RAPAPORT... Manufacturer anxiety, producer confidence and collective marketing were all themes addressed at the Third International Rough Diamond Conference.
The Third International Rough Diamond Conference, held February 11 to 12 in Tel Aviv, set the tone for Israel’s strategy in 2008 to partner with producers, particularly in Africa.
Rising rough prices, growing demand for diamonds, scarce supply of high-quality goods and shrinking profit margins were on the agenda as local diamantaires expressed their anxieties for the coming year, spotlighting the challenges facing them and other manufacturing centers.
“We have a chronic problem in Israel,” said Efraim Raviv, former managing director of the Israel Diamond Institute (IDI), who received an industry appreciation award prior to the opening of the conference. Turning to De Beers Managing Director Gareth Penny during his speech, Raviv said, “We can never get enough rough. We need to bring producers closer to us.”
Raviv’s concerns were not allayed by other speakers at the podium, who repeated market forecasts showing a relatively flat long-term supply of diamonds compared to a 5 percent projected growth in demand.
WHAT SHORTAGE?
Moti Ganz, chairman of the IDI and president of the Israel Diamond Manufacturers Association (IsDMA), expressed an opposing view, however, disputing the notion that there is a shortage of rough in the market. “There is rough and there is polished,” Ganz said, noting that polished manufacturers have accumulated unprecedented diamond stockpiles valued at $14 billion to $17 billion.
“The problem is that there are not enough buyers of polished and there are too many manufacturers who purchase rough and manufacture polished even though they have no orders,” Ganz explained.
While Ganz’ comments were viewed by some conference attendees as controversial, they did expose a widespread concern over flooding the market with too many factories, particularly as southern African countries seek to establish themselves as viable manufacturing centers in 2008.
Namibian Diamond Commissioner Kennedy Hamutenya stressed that the 11 sightholders chosen by NDTC (Namibia Diamond Trading Company) was the maximum the country could afford to supply at the moment. “The cake,” of Namibia’s production of approximately 2.2 million carats, “is too small,” Hamutenya argued. “We would rather have a few successful factories that build a solid foundation [for beneficiation] than cut the slices too thin.”
AFRICA CALLING
Hamutenya nevertheless stressed that beneficiation would not work without the involvement of the international community, particularly in the area of skills transfer and training. That view echoed the sentiments of the South African, Angolan and Botswanan conference delegates, who acknowledged Israel’s participation in their emerging cutting industries.
Israel’s strategy to woo producers was perhaps most evident in the presence at the conference of high-level delegations from Sierra Leone, led by the country’s Vice President Samuel Sam-Sumana, and Liberia, headed by Liberian Minister of Lands, Mines and Energy Eugene Shannon. IDI representatives had traveled to Sierra Leone in January to issue a personal invitation to the conference to government officials and they had signed a memorandum of understanding with Liberia in November, pledging cooperation and Israeli assistance in the development of the diamond industry in that country. Both Sam-Sumana and Shannon appealed to conference attendees for investment in their respective countries so that diamonds can be used to alleviate poverty.
LOOKING FOR LETSENGWhile diamonds were infamous in the 1990s for fueling conflicts and civil wars in mining countries, the industry became mindful in the days after the Kimberley Process (KP) was introduced of its corporate responsibility to protect the diamond industry’s reputation. That “diamond reputation” still had a place on the conference agenda, but mining companies were noticeably upbeat about their operations, noting that small price increases in rough are offsetting production declines. Miners assured the conference that there was at least a stable level of rough supply coming to market through their operations.
ALROSA President Sergey Vybornov reported that his company has an estimated $109.3 billion worth of diamond reserves that would be mined during the next 35 to 45 years, “which should ease some of your anxieties.” Vybornov neither spoke in carat terms, nor did he give production forecasts for individual mines, but he did single out two new pipes that the Russian company discovered in 2007, which have combined diamond reserves of around $5 billion.
