Rapaport Conference Looks at ‘Confusion and Uncertainty’

The abundance of challenges the diamond industry faces was on display at the third Rapaport International Diamond Conference in September. From synthetics to out-of-control rough prices, speakers noted that the industry was in a sometimes-tumultuous period of change.

“Never before has there been so much confusion and uncertainty as there is in the industry today,” said Martin Rapaport, the event’s host and moderator. Following are some of the highlights of the one-day conference.

State of flux. The industry is undergoing so much change that Saul Singer of Rapaport Research admitted, “We really can’t predict what will happen five years down the track.”

But Singer did predict that both rough and polished prices will continue to increase, especially in better goods. “There have been no world-class diamond discoveries this decade, [which] means there will be no significant rise in the quantity of rough diamonds produced,” he said.

He noted that the De Beers’ Supplier of Choice policy had accomplished its goal of greater advertising and increasing demand. “The question,” he said, “is at what cost?” Singer added that Supplier of Choice has created a situation where “more diamonds are being offered to less people.”

Before SoC, he said, around 60 percent of the world’s diamonds were distributed to 120 sightholders. At present, that amount is being distributed to 93 sightholders, who are now more restricted in what they can do with the stones. And since the other major miners also have “sightholder” systems, more than 60 percent of the world’s rough diamond production is already committed to certain players, with only 40 percent going through the secondary markets.

These conditions are further boosting rough prices, and Singer noted that’s taking a toll on manufacturer profits. The major market and bargaining power is now at the two “bookends” of the pipeline—retailers and miners.

Singer also addressed the other major market trend: that most of the growth in the diamond business is coming from the high end, while the middle market is largely stagnant. Singer noted that while Tiffany is experiencing double-digit sales growth, Zale has posted only marginal sales growth and a decline in earnings.

He said the middle-market segment is suffering from increased competition for consumer dollars. “In the past, a piece of diamond jewelry retailing in the $200 to $500 price range would mainly compete with other luxury and intimate products,” Singer said. “Now it is competing with products such as stylish housewares, DVD players, smart phones, GPS navigation systems, as well as traditional luxury and intimate products. What is more of a status symbol today for an upwardly mobile female consumer: a self-purchased platinum four-prong diamond stud earring retailing at $450, or a self- purchased multifunctional handheld PDA retailing at the same price?”

Singer said rising oil prices probably will not affect overall diamond sales, but they could depress price points. Ideas and emotion. Richard Lennox, of the diamond account at JWT, urged attendees not to underestimate the power of ideas. “Our tendency is to focus on each other [in the industry],” he said. “But we are in real danger of being outthought.”

He noted that JWT was looking for “beacons”—powerful ideas such as the right-hand ring or the past, present, future positioning for three-stone jewelry. “We need to go beyond physical attributes to attach emotional ideas to jewelry,” he said. “Meaningful, resonant, and surprising ideas are the solutions to combating the commoditization of diamonds.”

Lennox’s words were seconded by Shmuel Pluczenik of Universal Pacific, whose Escada jewelry held a fashion show. “Consumers do not lie awake dreaming of clarity, color, and cut,” he said. “We need to rekindle the emotional fire of diamonds.”

Sierra Leone. The emotional high point came from the talk by Chief Mohammed Dhaffie Benya V, chairman of the Paramount Chiefs of the Eastern Region of Sierra Leone, who spoke of diggers in his country who earned little money for their work but had no options but to keep digging. “We need your knowledge, your know-how, to help us,” he said to the attendees. “When you leave here today, remember what I’ve said and think of the people of Sierra Leone.”

Prices, treatments, ethics. In a typically energetic speech, Rapaport said the industry was facing a supply shortfall and predicted diamond prices would keep increasing. “Diamond prices will head northward—faster than we expect,” he said. “I’m predicting even more speculation.”

He noted that technology was changing the business and said everyone in the diamond business should mark each parcel of stones “natural, untreated.” “If it doesn’t say ‘natural, untreated,’ maybe you should assume that it isn’t,” he said. “The industry can no longer assume that things are kosher.”

Rapaport added that his company was involved in trying to solve the problems faced by artisanal diggers in Africa. “If we don’t address this stuff, we are toast—from a business but also a moral and ethical standpoint,” he said. “There is a general trend of the diamond industry getting its act together, becoming more formal. Things like the Patriot Act are taking this industry to a better, higher level.”

Synthetics. Gemological Institute of America president William E. Boyajian said that while synthetics are a growing threat for the industry, the GIA lab is not seeing them in big numbers.

“Synthetics are difficult and expensive to create,” he said. “It has taken longer than anyone thought, and it will take much longer than anyone thinks. When I talk to the public media, I say: ‘Go to 100 jewelry stores, and ask them if you’ve seen synthetic diamonds.’”

Creating colorless synthetics is particularly challenging, Boyajian added. “We know of no commercial production of colorless synthetic diamonds,” he said. “Most of the synthetics are fancy colored, which is good, since most of them are already sold with reports.”

He said the industry has to learn to “not be afraid” of the stones. “Is it going to overtake the industry in a year or so? No,” he said. “Will it find a niche? In my opinion, yes it will.”

Boyajian said GIA was reconsidering the way it referred to synthetic stones. “Is the word ‘synthetic’ confusing?” he asked. “Yes it is. Consumers don’t know what it means. They think it means fake or phony. We are giving consideration to the word ‘lab-grown.’”

Nomenclature. During the day’s syn-thetic panel, Chuck Meyer of Gemesis defended the name “cultured,” which he said consumers understand to mean “man-made.”

David Benderly, chief executive officer of PhotoScribe Technologies, sounded a downbeat note when he argued that the industry is not as able to recognize synthetic and treated diamonds as it thinks. “Most of you have already sold synthetic or treated stones without knowing it,” he said. “Go back to your parcels and you will find some interesting stories.”

The Internet. In the day’s wrap-up, Minneapolis retailer Mark Moeller argued that well-established jewelers don’t have to worry about the Internet.

“Consumers are not only buying the diamond, they are buying your company and your history,” he said. “You have to have something behind your product. It’s not about the product; it’s about credentials, and it’s about your story. And if you don’t have a story, don’t bother.”