Diamond industry : 1st quarter of 2015 in review

Market Report : 1st quarter of 2015ehudlaniado.com 1
1st Quarter of 2015 in Review
Dark Clouds Overhead
All large sales periods – the November-December holiday season,
Valentine‟s Day, Chinese New Year, Hong Kong and Basel trade shows
– were disappointing to diamond traders. Worse, looking forward, sales
projections by chain stores in the US, Hong Kong and China are poor.
Most are reluctant to replenish their inventories and are adopting a
“playing it as it goes” policy.
A dark cloud hovers over the global economic landscape, indicated by:
a strong US dollar; weakening Asian currencies; plunging oil prices;
new regulations in China and Hong Kong; a fragile US economy; and
political developments in Eastern Europe. The diamond industry is
suffering against this backdrop. Confidence at all levels is shattered,
from the manufacturer to the consumer. The only thriving sector of the
industry, according to their own 2014 fourth quarter reports, are
miners.
Is this the new face of the diamond industry? Mining companies
thriving off high priced rough at the top of the pipeline, while loss-
making manufacturers pay top dollar for rough only to sell the polished

product at rock bottom prices? The industry is perhaps reconsidering
its strategy and logic, indicated by the large level of refusing to buy
rough.
State of Confusion
Market players report that polished diamond prices are in a “state of
confusion,” as asking prices deviate significantly from what buyers are
willing to pay. Manufacturers and traders sell at lower prices when
liquidity is badly needed.
Confusion among industry leaders and market makers is contributing
to the lack of confidence across all industry sectors. Contradictory
statements about the current and future status of the diamond market,
and current prices, abound.
Polished Diamond
Rising asking prices in a weak and falling market by two price
benchmarks has contributed to the confusion mode. Could it all be
because a few traders skewed the benchmarks by uploading their
inventory lists to the platforms with full list prices, and not at the
common discount prices?

Boosted Liquidity and Financing
More and more financially sound rough diamond dealers who profit
from selling rough on short payment terms are now offering longer
payment terms, allowing the secondary market some breathing air,
while providing sellers with a chance to boost sales and collect
payments on time.
Manufacturers prefer buying either smaller, cheaper goods or run-of
mine – the full range of sizes and qualities produced by a mine.
Cheaper goods allow manufacturers to run their factories with
relatively low capital investment, while buying run-of-mine enables
production of a wide range of polished diamonds. It has become
difficult to predict what type of diamonds will be easier to sell.
However, having a whole range reduces the risk, enabling
manufacturers to sell at the highest demand.
Manufacturers prefer to purchase from primary sources – bank-
financed transactions – or to buy only what they need in the open
market or at tenders, at prices that allow their factories to cover
expenses. They buy rough diamonds only to fill the volume gap
necessary to run their factories.
The silver lining is that while Antwerp Diamond Bank is closing and
other banks are reducing credit and financing, Indian and Israeli banks
stayed firmly committed to the industry. Furthermore, Dubai banks
have stepped in to fill some of the gap in the industry‟s financial needs.

Bloomberg recently reported that Barclays Plc has started lending to
diamond dealers as it seeks to expand in southern Africa.
Have the diamond industry‟s financing issues been resolved? Not
entirely. But a breath of fresh air has certainly pumped into the
industry‟s liquidity pipes. This may explain why rough purchases
persist despite small volumes of polished sales.
Lack of Direction
In similar situations in the past, large players made significant
purchases of rough diamonds to inject liquidity into the market. Sadly,
there is no such leadership in today‟s market.
The industry must act with caution. Any major price decreases, of
rough or polished diamonds, will decrease inventory prices. Such
situations have been overcome in the past. But it remains to be seen
whether the industry can withstand the pressure without leadership or
liquidity.
Representatives of the major diamond producers/miners held a
meeting in London. The participants met to discuss key issues facing
the diamond industry: lab-made goods and marketing.
According to a Bloomberg report, attendees included representatives
from De Beers, Alrosa, Petra Diamonds, Gem Diamonds, Lucara
Diamond, Dominion Diamond, Lukoil and Rio Tinto, which hosted the
meeting.
According to the report, few details were divulged about the meeting,
which focused on diamond marketing, industry research, and the
threat to consumer confidence from undisclosed lab-grown stones
entering the market.
Is this a first sign of regenerated leadership?

