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Corporate Diamantaires


Nov 22, 2013 2:00 AM   By Avi Krawitz
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RAPAPORT... The mid-stream diamond industry has been given a wake-up call this year by the corporatization of supply. Suddenly, the majority of rough production is being controlled by public companies following ALROSA’s October share placement and Anglo American’s 2012 buyout of De Beers. And just as suddenly, manufacturers are forced to buy according to a different dynamic – much to their dismay.

It’s surprising that manufacturers are in such a panic, given that the restructuring of the diamond-mining sector has been a long time in the making. They know that diamond mining executives are hired to drive shareholder value and not industry morale. And, the reality today is that those managers are faced with a far broader – and much more demanding – set of shareholders to satisfy than before.

As these changes have become reality, diamantaires have lamented that there is no one left to look after their needs in the industry. Their assertion that the major rough suppliers are not as warm to their clients as they used to be is as irrelevant as it may be true. Mining companies are in the business of selling diamonds and will try to get the highest possible price they can to drive revenue, profit and shareholder – not sightholder – sentiment and value.

De Beers and ALROSA in particular, which together control about 50 percent of global production, are able to drive their own profits against largely family-run manufacturing businesses, who are still trying to operate in an old-fashioned industry. Manufacturers are consequently left to exert their own influence back on the market by insisting on rough supplies at fair values, or otherwise leaving goods on the table.

In the past few months, the manufacturers effectively made their opinion known by refusing about 15 percent to 25 percent of goods at the September and October De Beers sights. De Beers was subsequently forced to lower prices by around 3 percent to 5 percent at last week’s November sale. Many sightholders felt it was too little, too late given the reported lack of correlation between the rough and polished markets. Some suspected that De Beers wanted to ensure a positive mood at the sight, given that it was the inaugural sight held in Botswana. As one Antwerp-based sightholder put it, “[De Beers] certainly didn’t want refusals to spoil the successful transfer of its sales division from London.”

Still, one likes to believe that traditional supply-demand dynamics forced De Beers to lower prices and that it will be left to sightholders to influence further adjustments in the future.  Alternatively, De Beers sights will lose their value, as has been the complaint for much of 2013, and stronger, better-positioned players will swoop in to buy the goods.

Already this month, Israeli sightholder EFD announced that it has relinquished its sightholder status in order to follow an independent course in the diamond industry. EFD declined further comment on its decision. A De Beers spokesperson stressed that this was an isolated case and that De Beers has not had other such notifications. Regardless, manufacturers are being forced to think out of the box to squeeze out profitability in their rough supply.

Signet Jewelers announced last week that it has acquired the Botswana factory of Exelco, an Antwerp-based sightholder. Sources stressed that Exelco will continue to receive supply from DTC Botswana and De Beers International, as it has in the past. De Beers confirmed that the factory sale does not mean that Signet is now a sightholder, and the jeweler would still have to make its own separate application to be included in a sight next year. Lior Kunstler, a partner at Exelco, declined to comment for this report, except to stress his satisfaction about the deal. 

Still, the sale is telling, even if it involved one of the stronger sightholder companies. While manufacturing margins will continue to be squeezed by mining companies’ attempts to raise rough prices, it is those diamantaires that are able to gain value elsewhere in the pipeline that will be most capable of buying the so-called non-profitable rough.

Signet explained that it seeks to significantly advance its rough diamond sourcing and manufacturing, and that the acquisition of the Botswana factory represents an important element of this goal.

The company joins an impressive list of jewelry retailers exerting their muscles in the rough diamond space. Consider that Chow Tai Fook, Chow Sang Sang, Tiffany & Co., Graff Diamonds, and Gitanjali Gems each have a De Beers sight, or two, with many also sourcing from ALROSA and other mining companies.

Revealingly, most of those retailers are also public companies operating in a cutthroat shareholder environment. They need to improve their margins by going straight to the source and cutting out the middleman. Why buy polished diamonds for their jewelry that has been marked up through numerous deals since the diamond was mined when they can gain that margin by purchasing the rough and polishing it themselves or via a joint venture?

For wholesale manufacturers, this means they are competing on an uneven playing field ‎and it appears that a two-tier system may have developed within the sightholder ‎community. It could be argued that mining companies selling their goods on contract ‎may be basing their high rough prices on how efficiently the resulting polished can be ‎sold at the retail level rather than the wholesale level. ‎

Diamantaires, therefore, find themselves in a tough environment and somewhat alienated between the corporate miners and retailers. Many are currently looking to forge alliances with their retail customers in order to better manage their rough supply. It seems this was the motivation behind the Exelco-Signet deal.

Those unable to do so will soon recognize that they will need to adopt a similar attitude toward doing business because there is no one who will look after their needs, except for themselves. Frankly, in the modern business world, that is how it should be. Rough diamond buying – as with any other commodity – should be a price negotiation, not a handout. Diamond manufacturers’ role in the rough market ought to be to force that negotiation.

Diamantaires have always bought goods based on relationships and feel most comfortable doing so. That is the strength of their business. If that familiar aspect has been eroded away with their rough suppliers, then they need to find a way to rejuvenate that relationship on their own terms. Or, they should focus on creating value through relationships elsewhere in the pipeline. As rough supply is increasingly governed by corporate goals and shareholder needs, diamantaires don’t need to feel as isolated as they do today. But they do need to adjust their thinking if they wish to survive.

The writer can be contacted at
Follow Avi on Twitter: @AviKrawitz

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Tags: Alrosa, Avi Krawitz, Botswana, De Beers, diamonds, Jewelry, Rapaport, Signet, Tiffany & Co
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