When we launched this website at Rubel & Ménasché, our ambition was to get to know the diamond industry better. And to do our best to help you understand it!
Edahn Golan, an analyst whose articles we liked to publish, decided to branch out in 2014. But we still wanted to get his view on the diamond industry: so we invite you to a three part interview on the subtleties of the diamond world.
Here is the first part of an open discussion.
On the program: an overview of 2014, current challenges for the sector, the difficulty in understanding rough and polished prices and the hopes for 2015 as the year begins.
– Hello Edahn, how are you?
I’m very well, thank you. The past year was a very busy one and therefore a very interesting one. Many people in the financial sector have lots of questions about the diamond industry and many from within the industry are working hard to launch innovative initiatives, which is good for the diamond jewelry industry at large and opens up many opportunities.
– No need to introduce you to our readers! They are all used to read you here and we hope it’ll continue. But we talk about it later…
So, thanks for answering our questions. Let’s talk about the 2014 year in the diamond industry. In your opinion, what shall we remember? What could be the statement for end of the year?
This was a very unusual year for the diamond industry. Polished diamond prices were rather stable in the first half of the year and rough diamond prices were such that diamond manufacturers earned well. However, during the second half of the year, rough diamond prices continued to firm up, while prices of polished sank, leading to a very tough situation for manufacturers. This took place against a backdrop of a changing landscape: shrinking financing, anti-corruption laws in China, shifting tastes among American consumers, the rise of recycled diamonds and lab-grown goods among other. Each one of these played its part.
Diamond trading, manufacturing and prices are linked to the availability of financing. The closing of Antwerp Diamond Bank (ADB), the more stringent demands on liquidity by and from banks as well as a less favorable lending environment led to less financing, especially to mid-size and smaller companies.
The new anti-corruption laws in China led to a decline in spending on “gifts” and this affected sales of diamond jewelry as well as high-end watches and whiskey in China. In the US, we are seeing indications that consumers are looking for “more for less,” buying more items at lower price points. This is a reversal of the trend seen in 2008 and even more so in 2009-2010, of less for more, which was spending on a very worthwhile gift, such as a nice diamond jewelry item. At the time, price points were surprisingly high. In 2010, the diamond industry had a great year.
At the same time, there were smaller influencing issues such as the recycled diamonds shifting to bigger diamonds (because of more divorces and less distress sales). Lab-grown diamonds started to show up on the horizon too as a bona-fide item. It still has a very long path ahead until it establishes itself, but it’s starting to head that way.
[two_third]It’s important to add that not all is negative and there were some good things happening. Alrosa’s rough supplies are very attune to the market and goes mostly to contracted buyers which adds to the stability of the market. There is a growing understanding that greater transparency is needed and many companies are adapting to that. This in turn will make it easier for banks to provide financing and at the same time improve the perception of the diamond industry in the eyes of consumers, mostly in the US and Europe.
The US economy is growing and I hope it will pull behind it the rest of the world. Also in the US, expenditure on jewelry is rising – the average spend is estimated at more than $600 per household.
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“There is a growing understanding that greater transparency is needed and many companies are adapting to that.”
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– So, what could we expect for 2015? Any insight
[two_third]I wish I knew! But there are a few points I think we should pay attention too. The year starts with very serious concern about the supply of rough diamonds, specifically their prices but also the composition of goods. Some rough diamonds are in demand and some are not. In that context, the old contracted supply model of agreeing years in advance on what goods a Sightholder buys from De Beers may need to be re-examined. In terms of polished and consumer demand, the early indicator will be retail replenishments after the New Year and before Valentine’s Day in mid-February.
Internally, if financing, prices and transparency improve, then we have the basics for a better year. Externally, a continued improvement of the global economy and stable political environments will do the trick.
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“The old contracted supply model of agreeing years in advance on what goods a Sightholder buys from De Beers may need to be re-examined.”
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– These past ten years, the diamond industry has transformed itself and known big changes. According to you, what are the biggest challenges it has to take up right now?
Investment in marketing is essential. I don’t have any smart advice on how to do it, but if we look at total luxury consumption, diamond jewelry is losing market share and that is very unfortunate especially in light of the durability of diamond jewelry. Perfumes evaporate, cars lose their value, handbags wear and shoes tare – but diamond jewelry endure the test of time. Diamond jewelry, therefore, have an advantage over many other luxury items and this is why they should have a growing market share and provide their owners with many years of enjoyment!
-You know, I’m always surprised by the particular diamond pricing system and how the rough market impacts the polished one’s!
The big conundrum! A group of complex considerations come into play when De Beers and Alrosa set rough prices. They take into account polished prices, premiums paid by the secondary market (when they rise, miners raise prices), cost of polishing, tender results and other data into account. In addition, they look at their own expenses such as labor and energy, and let us not forget expectations of their stockholders. They also add the mysterious “gut feeling” factor that may cause them to add or subtract from the price based on experience and desire.
If we look at those considerations, rough prices should come down because the price of polished is lower, premiums are near nil, the price of oil is down and tenders are not showing enthusiastic results.
As for polished diamonds, retailers’ willingness to pay more for diamonds is an important component in changing polished prices, which is an oddity. They accept changes in the price of gold and silver as a given, almost a Force Majeure, but reject this notion when it comes to diamonds, which is another reason why the industry needs transparency so desperately, so the interplay in prices is a two-way street.
– What do you think about this tendency – given by De Beers nowadays and Alrosa a few years ago – of diverting one’s activities?
We are actually seeing a consolidation in Alrosa, which sold its hotel chain and gas holdings while buying several diamond resources in the past couple of years. De Beers was always a company that had many related activities and that has expanded a little lately with the addition of the recycled diamonds purchasing program, for example. It is more an issue of business philosophy then anything else.
-So, who would be the most important leading diamond players in the future – and not only in the near one!?
It would probably be a company that has a very good understanding of the entire pipeline and that figures out how to provide the best value for its customers while managing its internal workings efficiently.
If it’s an integrated firm, then the leading diamond player of the future is one that knows how to buy and sell rough at the right price, polish it well, creating easily identifiable jewelry designs and offers a great store experience. For a segment player, that would require tight control of finances, even being a self-financed company with little reliance on bank loans and credit. In times of great transition, traditionally agile companies evolve while others shrink, and this is true for diamonds too.
Edahn Golan & Marianne Riou
