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Itzhak Forem--New President of the World Federation of Diamond Bourses

Nov 10, 1998 11:35 AM   By Martin Rapaport
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Following is an interview with Mr. Itzhak Forem, President of the World Federation of Diamond Bourses (WFDB) and President of the Israel

Diamond Exchange.

Martin Rapaport: Congratulations on being elected president of the WFDB.

Itzhak Forem: Thank you very much.

MR: What is your view of the industry’s current situation?

IF: I do not remember, and I do not think anyone else does either, such a complicated situation in the global economy. This situation has had a great influence on the diamond industry.

During this period I do not think there have been three consecutive months of good business. At this point, the world is exhausted and does not have the strength necessary to continue. I hope that this is the height of the crisis and from now on things will only be better.

MR: I understand that demand is weak. Is this the main problem today – that the Far East is quiet?

IF: The Far East is one problem. If anyone wants someone to blame, they blame it on the Far East situation.

The real problem of the diamond business lies in the low profit margins. We have not seen reasonable profits for many years now. We are content at times with just 2 to 3 percent profit. However, if you make the exact calculations, we are essentially losing money with these percentages. You cannot build a business on 2-3 % profit because if you have a hard time, and lose 10% on one deal, you have already lost what you earned in the year.

Because we are weak today, we sell the goods at any price for a low profit or even no profit at all. We want to be rid of the goods to have the money to continue in the business. Nobody wants to leave the business.

MR: So you are saying that people are willing to make low profits just to stay in the business. Do they think things are going to be better?

IF: Diamonds are a family oriented business. People are born into the business and want to stay in the business. To do so they must believe things will be better.

MR: How many people are in the Israeli diamond business?

IF: People have been forced to leave the industry. Back in the crisis of the 1980’s it was the small and medium manufacturers who helped move us out of the hard times. They were given the chance and jumped at the opportunity to begin manufacturing. Lately, after examining what has been happening to the large diamond manufacturers, it has become very apparent how important it is to keep the small manufacturers in the business. Without them the situation could be even worse.

MR: Why?

IF: The smaller manufacturer has fewer costs than the large companies. They work alone with their family, have reduced overhead, and can afford to sell at a cheaper price. The large companies who have their vast worldwide marketing connections need to buy from the smaller manufacturers to keep their average costs low.

The large manufacturer has a lot of costs. He can, however, sell abroad. The small manufacturer sells close to home to the larger companies who can then sell the goods farther down the pipeline at a better price.

MR: Does a large company find it easier to deal with the crisis?

IF: I do not think so. I think that a small company that reduced its expenses can exist better than the large company with high overhead costs and the large credit deals which are a main factor in the game today. There are no rules. Lately what has happened in Israel proves this.

MR: What about the rough prices – do they influence the profitability? The CSO has reduced the rough supply, believing that this will preserve the profitability by making sure there are fewer goods.

IF: De Beers wants to sell diamonds all over the world, but there are not that many people who want to buy today. No one wants an oversupply.

It is still apparent, though, that there are enough goods coming from other sources and the market does not yet feel a lack of supply.

MR: But the rough prices are high.

IF: When the sight holders complain that they do not profit I tell them not to buy. Apparently they do not listen.

MR: There are people that specifically want to become large companies today, even if they do not profit. They believe that they will make it through the hard times by being a large manufacturer, and the smaller companies will not make it through this crisis.

IF: I do not believe in this idea and never have. Everyone has a place in the business. What makes this business special is the mix of big and small companies, each gaining from the other.

MR: Are the rough prices too high?

IF: If we do not profit it is a sign that they are too high. If polished prices do not rise then the rough prices are too high. I would rather that the price of rough remains high and that the price of the polished would rise.

MR: Demand though is low. I assume that if there were a way to raise the polished prices our people would do it. I do not believe that it is possible to make more money from polished today.

IF: The proof that it is hard to reach the better polished prices is that people are seeking alternative paths to make money. They are moving directly to jewelry, there are fewer middlemen in business, manufactures sell directly to consumers. This is a sign that things are tight and crowded.

MR: The CSO says that if we lower the price of rough the price of polished will also go down.

IF: If they reduce the price of rough I believe the polished prices will go down as well. There will be more profitability if this happens. People do their calculations automatically, and if they feel they can profit they sell. Let’s go back to the 1980’s. The price of rough was attractive and that is how they overcame the crisis, more people could deal with the prices.

MR: So a criteria for moving forward today is for there to be profitability and more attractive rough prices.

IF: Another condition is to allow people who have the money to buy rough at the right price. The rough should pass through as few h*ands as possible so as not to allow the middleman to profit.

MR: I am examining the rough prices on the market today. Prices are either the CSO price or lower, so there is no profit in brokering.

IF: There are no people who can buy the rough in order to sell it further. People are scared to give credit.

MR: The CSO claims that there are too many people in the diamond business. If they lower the prices, people will fight each other to sell. This reduces the profitability.

IF: I believe that the market should be left to do its own thing. The CSO should not worry about the number of people. If they are in the business it’s a sign they can survive.

MR: I would usually agree that the market should go its own way, if there were no monopoly determining rough prices. In other industries the rough prices would drop in a similar situation.

