Hello George
You have been busy!
Its a lost cause railing at these two. As I posted Friday, when you answer questions they ignore or spin the answers and when you ask questions they are generally ignored.
On the brighter side, does any one else detect the note of desperation entering both their posts of late, especially the South African Spin Doctor's? In his last to me, he almost sounded hysterical. I honestly could not find a word of logic or any connection to the reality of what I posted.
I think he is truly losing it. Either that, or perhaps it is simply a matter of the closer to home I post, the more alarmist and reactionary he makes his replies in the desperate hope that somebody actually believe his meanderings.
Goalie, are we supposed to be cousins, shills, joined at the hip or simply share a common belief in the future of SUF and the integrity of management?
In light of some of the points George made, the following articles might be of interest to all:
January 1998
Two-Tiered Market A Reality
By Russell Shor, editor,
New York Diamonds Magazine
The two-tier diamond market is now a reality. Market forces will determine small diamond prices while larger stones remain De Beers-protected. That was the message from participants in the second Financial Times Diamond Conference in London Oct. 27.
They drew sharp battle lines across the market and price divide.
De Beers director Gary Ralfe said in blunt terms that producers of small diamonds outside the Central Selling Organisation umbrella will no longer "get a free ride" from De Beers' market protection and advertising. Taking the counterpoint, Argyle's rough diamond manager, Mike Mitchell, and a top Indian diamond manufacturer, Ashish Mehta, asserted that failure to support the small-diamonds market eventually will weaken prices and demand for larger goods.
Antwerp banker Paul C. Goris, a director of Antwerp Diamond Bank, believes the widening gulf between the small and larger diamond markets is a symptom of a fundamental change in the diamond industry away from the De Beers dominated single-channel marketing system.
"We must reconcile to the fact that the days of a predictable and stable market and a single-channel supply, with guaranteed profits, probably are over and that the diamond business is in a transition to a free market environment," he said.
In his presentation, Ralfe warned that the CSO "may not defend prices in certain near-gem or cheaper qualities." Nor, he said, will it allow producers such as Argyle or Russia to move in and gain market share in the sale of these diamonds while De Beers stocks them.
Ralfe drew the "tier" line at three-quarter-carat rough which polishes out to a fifth of a carat. He explained that rough diamonds larger than that size represent about two-thirds of the total value of diamonds sold by the CSO. These stones have continued to rise in price even in the "difficult "90s," whereas those below that size have been falling.
Ralfe stressed that the major reason for this price divide is structural. In recent times, more diamond producers are selling outside De Beers' single-channel system, creating a "vicious circle" in which producers compete for market share and bring downward pressure on prices. This is particularly true of smaller goods, which have been most hit by outside sales.
"In short," said Ralfe, "the more competition there is in any type of diamond, the more we will compete rather than defend that category by stocking."
Part of the reason for this price discrepancy is cyclical, Ralfe added. Japan and other Asian markets have been "sick," leading to a decline in global diamond consumption in 1996 and a probable further decline in 1997, Ralfe said. Falling demand has put added pressure on prices.
Soaring stockpile
De Beers' market defense caused its diamond stocks to increase from a book value of $1.95 billion in January 1985 to $4.7 billion by the end of 1996. The reason it can hold such stocks, said Ralfe, is its enormous financial resources "so strongly visible from its balance sheet and from the close to $4 billion worth of credit that it has with bankers, secured by non-diamond assets."
The stockpile has grown so greatly in value because De Beers has defended the larger stones, "with the result the stock is now balanced toward the better goods," said Ralfe.
In the short term, De Beers has severely curtailed sales of larger diamonds because of the recent market slowdown, benefiting the entire diamond industry, Ralfe said. He went on to say that over the longer term it's likely De Beers will focus its advertising funds "toward diamonds coming from its own mines and those of its partners in Southern Africa rather than giving a free ride to those diamonds outside the CSO system."
Ralfe went even further after the conference, saying that De Beers' marketing people are looking at possibly "branding" De Beers-produced diamonds, though he acknowledged that would be a difficult task.
