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Moscow Meeting
Jul 30, 1999 11:08 AM
By Martin Rapaport
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By Martin Rapaport
The general mood at the Moscow meeting was positive reflecting a significant improvement in trade profitability over the past year. There were however grave concerns expressed about the future of the industry. While De Beers was roundly praised for supporting the market by restricting supplies of rough diamonds, they were also confronted with concerns regarding De Beers branding and direct sales of polished diamonds to retailers. Lazare Kaplan International (LKI) also came under pressure over the General Electric (GE) treatment issue. To their credit, De Beers’ Gary Ralfe and LKI’s Leon Tempelsman addressed the issues in an open and frank manner. While they did not provide satisfactory solutions to all trade concerns they displayed a willingness to consider the trade when making decisions. The most significant achievement of the Moscow meeting was that it ushered in a new atmosphere of open communication and greater transparency as the diamond industry enters the new millennium.
To provide our readers with a taste of the proceedings we have included a position paper presented by Sean Cohen, president of the International Diamond Manufacturers Association (IDMA), on the general state of the industry (page 1), Gary Ralfe’s opening comments (page 25) and the IDMA and World Federation of Diamond Bourses (WFDB) resolutions (page 11).
The Moscow meetings raised the following primary issues:
1. GE treated diamonds and what to do about them.
2. De Beers branding.
3. De Beers expansion of its polished sales to retailers and the fear that information given to the Central Selling Organization (CSO) by sightholders was being used to sell its customers?
GE Treatment
The discussion about GE diamonds focused on their detection and disclosure. Gary Ralfe consistently referred to an annealing process which is a “high temperature and high pressure” (HTHP) process that reorganizes the molecular structure of diamonds and results in a change of color. Ralfe disclosed that 20 years ago De Beers discovered that Type 2A diamonds with negligible or no nitrogen could be enhanced without detection, that De Beers "buried the secret" and since then has not sold Type 2A diamonds of inferior brown color. Less than 1 percent of De Beers diamond production is Type 2A and the majority of the 2A’s are already high color.
It should be noted that the GE annealing process does not only reduce the intensity of color — turn an H into an E —but it can also be “reversed” to intensify the color of a diamond — turn a dark stone into a fancy color.
Ralfe was optimistic about detection of the GE treatment. De Beers scientists say Type 1 annealed diamonds are "very easy to detect" and that certain characteristics will eventually enable detection of annealed Type 2A stones after the treatment. While such type 2A detection is not currently possible, De Beers and the GIA "are working on it" and hope they will be detectable "in due course." Ralfe also made it perfectly clear that De Beers supports full disclosure of all diamond treatments.
LKI’s Leon Tempelsman held his own during an intensive two hour question and answer period. LKI agreed that disclosure of the GE treatment was obligatory and it made no difference if the GE procedure was called a treatment or a process. Regarding detection, Tempelsman held the opposite view of De Beers and believed GE stones would remain undetectable for the foreseeable future. He stressed the fact that LKI had taken the high road by laser inscribing all GE stones and submitting them to GIA. He also committed to not selling GE treated rough and to giving notice to the industry if LKI stopped sending all GE treated stones to the GIA.
LKI supports the cooperation between GE and the GIA and hopes that a method of detection will be found. GE is cooperating with GIA to the greatest extent possible while protecting the secrecy of the process. Tempelsman believes that if the process became known, many firms all over the world would apply the treatment and sell the diamond without disclosure. From LKI’s viewpoint, while protecting the secrecy of the treatment may make it harder for GIA to establish detection criteria, the secrecy is very necessary to ensure that unscrupulous firms do not use the process without disclosure. This is especially true, given the opinion of GE scientists that the treatment will remain undetectable even if GIA was given the full details of the process.
At the meetings, GIA said that it was devoting maximum resources to detection and was in dialogue with GE. It also disclosed that a number of GE diamonds had been re-submitted to the lab. Since GIA “fingerprints” all diamonds and all GE diamonds are submitted to the lab before sale, GIA was able to “catch” these stones. GIA announced a policy whereby they would re-laser such stones with GE-POL or identify the owner to the Jewelers Vigilance Committee (JVC) in the event he did not agree to re-laser.
As evidenced by the IDMA and WFDB resolutions, everyone agrees that disclosure is required. The WFDB requires that disclosure must be in writing and also made when stones are submitted to a grading lab. Furthermore, if a stone is sold without disclosure, even by a seller acting in good faith who did not know it was GE treated, the buyer has the right to cancel the sale and receive a full refund. This clearly implies that if anyone, including a jeweler, unknowingly sells a GE processed diamond, the sale can be cancelled and the buyer is forever entitled to a full refund.
