Asian Crisis Buyers’ Market

Early this year a group of Korean retailers helped organize a series of “Patriotic Diamond and Gold Buyback” drives to help their country’s beleaguered economy recoup some precious foreign exchange. Before the first quarter was out, Korean consumers sold back more than $50 million worth of diamonds through Israeli and Antwerp diamond dealers who had backed the local retailers’ drives. The diamonds’ ultimate destination: the American market.

The Korean drive and the less organized procession of diamonds streaming out of Asian dealers’ inventories are the main reasons American retailers will continue to have their pick of diamonds in most sizes and qualities this year, despite De Beers’ Central Selling Organisation’s (CSO’s) drastic cutback in its sights.

“It’s still a buyer’s market out there,” says CSO’s Harry Garnett, who heads its market liaison division.

With the Japanese market still slowing and many other parts of Asia in free fall, Garnett worries the world is filled with too many diamonds chasing too few buyers. “This is the root cause of the malaise we’re in today,” he says, noting that American retailers still have the upper hand in terms and prices.

This year, sales have remained strong throughout most parts of the United States, coming off a 9% increase last year. Retail sales in general were the strongest in seven years through the first quarter, and diamond jewelry has kept pace, running about 7% by De Beers’ estimates over the same period in 1997.

However, the diamond trade won’t reap all of that reward. Competition from overseas diamond dealers has cut already slim profit margins even thinner for dealers and wholesalers.

Most say they don’t blame retailers for using this opportunity to wring out the best terms possible but believe that memo deals are sapping industry strength with high carrying charges and potentially damaging high returns.

Getting stones at 50% off Rap. The Korean buy-back scheme is especially troubling to many U.S. diamond dealers because Korean consumers favor the top colors and prime makes in quarter carats to caraters that have become so popular among the better jewelers here. Moreover, the buyers picked up these high-quality diamonds at distress prices, which could allow them to undercut Americans in their own market.

Korean press reports claimed that major department stores, in league with Israeli and Antwerp dealers, took advantage of consumers in need, offering below bargain-basement prices for their stones – as low as 50% below Rapaport.

Consumers complained the buyers were paying 25% or less than their gems’ actual values in dollar terms, and the trade worries that this would enable those dealers involved in the buy-back to dump them in the United States at below market prices and still make a profit.

Garnett doesn’t discount the possibility of Korean dealers dumping their goods on the American market but says thus far the numbers of Korean diamonds aren’t high enough to create a long-term destabilizing situation.

The situation with smaller diamonds – while improved from the trying days of late 1996, when Bombay was awash in inventory – remains dicey. On the encouraging side, Garnett says the Draconian cutbacks in CSO sales this year – 40% to 50% of first-half 1997 levels – are beginning to help stabilize prices of diamonds under a carat.

Asia’s economic turmoil and the subsequent “destocking” in the region caused prices there to fall as much as 10% on half carat to carat goods, especially medium colors, with even steeper declines on smaller goods.

While prices and inventories of smaller goods stabilized in the spring months, dealers of such goods are still offering overly generous terms to American retailers to move excess goods and get the upper hand in market share. Many are tempting retailers with long memo deals and terms that American dealers have been trying to get away from.

Jeff Fischer, president of the Diamond Manufacturers and Importers Association, says if the newcomers “start making a lot of very bad business decisions, it will only undermine everyone’s future. The basis of business in America is building a relationship – which means sticking with a customer through good times and bad – not just saying something that will get you in the door.”

Here come the Israelis. In addition to selling their excess inventories in the United States, a number of foreign companies are moving there for the long haul. The most high-profile arrivals are from Israel.

Last year, Lorenzi Diamonds, Israel’s third biggest exporter, set up shop in New York, hoping to make the office its “flagship.” Meanwhile, Lev Leviev, former owner of L.I.D., is said to be setting up a New York office for his new company, L.L.D.

What worries dealers is that the new arrivals are entering an already crowded market. “It could be a disaster,” says an industry banker. “Where is all the inventory going to go?” But Krista Retto, vice president of Lorenzi, argues there is more than enough room in the market.

Australia’s Argyle Diamonds, the world’s largest single producer of smaller diamonds, has also made a concerted marketing effort in the United States through the Indo Argyle Diamond Council. Its target: mass merchandisers and large chains.

Argyle’s rough diamond sales manager, Mike Mitchell, says the Asian crisis and the subsequent fall in prices show clearly that De Beers’ two-tiered market concept – protecting half-carat-plus diamonds while letting smaller goods float in the free market – does not work. (De Beers denies it’s intentionally pursued such a strategy, saying it has evolved from its lack of control over the smaller goods sector.)

The Asian crisis has caused prices to weaken all the way through to caraters, says Mitchell, who stresses that restoring the demand side in emerging markets and hard-hit economies should take precedence over everything else.

“First our research shows that 62% of all diamonds sold in the United States by volume are under 17 points, so De Beers’ two-tier market can cause major problems. Secondly, it’s apparent now that price declines in one area [of diamond quality] will eventually cause declines in other areas. This is why we have to work to recover demand,” says Mitchell.

Big demand for big stones. One area in which supplies are dwindling is very large, high-quality diamonds – 5 carats and up. Sales of such diamonds have doubled or more in the past two years, and retailers see no signs of a slowdown. Figures are lacking because De Beers’ retailer surveys top out at $10,000, whereas most of these diamonds retail in the six figures. But the firm’s market watchers agree the boom is real, even if they aren’t willing to increase allocations of such goods to New York sightholders.

American diamond dealers say they’re hard pressed to keep up with demand for quality goods. They acknowledge the buyer remains king in the low-quality arena: yellowish stones that won’t face up fancy color and highly included stones are difficult sales today.

“For a while these were moving in Asia, but no more,” says Amir Goldfiner of Rahaminov Diamonds in Los Angeles. “If you get G colors and SIs or better, they move right away – in fact, we’ll buy them even if we have no customer lined up because demand is so strong.”

The boom in big diamonds is not all easy money. The Rapaport Diamond Report lists prices for stones up to 5.99 cts. but even above that, prices for diamonds are set at the major auctions and don’t allow for hefty profits. Some say they’re getting by on 10% margins, but that’s still $10,000 on a $100,000 stone, they concede.

“Margins are getting smaller because consumers have many more options of buying such stones now,” says Susan Jacques, CEO of Borsheim’s in Omaha, Neb. One option is the auction houses. They’ve made a concerted effort to go after well-heeled private buyers all over the United States.

New York sightholders remain hopeful that De Beers will stick to its small sight policy this year to soak up the foreign goods flowing into the country. De Beers executives promise to do just that, though analysts believe there will be enormous pressure to relent. Says one analyst: “De Beers’ CSO sales will be $3.1 [billion] or $3.2 billion this year compared to $4.64 billion last year. That’s a significant decline in sales, especially when it’s somewhat voluntary.”

Garnett, however, says De Beers will do “whatever is necessary to restore market stability. This is our traditional role.”

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