Saying "No" to two tiers
India's Ashish Mehta and Australia's Mike Mitchell charged that the CSO would make a destructive mistake in pushing a two-tier market.
Mehta, of Bombay's Kantilal Chotalal, acknowledged that prices of some goods - especially smaller, brownish polished - have declined as much as 35% and are declining still, but insisted "the diamond market cannot be segmented because this strategy cannot work in anybody's interest."
Argyle's Mitchell told the group that the CSO's failure to protect price erosion of smaller diamonds is a major reason for Argyle's 1996 departure from the network.
"Neither prices nor volumes were protected despite our contract," he said, adding that a strong, unified marketing effort is now critical if the diamond industry is to pull out of its current cycle of diminishing profits.
"Supply side management is necessary but not sufficient," he declared. "We must now focus more on the demand side of the equation to create programs that move away from selling diamonds as a commodity."
Mitchell told the gathering that over the years De Beers has developed a strong generic image of diamonds - both large and small, white and colored, pure and included - in consumers' minds. "Therefore to denigrate one diamond is to denigrate all diamonds and is a very irresponsible game to play," he said.
He stressed that "all parties with the long-term interest of the diamond industry at heart should vigorously pursue the belief that all diamonds are part of the integrated market."
In the past Ralfe has denied De Beers was pursuing a two-tier market policy, saying that diamond prices were a continuum in which compromising one sector would lead to price erosion up the line.
That's still true, he told the gathering, but stressed the erosive effect was localized to a particular category, not the entire range of diamonds. "(Eroding) prices of Indian stars may affect small sawables, but you will not see them affect 2-carat polished."
CSO executives have always maintained that their control over smaller diamonds is much looser because of reality, not policy. It's a reality that includes the loss of the Argyle production, Russian sales outside the CSO and the large volume of Congo (Zairian) rough which has poured on to the open market in recent years.
Indian tensions
After the conference, a number of top Indian manufacturers complained that price erosion is indeed growing and blamed top CSO executives for adopting what they claim is a contemptuous attitude toward small diamonds. In the words of one Indian sightholder: "At the beginning of this crisis, the price declines were centered in the tiny stones under 50 per carat. Then it was the 5 to 7 pointers that were hit and now we are seeing problems even in melee and 20 pointers."
Indian sightholders, in support of their case that the CSO is pursuing a two-tier market at their expense, cite denigrating remarks reportedly made by CSO people about the small, lower-quality diamonds that are the bulk of their production. "This has created great concern in India that the CSO will no longer support our goods," said one.
Mehta admitted, however, that much of the continued over-production of lower- quality polished stems from a fundamental problem with its industry.
"We are more production-driven than demand-driven," he said, noting that manufacturers will buy and polish rough even if there's no immediate demand just to keep their workers in place and the polishing wheels turning. This has contributed to the large stockpiles of small goods which exist in Bombay and other diamond centers, he conceded.
"This situation needs correcting but it will likely continue as long as manufacturers can cover their costs and not lose money."
As for the future, Paul Goris, the Antwerp banker, said the emerging free market entails less predictability and less stability. He noted that today's situation in smaller diamonds demonstrates that in a multi-channel rough marketing environment, producers will want to keep their inventories at a minimum instead of stocking diamonds, as the CSO has done over the years.
Goris believes the industry ultimately will adapt to this change, provided its members keep a tight rein on their businesses.
--Russell Shor in Radnor, PA (610) 964-4469
********
January 1998
CSO Tightens Screws on Caraters
By Russell Shor, editor,
New York Diamonds Magazine
Larger, better-quality diamonds will grow ever-scarcer through the first half of the year as De Beers' Central Selling Organisation keeps a very cautious rein on sight allocations. In spite of such stringent supply-side tactics, prices of these goods should remain relatively unchanged as demand isn't yet strong enough to force them upward. Turmoil in the worldwide diamond markets makes it unsure if or when that demand will come and a small but significant flow of larger diamonds from the Argyle mine is a further price-depressing force.
