Sunday,March 13,2005
Industry Analysis: Diamond Outlook Shows Dwindling Supplies, Rising Prices
Russell Shor
Dwindling supplies of rough coupled with increasing demand for polished will drive diamond prices ever higher, but will also force major consolidations within the industry.
This was the conclusion of several key diamond executives who addressed the Rapaport International Diamond Conference Oct. 20 in New York.
They predicted that shortages of rough diamonds in coming years will run square against the numerous industry marketing and branding initiatives. The resulting combination of rising prices and high advertising and marketing costs will force many firms—even large, well-established companies—to either consolidate or vertically integrate with retailers, or go bankrupt.
Moshe Leviev, of the Leviev International Diamond Group, told the audience of more than 280 that shortages of rough diamonds over 20 points, especially high-quality goods, will be a dominant factor for the next decade.
“Diamond stocks held by De Beers and other mining companies totaled over $22 billion a few years ago. Now these are down to $3 to $4 billion – essentially working stocks, meaning there is no overhang.”
He added that he believes there will be no major new “breakthrough” diamond mines coming on line for five to eight years at a minimum, so shortages will get worse as demand rises.
However, there are several potential large mines in Canada and Russia that could be developed within that period if procedural and legal problems can be ironed out.
Dilip Mehta, chairman of Rosy Blue, an Antwerp-based multinational diamond firm, noted that the industry is entering an era of fundamental change: from an excess of supply over demand, to the reverse.
“We’ve seen how rising demand helped De Beers liquidate nearly all its buffer stocks of diamonds and, assuming that demand keeps rising, production will not be able to keep up.”
Both warned that prices for diamonds will rise significantly in coming years.
However, De Beers’s Diamond Trading Company (DTC) has set a growth target of 50% in worldwide diamond jewelry sales — $84 billion — “in the next 10 years,” according to Lynn Diamond, director of the Diamond Promotion Service. It’s apparent that most of this growth will come from price increases, not rising unit sales, because of supply shortages, added Ken Gassman, research editor for the Rapaport Diamond Report.
Leviev stressed that the DTC’s Supplier of Choice initiatives, which require sightholders to fund costly marketing and advertising campaigns to increase diamond jewelry sales, will take their toll on diamond manufacturers.
“First, there is no guarantee that sufficient rough will be available to support all of these initiatives. Second, the market cannot support 130 different diamond brands. So we are likely to see many companies bankrupted by high costs.”
The shortages in quality rough diamonds ultimately will lead to a major reorganization of the industry, with major retailers and diamond suppliers vertically integrating, said Elliot Tannenbaum, who heads the Israeli operation of Schachter and Namdar.
“By 2010, we will see suppliers taking major stakes in retail jewelers. By 2028, we will see a situation like the oil companies, where a few major players have operations integrated from mining to retail. Retailers not attached to major suppliers may have difficulty finding supplies.”
Martin Rapaport, publisher of the Rapaport Diamond Report and organizer of the conference, stressed that future retail competition will be geared more toward marketing and branding initiatives than price.
“In short, strategy will be more important than skill.”
The future, however, is less worrisome than the current industry debt and inventory situation, according to Peter Gross, who heads the diamond and jewelry division of ABN AMRO Bank, the industry’s largest lender.
“Before we get to the supply shortages, there is an excess of polished inventory hanging in the market and an excess in manufacturing capability that is driving the price of rough to unrealistic levels.”
He said the excess manufacturing supply is causing the current spike in rough prices, even as large quantities of polished are still sitting in dealers’ safes. This has created an unhealthy situation.
“The rising cost of rough and lengthening credit terms of U.S. retailers has contributed to a very sharp rise in industry debt during the past year: from $6.88 billion to $8.66 billion. Most of that increase is from India, where the debt nearly doubled in three years.”
Gross said the rising debt levels are not a concern in themselves, but that there is a decline in the “quality” of the debt – rough price increases and high inventories of polished stock are squeezing profitability from the industry.
“Many companies are actually losing money today,” he noted, adding that diamond manufacturers must rein in the ever-lengthening credit terms demanded by retailers.
Retailers, however, say they are being squeezed as well.
Terry Burman, CEO of Signet Group, which includes Kay Jewelers and Jared Galleria, reported that consumers are demanding greater value for their money which, in turn, is shrinking gross margins.
“We must attack the margin problem by getting a greater share of the consumer’s wallet. Of course, we push suppliers as hard as we can for terms, but we realize everyone has to make a profit.”
Another challenge, said Ed Bridge, president and joint CEO of Ben Bridge Jeweler, Inc., is the increasing numbers of treated gemstones and synthetics in the market, adding that disclosure of such goods is necessary to maintain consumer confidence.
GIA President Bill Boyajian stressed that there is a legitimate place in the industry for treated and synthetic gems, provided they are disclosed. However, he added, there are rogue treaters who refuse to disclose treatments.
The consequences of nondisclosure can be heavy, he noted, citing the collapse of the emerald market following consumer concerns over unstable fracture fillings, a “slide” in ruby prices following a new high-heat treatment of Mong Hsu goods that recrystallized some material into a kind of synthetic, and the collapse in prices for beryllium-diffused corundum. He also cited the “volatile” reaction against GE-produced HPHT-treated diamonds.
Two high-profile producers of synthetic diamonds promised full and complete disclosure when their products are market-ready.
Carter Clarke, co-chairman of Gemesis Corp., and Bryant Linares, president and CEO of Apollo Diamond, Inc., both promised “full disclosure down the line” for all their products, including laser inscriptions identifying them as lab-created diamonds.
Both also stressed that their products are designed to fill a consumer desire for high-quality diamonds at affordable prices.
Clarke, whose synthetics are grown by the traditional HPHT process, said Gemesis will offer diamonds equivalent to Fancy Intense and Fancy Vivid yellow at a much lower cost than comparably colored natural diamonds, and will channel distribution through reputable retailers and jewelry manufacturers.
Linares, who helped adapt chemical vapor deposition (CVD) technology to create gem-quality synthetic diamonds, explained that the “highly transparent, highly pure” CVD-created diamonds will be a new source of high-quality diamond that will give consumers new price options.
He told the audience that CVD-created gem diamonds are identical to mined diamonds in all ways that matter to consumers. They have a different spectroscopic signature, but are “predominately type IIa, with high purity because they have few inclusions. In short, with respect to the 4Cs, they are identical to natural diamonds.”
Both Linares and Clarke stressed that their products will fill a consumer niche for quality diamonds at affordable prices. Clarke said his products will be priced similar to G-VS diamonds of comparable weight. Linares has not yet determined prices for Apollo diamonds. Burman, however, believes the prices that consumers will pay for synthetic goods cut off far below their expectations: “We’ve found little consumer interest above $500.”
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