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Leadership in Unprecedented Times

'With challenges come opportunities'

Jan 21, 2009 7:22 AM   By Varda Shine
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RAPAPORT... The following speech was given by Varda Shine, managing director of Diamond Trading Company (DTC), at DTC's annual sightholder cocktail party on January 20, 2009.

On this evening this time last year there was a fair amount of certainty in the room. We knew that the 2007 Holiday season in the U.S. had been nothing to write home about, but that it was reasonably solid, and overall 2007 sales were positive.

Rough prices were strong. The Supplier of Choice (SoC) applications process was behind us: We were about to start a new contract period led by the most qualified Sightholders best positioned to add value to the rough diamonds we sell and drive demand.

In short: The future looked secure, except that the prevailing constraint continued to be the shortage of rough! Externally and internally there was pressure for the DTC to adopt, in whole or in part, a tender system to capture so-called "full market value." SSV was missing a trick, we were told, judged from rumored (and actual) premiums on DTC boxes.

In reality, DTC was pricing fairly and robustly into the "hot market" that led up to our largest sight on record in mid-2008. At the same time we were flagging internally and externally that in our view the high prices reportedly being paid on the margin at tenders were unsustainable.

But...!

The world could hardly be more different one year on. I’m not going to spell out the difficulties that face us and the industry -- we are all very familiar with those stresses and strains. What I can say, and not by way of cheering you up I’m afraid, is that our preliminary view of Christmas sales in the U.S. is that they underperformed expectations. We do not have a precise read but the percentage decline year on year is likely to fall somewhere between 15 and 20 percent, leaving the decline for the U.S. market as a whole for the year in the high single digits. While a glimmer of good news is that the number of pieces sold may in fact not have declined, the need to move those items means that retailers’ margins have suffered and they are not in a position to replenish stock as strongly.

Barack Obama became president of the U.S. today. A week ago he stated that the U.S. over the next two years will be operating at some 7% below its potential -- translating into $2 trillion of lost production. His three-quarters [of a] trillion [dollar] stimulus package will go some way towards plugging this gap.

Operating Below Potential

Similarly, I think we can all agree that the diamond business is operating well below its potential. However, global consumer demand has not fallen off a cliff -- it contracted marginally last year and will do so again this year. The real challenge is financial liquidity combined with the large polished stock overhang in the pipeline.

We need simply to recognize that the world has changed around us and we need to take action now to help ensure a strong future. We cannot run and hide: We must demonstrate what we are made of and what we stand for. We stand for diamonds! And in this sea-change we have to guard against diamonds drifting off into irrelevance, becoming thought of as yesterday’s extravagance.

There can be no doubt that we are all going to have get used to thin levels of business for quite some time. But with effective stewardship, diamonds will make a very solid comeback.

The Positives

Why do we believe this? Here are a few reasons:

• The certainty of demand: Unlike other products, diamonds have not lost too much ground in the first place. Even in a recession, people are going to continue to get engaged and marry. Even in a recession, consumers in all core markets still rank diamonds as the first or second most-desired purchase or gift.

• Medium-term supply issues: The short-term reduction in diamond inventories and sales, coupled with a significantly lower level of investment in exploration and new mining projects, is likely to create a shortfall in previously forecast levels of diamond supply in the medium term.

• Financial value: As the hardest material on Earth, diamonds represent a reliable hard asset for people migrating away from debt, risk and the complexity of financial trading. Historically, there has been incremental growth and low volatility in the value of diamonds, making them attractive in the long term. As people are losing their assets they are looking for alternative investments to the point that on a regular basis we are being approached by individuals keen to capitalize on this.

• Enduring value: In uncertain times, research shows that consumers gravitate towards quality. They buy fewer, but better things -- things that last, which are not disposable and that hold their value over time.

• Strong long-term fundamentals: Diamonds are a rare and finite treasure of nature and, with future demand growth in emerging markets, demand is likely to significantly outpace what is forecast to be lower levels of diamond supply for many years to come -- even if it won’t happen in 2009.

• In all of this, De Beers is going to continue to invest in diamonds and to do what it can to support diamond equity. Gareth will outline to you the broader De Beers approach, but let me say a few things from a DTC perspective.

What is DTC doing?

As we begin the New Year, and taking into consideration some of your recommendations and the current unprecedented economic climate, we have planned the following:

• We have taken great efforts to present DTC goods at fair value. I am sure you will agree when you see the goods.

• We have decided to continue to actively promote the equity of the product that we sell to you by taking the long-term view when making decisions on our strategy in the context of prevailing consumer demand, stock and liquidity challenges.

• In response to your requests to "get back to basics," the DTC has determined to show the goods differently in Sight 1.

• The small January Sight provides the DTC with the opportunity to test the changes and receive feedback from you, our Sightholders.

• The DTC has determined that for Sight 1, all goods will be sold without black seals or heat seals.

• In view of the substantially decreased level of Sightholder demand for new rough diamonds, we anticipate reducing the ITOs offered to Sightholders by roughly 50 percent for the remainder of the current ITO period -- the January, February and March/April 2009 Sights -- although this will be assessed on a Sight by Sight basis.

• But we do anticipate that we will be operating at a reduced level this year.

• The DTC is exploring options for bringing surplus goods to the market once every avenue of Sightholder demand has been satisfied.

• De Beers will continue to help drive demand by investing in the highly regarded generic marketing campaign in the U.S. that highlights the enduring value of diamonds, and by investing in the Forevermark in the Far East.

• We will remain committed to beneficiation and will work with our producing government partners to ensure that existing initiatives remain on a sustainable footing.

In Closing…

The DTC is tightening its belt, just as you are, and we will, REGRETABLY, be letting a significant number of people go over the next quarter. But let me assure you that we are doing so in a very considered way and in a way that will still leave us with a depth of talent and experience that is unique in this industry. And we are going to put our assets to work in new and flexible ways to strengthen our partnership with you.

I would like to leave you with some final thoughts:

• We will continue to support you.

• We are all in this together. We have been through tough times before together and together we will come through them again, stronger than before.

• "United leadership" will transform this industry.

• De Beers and DTC are taking decisive action, and I know you are too.

• We are lucky to be in the diamond business!! Let’s not lose sight of that.

• Treat diamonds as the natural treasure that they are -- they are getting rarer.

• Some investors see incredible opportunity in these dark times -- and as leaders of our industry this must hold true for us too.

• To a joint successful 2009!!!

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Tags: Consumers, De Beers, DTC, Government, Production, Sightholders, Sights, Tenders
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