De Beers Branding
The De Beers branding issue was hotly debated in almost all the sessions. At IDMA it intensified existing political rivalries and resulted in a few embarrassing moments. Some members of the WFDB were so opposed to branding that it was agreed not to agree and no resolution was passed. Aside from the politics, the real issues regarding De Beers branding focused on three areas. First, the exclusionary nature of branding. If branding is successful and is limited to sightholders, then a majority of the diamond trade will be disenfranchised. Everyone at IDMA and WFDB agreed that such exclusionary tactics would be completely and absolutely unacceptable to the diamond trade. Second, the exclusionary problem would not just relate to people but also to the stones themselves. What will happen to unbranded diamonds? Will they be worth less? Third, there is great concern that branding is merely a stepping stone for De Beers to penetrate the polished diamond markets and cut out a majority of the distribution system by selling polished diamonds directly to retailers.
De Beers’ Ralfe explained that the De Beers branding technology was originally developed to be a hallmark — like 18-karat gold — that would differentiate natural diamonds from the possible advent of undetectable synthetic diamonds. The hallmark concept took on extra meaning in light of the undetectable GE process. On the critical issues regarding the exclusionary nature of branding, Ralfe provided little comfort. The best he could do was say that “De Beers has made absolutely no decisions in regard to branding,” that the company would not do anything sudden or radical, and that before any decisions about branding are made “we need to take into account all the views in the industry and within the trade.”
Given the fact that De Beers is currently undergoing an unprecedented strategic review, there is very little Ralfe could say. What Ralfe did say in other statements was that De Beers as a company will always take into consideration the needs of all “stakeholders.” These stakeholders include the mines, the members of the cartel, the sightholders, the general diamond trade and most importantly, De Beers shareholders.
Ralfe’s primary problem these days is that De Beers share prices do not reflect the value of the company. Almost all of De Beers share value is based on its Anglo holdings. Given the collapse of gold prices, Ralfe is going to be under ever increasing pressure to rationalize De Beers diamond value and in fact that is what the strategic review is all about. The fact is that the investment market puts “extremely little value” on De Beers diamond business and zero value on De Beers $4.5 billion stockpile. This speaks greatly about where De Beers management needs to direct attention and also challenges the concept that there is real value associated with De Beers and the CSO’s cartel value. Simply put, the investment markets are telling De Beers that it does not pay to be a monopolist, it does not pay to own and maintain expensive diamond stockpiles. The real issue is not merely what De Beers is going to do about branding or direct selling of polished. But more importantly, and more broadly, what is De Beers going to do about its expensive stockpile and should De Beers retain its role as a monopolist or “swing producer?” De Beers may be looking for an exit strategy from the cartel business.
De Beers’ management is appointed by the shareholders and ultimately the needs of the shareholders will be primary. While it can be argued that it is in the best interests of the shareholders to have a viable, vibrant and profitable diamond distribution system, the question will always be — at what cost? Ultimately, when decisions are made, the primary question that will need to be answered is how can De Beers make more money and how can it get its share price to go up. Certainly, De Beers will take into consideration the impact that branding will have on the distribution system, but in the end it will use branding the best way it can to increase shareholder value.
De Beers Polished Sales
This “hot potato” was bounced around in almost all the meetings. Fueling the fire was a brochure distributed by the De Beers’ polished diamond division at the recent Basle Trade Fair. The brochure freely given out to retailers explained that the De Beers’ polished division had diamonds to sell and had recently “become a sightholder in their own right.”
Needless to say, the fact that De Beers does not yet have a branding policy highlighted trade concerns that De Beers does in fact intend to go downstream and sell everybody’s customers’ customer.
Ralfe referred to the issue as a “storm in a teapot” He stated unequivocally: "We have certainly not decided to take our business vertical.” Trade concern was so great that Ralfe was asked to talk again in a joint meeting about De Beers polished plans and provide assurances. While Ralfe did provide straightforward assurances regarding De Beers’ current policies and known intentions, he also made it clear that there were no guarantees for the future.
Tiffany Partners With Aber
Let it not go unnoticed that Tiffany & Co. has announced this week that it has formed a strategic partnership with Aber Resources, a primary Canadian diamond mining company. So there you have it — from the mine direct to the retailer with a branded diamond. Will it pay for De Beers to do the same thing sometime in the future? Who knows? Perhaps the next step is for Aber to cut out Tiffany and sell direct to the consumers themselves. What will De Beers shareholders tell them to do then?
While it is entirely understandable that the diamond trade would like a stable environment with assurances for the future, it is high time that all of us in our industry realized that this scenario is unrealistic in the current environment. Wake up folks. It’s not just the internet. Not just GE. It is also De Beers. The sleeping giant called De Beers is waking up and no one including De Beers knows how it will play the game of the future. It is high time for us to stop looking to De Beers for assurances it cannot provide. It is time for us to start learning how to read the tea leaves of the future all by ourselves and to figure out how we will position ourselves to make money no matter what De Beers, the Canadians or Tiffany & Co. does.
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Tags:
Consumers, De Beers, GIA, Jewelers Vigilance Committee, Jewelers Vigilance Committee (JVC), JVC, Lazare kaplan, Production, Sightholders, Tiffany, World Federation of Diamond Bourses (WFDB)
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