In melee and smaller diamonds, the CSO-Argyle split is still tops on the industry's worry list, with good reason. Continued over-supply and depressed prices seem certain as the CSO, Argyle and other outside producers vie for market share. This will keep prices weak.
On the demand side, De Beers estimates that 1997 worldwide diamond jewelry sales fell an estimated 6% in dollar terms and its market forecasters see no reason to expect an upturn this year. The U.S. provides the only bright spot with a projected 6% gain in diamond jewelry sales this year, but this advance is unlikely to offset the grim picture in the Far East, say De Beers' researchers.
Japan and the Far East account for almost half of the world's diamond jewelry sales, but the Asian currency and stock market crashes hit the diamond business very hard in the third and fourth quarters. And there's little relief in sight this year. The currency crash roll-call encompasses some of the most promising emerging diamond markets: Thailand, Indonesia and Malaysia, with 30% to 40% of the regional volume, and Korea and Singapore, with 10% to 15%. Currency devaluations translate into direct price increases for diamonds, which generally are traded in U.S. dollars.
The financial crises had the knock-on effect of hitting all Asian stock markets. They drained a huge amount of wealth from the region and undermined consumer confidence - very bad for diamond consumption.
"We don't see an improvement until the second half of the year at the earliest," says De Beers researcher Jackie Steinetz. She takes Mexico as a model of what's likely to happen, noting that after the sharp devaluation of the Mexican peso in December 1994, diamond jewelry sales were terrible in 1995 but recovered nicely in 1996.
Japan's economy was not directly affected by the turmoil elsewhere in Asia, but sagging consumer confidence in general and a loss of confidence in jewelry following several big bankruptcies and the Central Grading Lab scandal have hurt jewelry sales there. In addition, there's been a worrisome cultural shift away from diamond engagement rings.
Overall, Japanese diamond jewelry sales fell 12% in yen terms last year, 21% in dollar terms.
Steinetz says there's hope for a slight improvement this year because the industry is uniting to address its problems and De Beers is shifting its advertising strategy to rekindle desire for engagement rings.
In Europe demand has been improving slowly, with sales of large stones rising quickly in Germany for the first time in several years. "Carat-plus sales were up 78% last year and half-carat to one-carat sales were up 33%," says Steinetz. She credits De Beers' "Modern Woman" solitaire advertising campaign for the turnaround.
Battles for market share
On the supply side, the gulf in the two-tier market will grow ever wider.
At the top end, rough dealers and major manufacturers agree the CSO must keep very tight control to keep trade confidence alive in what everyone acknowledges will be a difficult year at best. The CSO is following such a course in an effort to bolster prices in the half-carat-plus market.
"The CSO cannot do much more than cut sights until goods are so scarce that people will be willing to pay more for them," says one executive who believes there won't be a CSO price increase until there's a "major turnaround in world markets."
The picture at the lower end of the market is even bleaker with the specter of an all-out price war sapping confidence and profits, Antwerp dealers warn. Haik Arslanian of Arslanian Freres says prices of rough under a half carat fell 10% last year with no relief in sight. "Things are still very weak in that type of rough," he complains, "and there won't be any improvement until markets get better and take the excess goods."
He's one of many top Antwerp rough dealers who believes he's a loser in the market share battle.
Isi Horowitz of IDH in Antwerp explains: "What's happened is that the CSO has replaced with its own production the $350 million worth of diamonds it lost when Argyle went independent. At the same time, Argyle is still selling its $350 million worth on top of the CSO goods." Worse yet, say manufacturers and rough dealers in Antwerp and India, Argyle has lowered prices on its rough, something the Australians steadfastly deny.
"Argyle definitely lowered prices of many goods after the CSO's big sights early last year," says Sammy Doppelt of S. Langer Diamonds, Antwerp. "This renewed the downward price spiral on rough that hadn*t been affected before." Indian manufacturers say prices of the cheapest Argyle rough have been in free fall. "What used to be offered at $2 per carat is now about 70 cents," says one who declined to be identified.
