Experts See ‘Rocky Road’ Ahead for Industry

The diamond industry might have some rocky times ahead of it, speakers agreed at the recent Rapaport International Diamond Conference, held in October at New York’s Waldorf-Astoria.

The event drew a virtual Who’s Who of the industry, with most noting the industry was in a period of great change.

“The market as we used to know it is gone,” said Matthew Fortgang, president and CEO of M. Fabrikant and Sons. “As my father would say, ‘It’s a history lesson.'”

And Martin Rapaport, organizer of the event, said the industry is “no longer sitting in some idyllic little world; we are in the middle of the volcano here. We can’t just sit back and relax.

“Diamond manufacturers today are fundamentally suckers,” he added. “We should be in the business of making money, not making diamonds. If you add value, then you are entitled to the profit from that added value. There is no more profit in flipping diamonds than flipping burgers.”

Among other points made at the daylong event:

  • Members of a retail panel agreed that the renewed focus on brands and marketing brought on by Supplier of Choice was generally a good thing. “It was initially a little crazy, but people are more focused now,” said Mary Forte, CEO of Zale Corp. “It got people to take steps, and a lot of them are positive.” Forte also noted that if diamond prices rise too fast, “the consumer will resist it. If prices go up, the increases need to be rational, they need to be well thought out, they need to be even.”
    On the subject of “conflict diamonds,” Susan Jacques, president of Borsheims in Omaha, said the industry “was very fortunate that the consumer backlash was not worse than it was.”

  • Leading banker Peter Gross of ABN-AMRO gave his “top 10 concerns” of the year. Among them: Industry bank debt is too high; payment terms are too long; there is a build-up of inventory in the cutting centers, which he estimated at $1.5 billion to $2 billion; producers have increased rough prices “beyond reasonable levels and polished is not following.”

  • Elliott Tannenbaum of sightholder Schachter and Namdar included some surprisingly pointed criticism in his speech about his search for the rough diamond supplier “of his dreams.”

“I’m a very frustrated diamond manufacturer,” he said. “I’m looking for a new kind of rough supplier—one that is dedicated to meeting my requirements.”

He noted that his longtime supplier—the DTC—”still has a period of re-engineering to do” and has not been able to find new diamond sources. “The DTC lagged behind in securing new and incremental rough supplies as a result of being distracted by [its] Supplier of Choice initiative,” he said.

As a result, even bigger changes may be brewing.

“DTC, for business and regulatory reasons, has given up its guardianship of the industry, although it is still the undisputed leader,” he noted. “But who can say it will continue to be five or 10 years from now? … This is not as implausible as you might think. No one would have thought 15 years ago that a company like AT&T could virtually disappear. For decades, it had end-to-end control of America’s telecommunications network. It was deemed a cartel, and broken up through governmental regulation. Sound familiar?”

This would not work to the industry’s benefit, Tannenbaum maintained.

“[There would be] no more development of the category to build desire with consumers,” he warned. “No more of the new product concepts, like three-stone jewelry and right-hand rings, that have propelled the industry for the last five years. No more marketing dollars spent to create demand for the products we all manufacture and sell. Synthetics could become a dangerous issue. And the Kimberley Process would become an empty promise. The DTC may not be the supplier of my dreams, but is there anyone who can fill their shoes if they drop out of the game?”

He noted that a better role model for De Beers would be IBM, which has maintained its hold on the PC industry by becoming “true partners” of the companies it works with.

“Just imagine where our industry—from retailer to rough producer—could go if it were led by a company like that,” he asked.

The Supplier of Choice initiative, Tannenbaum said, “was designed as a way for De Beers to aggregate purchasers on their own terms. It was not built to benefit individual business models, but to support and validate their own. Since the DTC could no longer maintain its own ‘verticalization,’ it pushed the concept downstream to the sightholders. Vertical partnerships were created between manufacturers and jewelers that served only to tie the hands of both.”