Unreasonable Rough Prices
Manufacturers expect the price of rough diamonds to fall. They are
unsure what price to buy at, but they will seek to spend what‟s left of
their cash flow in return for the best possible value.
Rough Diamonds
The value of rough should be determined by what consumers will pay
for the end product – the polished diamond. Diamond producers‟
reactions to market conditions are rigid. They don‟t respond fast
enough to feedback from midstream manufacturers struggling to sell
polished diamonds, to create cash flow that will allow them to buy
more rough diamonds.
In the Hands of the Manufacturer
Have manufacturers understood their power in paying cash? Are they
willing to forego their fear of losing a source to turn a profit? Perhaps,
if they realize that by making only “political” rough purchases they will
not survive. They won‟t continue to buy from sources that are trying to
maximize profits by narrowing midstream margins without analyzing
repeated negative feedback from manufacturers. Those manufacturers
have had to buy at any price to preserve their positions with major
suppliers.

The optimal solution may be a careful price reduction. While this would
ensure a healthy margin for manufacturers, it won‟t cause severe
damage to the value of existing inventories, which could be disastrous.
A balanced price reduction could help reduce the average price of
inventories at a moderate pace and even lead to positive cash flow.
Since October 2014, De Beers Sightholders have hoped for relief from
their supplier. They claim to have paid very high prices for six months,
making them unprofitable. De Beers does not agree. When Rob Bates
of JCK asked Mellier in an interview, “What is your sense of how much
Sightholders are making on their boxes?” Mellier responded:
“Customers‟ profitability is important to me. I want sound and healthy
customers. But I am not responsible for the margin of my customer.
They are responsible for their margin. It is down to them to maximize
their profitability.”
Major producers repeatedly declare that manufacturers should take
responsibility for their margins by conducting more competitive
business. Some producers are involved in every aspect of the industry
pipeline, from mining to running retail shops. According to analysts,
their retail activities are not profitable. What does this mean? Isn‟t this
just what‟s happening across the industry pipeline?
Polished Diamonds Bottleneck
Manufacturer inventories appear high. According to many
manufacturers, they have paid very high prices for rough, yielding
expensive unsold polished diamonds, which has resulted in large
inventories and negative cash flow.
The polished diamond pipeline is overloaded. We estimate that some
$8 billion worth of polished diamonds is on offer on trading platforms
and a further $2 billion worth of polished diamonds is awaiting grading
at gemological laboratories. This is one of the reasons that most

companies are in tight financial positions. Until these diamonds are
sold, cash flow remains a major issue.
Reduced Manufacturing Capacity
According to Indian market sources, manufacturing there has dropped
some 40% in value since late November. Factories are closing on
weekends, working hours reduced and manufacturers are polishing
smaller and cheaper goods, requiring less capital.
Indian manufacturers say they intend to reduce polished diamond
inventories until they align with demand. Market forces are likely to
push the industry to reduce inventories and buy less rough until the
pipeline clears.
Falling Polished Prices
The mood in the diamond market is hesitant. This is unsurprising
considering decreasing prices and that China and Japan, leading
polished diamond markets, have been consistently weak. More and
more goods have been directed to America where sales are strong.
Could this see supply outstrip demand in America, leading to further
decreases in polished diamond prices?
Polished Diamond

The Clash of Civilizations
A clash of civilizations is expected. In one corner are the rational
producers and primary suppliers that maximize profits for their
shareholders. In the other corner is the midstream – manufacturers
who can react emotionally, driven by fear of losing a primary source or
financing facilities instead of by real commercial needs.
Market forces should affect primary sources of rough by decreasing
prices. However, when Sightholders are forced to buy because of
contractual obligations – not because of rational economic needs – the
forces of supply and demand do not apply.
Offloading product on the manufacturers‟ wagon could prove
disastrous. Alternatively, rough supply could be reduced to the actual
needed volume despite contractual agreements. This is the preferred
method because simply reducing prices could devalue existing
inventories, causing a loss.
Primary sources may sell reduced volumes at the same prices as the
previous sales cycle. Sightholders could then accept their bank-
financed allocations. Banks that finance the diamond industry prefer
providing credit for purchasing from large miners rather than at
tenders or from outside sources. For these more profitable goods,
manufacturers must rely on their money.
According to market sources, some $730 million of rough diamonds
was offered at De Beers Sight 3. This quantity is likely to flood the
market. It is doubtful that the market needs all these goods.
The Manufacturer’s Dilemma
Manufacturers have accumulated some cash by reducing rough
diamond purchases, manufacturing capacity and other expenses.
These cash pockets might meet an oversupply of unreasonably priced