Argyle's rough diamond manager Mike Mitchell insists his company has "kept strong prices" and is not engaging in a "dash for cash." He blames the CSO for sagging prices, saying that De Beers "denigrates" lower-quality diamonds by gearing all of its advertising to the top end via the solitaire campaigns running around the world.
Another profit skid?
All of this adds up to another bad year for profits. Everyone from De Beers on down agrees that's certain. And there are no solutions in the offing.
"On paper we make 3%-4% on some CSO goods right now," says one Antwerp sightholder. "But when you factor in the two months it takes to process goods and an additional six to eight months to get paid for them, that little bit of margin disappears. We need a minimum margin of 6%-8% to make an actual profit today."
There is no magic solution because problems are too complex and "go all the way through the pipeline to the retail counters of the world," says Dani Shein, managing director of I. Hennig & Co., the largest CSO diamond broker. "The CSO's fully aware of the lack of profits within the industry, but we all must be realistic and work for a gradual, cautious solution to this problem."
Shein believes some shakeouts are inevitable among dealers and some manufacturers, especially in the middle of the pipeline where dealers have been squeezed hardest. "Who will prevail?" he asks. "It's conventional wisdom: the big companies which have concentrated on efficient, streamlined operations and the smaller niche players which offer something different."
The CSO's old solution of helping profits by putting "cookies" (a reasonably-priced larger stone to lower the average price of an expensive assortment) into sight boxes is no longer an option. "That won't work any more because such stones command peak prices right now," says Doppelt.
The CSO's Anthony Oppenheimer agrees that it can no longer sweeten sight boxes even if it wanted to, but for different reasons. "The days when [former CSO director] Monty Charles could move goods around to help a client are gone," he explains. "Today there's little leeway in sorting because government valuers working for Botswana, Namibia and other producers check goods very carefully and complain if they are undervalued."
Oppenheimer blames part of the profit bind on expensive outside rough. "Many CSO clients have to buy outside goods to augment their needs and quite often they are more expensive than our rough," he says. "So, in the end, we are talking about lack of profits on a mix of goods, not just ours. And if we lower our prices, it will just make way for more purchases of others' goods."
The "outside" price factor
Outside non-Argyle rough is very expensive and will remain so, say leading Antwerp rough dealers.
"In Angola the competition is to get the best goods, not to sell them, and it is very intense. This pushes prices way up," says one key dealer with long ties to the country. "This is because many mining companies have moved in during the past few years so it's not just a bunch of informal diggers anymore."
Despite production which has tripled in the past two years, the dealer doesn't believe Angola's diamonds pose a threat to stability in the top half of the market. "First, there's no supply overhang like you have in Russia," he says. "Second, these are the hottest goods around and it's still a sellers' market. Third, prices are very high so there's not much profit in these either."
Rough from other African countries is just as costly, adds Doppelt: "There's more competition than ever between buyers. And in the Congo Republic (formerly Zaire), the costs of doing business have gone way up as well. Security has to be tighter and all of the transactions must be in U.S. dollars - even bakshish - instead of the worthless local currency."
Oppenheimer says De Beers is meeting with industry representatives in each diamond manufacturing and trading center to get a handle on the problem. But he stresses, it has affected De Beers as well. "Our diamond profits haven't been that brilliant and our diamond account was down last year," he says. "Most of our profits come from non-diamond operations."
A report from South African securities analyst James Picton indicates that De Beers' diamond account fell 31% from 1989's total of $1.1 billion to $803 million in 1996, despite recovery from the early '90s recession and opening of the Venetia mine. And De Beers' 1989 cash reserves of $1.7 billion dwindled to $73 million by 1996. The chief culprits: surplus stocks and a sagging Japanese economy.
"As the industry gets squeezed, we get squeezed," says Oppenheimer. "We're cutting costs too, but other costs, particularly advertising, are going up."
--Russell Shor in Radnor, PA (610) 964-4469
Regards
P.S. These might also be of interest:
nrcan.gc.ca
nrcan.gc.ca |