He further argued “strong retail organizations or jewelry manufacturers don’t really need full partners. They prefer the flexibility of choosing among competing suppliers. As a result, during the last few years, many strong sightholders concluded partnerships with weak jewelers—companies that faced liquidity problems and that saw sightholders more as bailouts than as partners.”

He also said that Supplier of Choice was, in a way, too successful.

“It over-stimulated the industry, which, in turn, created a demand that the DTC could not keep up with as stockpiles disappeared and development of new sources of rough were not yet on line,” he said. “Other rough suppliers are now filling the gaps.”

Tannenbaum noted that the DTC is “still the strongest horse in the race and certainly has earned my loyalty,” But he warned: “When the leader of an industry enforces conformity, they can achieve stability—but that kind of forced stability can lead to mediocrity. And once that happens, others will be there to fill the gap between what customers get and what they want.”

  • Maurice Tempelsman of Lazare Kaplan, “took inventory” of the industry during this period of “extraordinary change.” The biggest change, he noted, is that a single producer is no longer propping up diamond prices by holding large amounts of buffer stock.
    “The risk that is inherent in our product is no longer contained, obtained, or managed at one point in the diamond pipeline,” he said, “but instead runs freely along the whole of that pipeline, with the potential of rupturing through surges at any given point.
    “Our industry is like a fleet accustomed and even designed to sail closely to shore, always close to a port of safety. Now suddenly, for the first time, [it’s] veered out into the open sea, where any sailor will know a very different world awaits.”
    In this new landscape, the industry has made an adjustment to being driven by demand, he noted.
    “On the surface, [things seem] to be progressing reasonably well. The rough market has been [hot], allowing buffer stocks to be unloaded without negatively impacting prices. A bevy of new branding and marketing initiatives have been announced, and downstream spending on marketing has undoubtedly increased. The shortening and unscrambling of the rough-to-polished pipeline has commenced, with some pain but without business failures or disruption on a large scale.”
    Yet beneath the surface, Tempelsman warned, a murkier picture arises.
    “We know that there is a dramatic growth of inventory in the middle of the pipeline. What has happened, in effect, is a transfer of the buffer stock, and with it a transfer of responsibility for managing systemic risk, from a single, well-capitalized, and expert institution to a multiplicity of smaller fractiously competitive players who are both unaccustomed to the task and heavily dependent on bank credit.”
    All that has led to unprecedented bank debt.
    “Many who are heavily indebted are simultaneously offering unrealistic and unsustainable terms to their retail customers,” he noted. “We know too that there is a disconnect between the price curves of rough and polished, squeezing margins at precisely that place in the pipeline where new investment in stoking retail demand is supposed to occur. And finally … there are stagnant margins at the retail level, which cannot be good news for an industry that has hooked its fate to retail expansion.”
    He concluded that “far from passing the test … of the transition from supply driven to demand driven, we have simply succeeded so far in avoiding that test.”

  • Similar warnings were sounded by Pravinshakar Pandya, managing director of Revashankar Gems, who said that rough producers “need to help the industry not to indulge in speculation. If you raise prices, do it one or two times a year, but raising them all the time does not reflect a sound policy.”
    He also warned that cutting factories in diamond-mining countries “should make economic sense. If the factories are subsidized or cheaper rough is provided, that goes against the free trade policy of the World Trade Organization. If the factories are started for political purposes, they may create employment for a certain number of locals but I don’t think it will go beyond that because then the economics will take over.”

  • William Fox, director of the Financial Crimes Enforcement Network for the U.S. Treasury, asked the industry to “help us ensure that criminals and terrorists are not creeping into your sector. Diamonds clearly have characteristics that made them so susceptible to abuse by criminals and terrorists,” he noted. “They have high value, can pass undetected through borders, and can serve as a medium of exchange.”
    Fox hoped the new Patriot Act provisions that jewelers are being asked to follow—which at press time had not yet been issued—would help end money laundering through jewelry in a way jewelers could handle.
    “We will do all in our power to make sure that the system we are designing is as rational and unburdensome as possible,” he said.