Diamond Demand Rises; Will Russia Play Spoiler?

The normally talkative diamond world has been quiet when it comes to predicting business for 1996. But leaders agree on one point: much of the outlook depends on a new marketing contract between De Beers and Russia.

Both sides have maintained an official silence on negotiations for the new contract, which would replace one that expired in December (past press time for this issue). But De Beers executives were optimistic a new contract will be signed soon or that the old one will be extended while negotiations continue. If the sides reach an impasse and break off their relationship, one of the first noticeable effects will be a reduction in De Beers’ $180 million-plus advertising program, which is supported by producers in the cartel’s network.

The biggest uncertainty in negotiations is Russia’s diamond policy itself. Evgeny Bytchkov, who chairs Komdragmet, the state committee on precious gems, may find himself out of a job or operating under strict limitations because of corruption allegations. These involve the alleged loss of more than $88 million worth of rough sent to joint-venture companies, including Golden ADA of San Francisco, Cal. Bytchkov, who has been the lead deal maker with De Beers, also has close connections to Russian President Boris Yeltsin, whose own future is in question due to health problems. Whether he could survive Yeltsin’s departure is the topic of much conjecture in Russia.

If Bytchkov’s influence wanes, Almazii-Rossii-Sakha (the agency that controls mining and marketing of Russia’s diamonds) and the province of Sakha (in which the diamonds are located) will play a bigger role in the negotiations. Both are known to be more cooperative with De Beers.

The primary issues in the negotiations:

  • Russian and Sakhan officials want to increase their diamond polishing operations to provide jobs and add value to their diamond resources. But De Beers wants these polishing factories to get their stock through the CSO, rather than direct from Russian stocks.

  • Komdragmet demands the right to sell 25% of Russian production independently and the right to supply joint domestic/foreign polishing ventures with unlimited rough. De Beers says most of these ventures are veiled smuggling operations that add few jobs and little value to the country’s diamond resources.

Supply, demand: Of course, Russia is only one factor that will affect the diamond market this year.

On the negative side are continued oversupply and soft prices of smaller diamonds, stiff price competition and a potentially problematic world economy.

On the positive side, diamond jewelry sales should hold up reasonably well, though gains are expected to be slightly lower than the 6%-8% forecast for 1995. Experts also predict more demand for better qualities and larger sizes (1 ct. and up). “We’re fairly optimistic about the U.S. market, though there are some issues which bear watching,” says Jackie Steinetz, research coordinator at De Beers. Examples include corporate downsizing and profit margins under pressure from price competition.

A De Beers survey found that 68% of U.S. retailers believe they’ll do better this year, down from 70% in last year’s survey. “We began 1995 pretty optimistically,” Steinetz says. “Then we ran into the Mexican economic crisis, which hurt a lot of U.S. businesses; a larger than expected retail destocking; and doubts over increases in taxes and interest rates.”

Supply also will play a role. Some qualities of small goods remain overabundant, even though De Beers addressed the situation by cutting prices of smaller, lower qualities by as much as 11% in July.

The opposite problem of tight supply is evident in larger gem rough. When De Beers announced a 5% increase on gem rough of 2-plus carats in November, dealers said demand had been running so high they could have increased sales more than 10% – if they had the goods. Dealers now hope De Beers will release more larger rough. This is unlikely, however, as long as Russia might upset the market by selling outside the CSO.

Consumer trust, Japan: Also affecting the diamond market this year will be consumer trust and the economy of Japan.

Rumors about synthetics, fracture-filling and other diamond treatments have shaken consumer trust, say dealers. In fact, De Beers is so concerned about the proliferation of diamond treatments and the march toward commercial-quality synthetic diamonds that it has organized a committee to monitor them and help gemological laboratories disseminate information about them.

And in Japan, the second largest diamond market after the U.S., a prolonged economic downturn has helped to keep diamond prices soft worldwide. Economic recovery at the end of 1994 stalled after the Kobe earthquake in January 1995 and terrorist attacks in Tokyo at midyear.

Now the county faces an even greater threat. With the bankruptcy of several banks and credit companies, Japan’s banking system now holds as much as $800 million in bad loans, an amount equal to 25% of Japan’s gross national product. Even if the government and banking system stave off a financial disaster and the yen remains at a tolerable exchange rate against the U.S. dollar, diamond jewelry sales in Japan are expected to rise only slightly over 1995. If the bank crisis continues, all bets are off. Unemployment and bankruptcies will rise and credit will tighten, throwing the country back into recession, say observers. “We’ll have to watch closely to see which way Japan goes this year,” says Steinetz.

HIGHLIGHTS

  1. The big question in the diamond market this year: “When (if ever) will Russia sign a new sales contract with De Beers?”

  2. Diamond jewelry sales should hold up reasonably well in the U.S.

  3. Prices will reflect an oversupply of some qualities of small gem rough and tight supplies of large rough.

  4. Treatments and synthetics have shaken consumer trust.

  5. New problems in Japan – the second largest diamond market – could keep prices soft.