rough diamonds. Sightholders were waiting to see the goods so they
could decide. To buy or not to buy? This was the question.
According to Sightolders, Sight 3 was one of the most difficult in many
years. With $730+ millions of rough diamonds offered at the sight
flooded by deferred, unwanted rough diamonds from previous sights,
they faced a huge dilemma as we reported in previous updates: “To
buy or not to buy?”
ITOs (Intentions To Offer) for the forthcoming contract period were
announced based on Sightholders‟ acceptance of the March allocation.
Refusal of goods may impact their ITOs for the upcoming contract
period. This created the pressure to buy as much as possible.
If 35% of the sight of $730 million was refused, will manufacturers
again turn to tenders and the open market to fill the gap between
primary supply and the real needs of the industry?
Trade Show “Bazaars”
Evidently, the diamond industry‟s mood now depends on the next
trade vent. With Chinese New Year, Valentine‟s Day, Hong Kong and
Basel trade shows behind us, the focus shifts to the upcoming Las
Vegas Show.
Our day-to-day professional life has become preoccupied with the next
sales event. In a market with undefined polished diamond prices, the
next trade show could be the one that lifts the fog.
Trade shows have become a way of life in the diamond industry. Huge
halls packed with thousands of exhibitors presenting their diamonds –
from the simplest goods to the most extraordinary.
Are trade shows the proper venue for such precious and rare a product
as a diamond? After the huge efforts involved in purchasing rough,
recruiting and training a work force, massive capital investment and

extensive financing, we bring our inventories to exhibit in hangars. Is
this the way to sell a diamond?
Competition between exhibitors can become intense. Well-established
manufacturers – strictly regulated and closely supervised on ethical
issues while facing high overhead costs, R&D investments, and an
expensively trained work force – find themselves in the same hall as
small manufacturers with hardly any chance of covering costs. The
small manufacturer is hopeful, wanting to break into the big league.
Knowing that he has very low overheads, he offers lower prices. A
buyer may not care if his supplier has a large and sophisticated facility
or small and rackety one, since the buyer‟s chief concern is spending
less.
This is an unhealthy situation. When competition is on price alone,
everybody loses: the small company won‟t recoup its show costs, while
the large company is forced to sell as though at a Bazaar, and may
have to offer longer credit terms or buy-back procedures. Clients lose
because they will never get decent service and do not stand on their
own feet, relying on inner-industry credit. Were these issues discussed
in the producers' London meeting?
Beneficiation
Governments believe they should generate economic benefit from
rough-diamond production on top of royalties and taxes. They call it
"beneficiation.” They expect manufacturers to build factories, train and
employ local workers, construct buildings, pave roads or otherwise
contribute to the local economy.
However, it seems that the existing models are not functioning well.
Recent reports have indicated that three major diamond-polishing
factories in Botswana have had to close operations.
Many other countries experienced the same fate. First Sierra Leone in
the 1960s, then the Central African Empire in the 1960s and „70s,

followed by Canada some ten years ago and Namibia in the early
2010s. In each case, factories were built, staff trained, rough
diamonds supplied, but high costs and inefficiency proved these
ventures economically unfeasible.
In order for beneficiation to work, manufacturers must be able to buy
reasonably priced rough diamonds. They should have close control of
production lines with the necessary infrastructure and support of a
knowledgeable and professional workforce. These elements are
apparently more important than lower wages. The efficiency and
experience of the midstream must be heeded.
Disclaimer:
The views expressed here are solely those of the author in his
private capacity. No One should act upon any opinion or
information in this website without consulting a professional
qualified advisor.

Diamond industry : 1st quarter of 2015 in review

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Diamond industry : 1st quarter of 2015 in review