The exploration theme ran strong through most mining presentations, especially among junior miners such as Rockwell Diamonds, Stornoway Diamond Corp., Shore Gold, Mwana Africa and Stellar Diamonds. Still, the likelihood appears remote of finding what Gem Diamonds Chief Executive Officer (CEO) Clifford Elphick referred to as the next “special” Letseng mine — which is owned by his company — or Harry Winston Diamond Corporation’s “once in a lifetime” Diavik mine.
Even plans by De Beers to bring four new mines on board within the two next years would not boost the company’s overall production since it has sold its Cullinan and Koffiefontein mines within the past year. De Beers production was stable at around 51 million carats in 2007 and Penny said he expects similar levels this year.
THE DE BEERS OPPORTUNITYThe De Beers decision to restructure its own operations — moving away from controlling the industry and toward increased profitability, often by selling some of its noncore assets — opened the way for expansion by new midtier companies, including Gem Diamonds and Petra Diamonds, both of which went on an acquisition spree in 2007. Gem’s Elphick and Petra Chairman Adonis Pouroulis both noted their investments in exploration and their intentions to ramp up production at their newly acquired operations.
Elphick also said Gem held its first polished diamond tender in January “as an effective method to understand the true value of rough diamonds,” adding that the move was based on the Harry Winston business model of combining the mining and retail segments of the industry. While Gem seeks to emulate Harry Winston by moving into retail, the opposite may also be true, as Harry Winston CEO Robert Gannicott said the Canadian company was in the market to buy more mines.
NO MORE SUGAR DADDYAs further evidence of the De Beers change in strategy away from being what he termed “guardian of the industry,” Penny appealed to miners and manufacturers to participate in marketing diamonds. “De Beers can’t do it alone,” he said of prospective marketing initiatives. “The industry needs a collective effort.”
Other speakers agreed with Penny, with Rapaport Group Chairman Martin Rapaport warning that “De Beers is no longer your daddy.” Most notably, industry mogul Lev Leviev echoed Penny’s appeal by calling on rough producers to invest in diamond advertising as a generic product. “The producers do not channel business in a sophisticated way,” Leviev said. “They must sit down and build a uniform marketing strategy for distributing merchandise so that manufacturers will no longer have to compete with each other for rough.”
OVERPRICED
Leviev was especially critical of mining companies’ tender processes, suggesting they contribute to crazy pricing. “People who buy at these prices are suckers,” he said. Ganz agreed, saying the tender and auction systems were bringing extreme prices to the market, and putting smaller manufacturers at a disadvantage.
Leviev nevertheless downplayed manufacturers’ concerns over rising rough prices, noting that “other commodities such as gold and oil have risen around 300 percent in the past five years, while diamonds have only increased in the range of low double digits.”
Since price increases have particularly affected Israel’s specialty — higher-quality large stones — local diamantaires took little comfort from Leviev’s words. Neither were their anxieties eased by Diamond Trading Company (DTC) Managing Director Varda Shine, who reiterated that less rough would be distributed to traditional centers like Israel, Belgium and India, due to DTC’s southern African distribution. Shine added that while the company’s pricing decisions had previously been dictated by government clients “who did not like volatility,” DTC would adopt a more dynamic pricing policy, communicating price changes before major shows.
Rapaport challenged attendees on pricing, urging manufacturers to give greater focus to profits by finding ways to add value to the industry, directing “one tough question” at the audience. “Who needs Israel? No Mines, No Consumers. How do we add value to diamonds?” he asked.
With Shine insisting that “the market sets prices,” miners exuding confidence in their businesses and African delegates assuring the market of their future success in beneficiation, most manufacturers left the conference with only a slightly better understanding of their prospects moving forward. Their universal appeal to the industry, however, was clear. Ganz summarized their position and surmised an answer to Rapaport’s question: “It is the manufacturers who create the market. Therefore, rough producers need to think about the manufacturers and make business worthwhile for them. You need to understand that the good of the manufacturer is the good of the rough producer and the diamond-producing states.”
Article from the Rapaport Magazine - March 2008. To subscribe click here.