IF: If there were no monopoly everything would rise and fall according to supply and demand. One supplier sells if he needs money and another waits and does not sell. I do not think this is bad - it should be this way. It will happen one day.

MR: How many members are there of the Israeli bourse?

IF: 2,400.

MR: What should bourse members be doing these days?

IF: My message is clear. People should work according to their ability and reduce expenses as much as they can. People should not complicate the situation by working beyond their ability. They should wait for this storm to pass.

MR: Banks – are they good or bad?

IF: Without the banks we cannot survive. Over the years the banks have not lost money because of the diamond industry and we have had good relationships with the banks.

The CSO plays an important role and should be more involved in giving the banks security that there is someone behind the business. The banks want the CSO involved in solving the problems of at least the CSO clients, the sight holders. This would ensure greater confidence on the part of the bank. The CSO does not do this, as it is not their policy.

MR: The CSO takes the stand that the market should be free.

IF: If the market should be free there can not be a monopoly.

MR: They say they are a monopoly for the good - they buy rough as a monopoly, but the polished is a free market.

IF: This is unusual – if you are a monopoly you are a monopoly.

MR: The CSO is a monopoly just for the rough. I believe that if someone went bankrupt and had a lot of rough the CSO would buy the rough.

IF: In the 1960’s people went bankrupt and there were original CSO boxes left. The CSO bought the boxes back from the bank.

MR: But in polished...

IF: They want a free market.

MR: There is a problem today because of the banks. The banks do not finance rough or manufacturing. The banks finance marketing.

IF: The Far East market was a cash market. The United States is a market based on credit. We need the banks to finance these credit deals.

MR: This is very dangerous. If someone goes bankrupt today...

IF: There will not be another Lorenzi. The writing was on the wall for everyone to see. You could not go wrong. People could see to stay away from Lorenzi. I see other problems, though. There are difficulties in other firms – but not in the same league as the Lorenzi problems.

I think things will work out. We will get through this time. The industry and the banks must learn their lesson.

MR: What will be the immediate influence of the Lorenzi case?

IF: It will take a number of months until it is behind us. People are trying to be more cautious, however time has proven that people have short memories.

MR: What about the banks – will they give less credit?

IF: The banks allowed things to get out of hand with the Lorenzi situation - $64 million in debts. They will be more cautious in the future.

MR: They allowed him to fall?

IF: I do not know all the details, but they certainly do not deserve a medal. It will be hard to turn this business into a cash business though. To begin with there will be no business conducted for some time and by then there will be much fewer people left in the business. You cannot make a law forcing people to sell for cash.

MR: We reached a point though...

IF: We have been at this point before and have found people’s memories to be short.

MR: What would happen if the US market receded?

IF: I do not want to think about this – enough said?

MR: According to the forecasts, by March or April America will begin to decline.

IF: There are other markets.

MR: Japan will bounce back?

IF: Not before the year 2,000.

MR: What about China, Russia? What is going on in Russia today?

IF: I am not hopeful about Russia. I just hope they will uphold all the important agreements established with De Beers.

MR: What about the Indian market? They have been taking market share away from Israel.

IF: Israel cannot compete with the Indians’ low labor cost. Therefore, it was just a matter of time before the melees would move to Indian production. If there were a country with half the Indian labor cost, manufacturing would move there. Israel must focus on preserving the standard of the medium and larger goods where the labor cost is not as essential as the professionalism. We are professionals. Each market should worry about its own niche.

MR: As far as finance goes - India has a lot of credit. No one can compete with the Indian labor cost and credit line.

IF: Israel has over a $1 billion credit line. I do not think Israel needs more credit.

MR: Are there any other new markets on the horizon?

IF: I am a great believer in the potential of the Mainland China market. I intend to travel to Shanghai in an effort to have them open their center and bourse and to encourage them to change their difficult laws forcing people to need visas and limiting free enterprise. I have no doubt that this market is inherently important. One of my most important missions is to open the Chinese diamond market as quickly as possible to diamond people all over the world.

MR: What direction do you intend to take dealing with the CSO?

IF: They should continue their policy of supervised allocation of goods. In the 1980’s they found ways to prevent manufacturers and professionals from having to leave the business. I think that they would be making a big mistake to focus only on the big companies and I hope I can cooperate.

MR: At the World Diamond Congress in Bangkok this year it was decided to improvise an open door policy to open every bourse to all bourse members.

IF: We did this.

MR: What can be done to start money flowing through the business once more?

IF: The goods must be attractive to bring money back into the business. People have to see they can make money with the goods and the goods have to be worth the money. If people can make money they will bring new money into the business – money which they had previously taken out of the business. Smaller companies will work together on joint ventures between to bring more money into the business. It has nothing to do with the price of rough – the assortment must be good.

I want to tell the world that everyone, not just the diamond industry, is going through an economic crisis. The impact on diamonds is strong because diamonds are a luxury item. In the future, however, I believe that new markets like Mainland China and a revived Far East will return the diamond industry to its rightful place.

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Tags: Banks, China, Consumers, De Beers, Economy, India, Israel, Japan, Jewelry, Manufacturing, Martin Rapaport, Production, Russia, United States, World Federation of Diamond Bourses (WFDB)
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