
   Bankers presenting at the conference noted there’s a crisis of trust in the banking sector because funds allocated to the diamond trade had previously been used in an irresponsible way for nondiamond-related transactions.
   There was also consensus that more effective marketing of diamonds was necessary to increase consumer demand and drive industry growth. The WDC called for greater coordination between the World Diamond Mark, a marketing initiative of the WFDB and IDMA, and the Diamond Producers Association (DPA), which launched its generic promotion campaign in June.

Current Trading Conditions
   Diamantaires recognized that profits had improved in the first few months of 2016, but questioned if it was sustainable given the state of the market. Already, polished prices softened in May due to it being a seasonally slower period and as a result of sluggish demand.
   The RapNet Diamond Index (RAPI™) for 1-carat, Gemological Institute of America (GIA)–graded diamonds slid .1 percent in the period May 1 to May 22, while RAPI for .30-carat diamonds declined .9 percent and RAPI for .50-carat stones fell .2 percent. RAPI for 3-carat diamonds dropped 1 percent during the period (see RapNet Diamond Index [RAPI™] chart in slideshow).
   Dealers were focused on sourcing the “right goods” to present at the JCK Las Vegas show, which took place in early June. Buyers, meanwhile, remained selective in filling orders and were not buying for inventory purposes. There was steady demand for .50-carat to 2.50-carat, G through J, VS2 to SI2 RapSpec A2 diamonds, while demand for 3-carat and 4-carat diamonds was weak.
   While U.S. demand supported a generally fragile global market, its trade contracted in the first quarter of 2016 with polished imports down 3 percent and polished exports declining 4 percent compared to the same period in 2015 (see U.S. Polished Diamond Trade chart in slideshow).

Manufacturing Stabilizing
   However, trading was vastly improved compared with the second half of 2015, when inventory levels were reduced. In the first quarter 2016, the midstream sought to replenish much of that depleted inventory leading to firmer polished prices and improved profit margins before the market slowed in April and May.
   Sarine Technologies, a supplier of equipment used in diamond manufacturing, noted the return of profitability drove higher manufacturing activity and renewed investment in capital equipment in the first three months of the year. The company reported sales jumped 27 percent year on year in the first quarter, while profits nearly tripled (see Sarine Technologies Revenue & Net Profit chart in slideshow).
   Large-scale manufacturers have reportedly stabilized their operations in May, following a ramp up of activity in the first quarter when India’s rough imports jumped 14 percent year on year (see India Rough Diamond Imports chart in slideshow). Small-to-medium-size manufacturers, meanwhile, are now raising their activity and driving demand for rough diamonds on the secondary market.
   Demand was steady during the De Beers sight in May as the company kept prices basically stable. The sight closed with a value of $630 million, bringing its total sales for the year to $2.5 billion.
   The Antwerp trade feels the strong rise in rough trading in the beginning of the year is cause for optimism, without “jumping to conclusions that a full-blown diamond industry recovery is underway,” said Margaux Donckier, spokesperson for the Antwerp World Diamond Centre (AWDC).
Similarly, participants at the WDC recognized that 2016 has so far been better than 2015 but many challenges remain to ensure sustainable growth in the long term. And many of them begin with the compliance issues discussed in Dubai.
   “Transparency, responsibility and sustainability — these themes run through all the challenges that we are facing as a global industry and also show us the way forward,” Blom said.

Article from the Rapaport Magazine - June 2016. To subscribe click here.

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Tags: Avi Krawitz