Diamond industry – summer reflections

Elena Levina

Summer is the most boring time for a diamond journalist. There is virtually no news in our market at this time of the year. Especially now, as all major players have already said that they do not expect changes in the market before the end of the year.

We decided to take advantage of this pause to reflect on those problems of the diamond market, which are discussed in the media much less than prices and demand.

A pleasant surprise may mean trouble

From the very start of January, the diamond market is on a slight hype: sales proved to be better than expected. But at the end of last year, it seemed that the demand died on its feet. One after another, jewelry retailers reported lower sales. Diamond-mining companies rushed to develop plans for reducing production and racked their brains how to live amid falling prices. However, the apocalypse did not happen! Both De Beers and ALROSA are posting sales even better than at the beginning of 2015. Polished goods continue to be sold, even never getting cheaper. All are excitedly telling that the beginning of the year is superior to any, even the highest expectations. Is this not a reason for optimism, albeit cautious?

Stop. Behind this optimism continuing for six months we have missed a small but important detail: as it happens, none of the market players could predict this growth of demand.

There are at least 7 major mining companies operating in the global diamond market (not to mention smaller players). Each of these companies may have a team of analysts and market experts. But in the course of six months all of these companies were saying that they did not expect so good sales.

Hundreds of dealers and diamond cutters are working in the world diamond market. Most of them are not novices and work in this industry from a young age. But at the end of last year, none of these companies said that the market would still have reasons for optimism.

And, of course, there are hundreds of independent industry and bank analysts covering this market. But all of them (with few exceptions) wrote in their reports that they held to conservative forecasts and expected that the beginning of 2016 will continue the trend of 2015.

However, in terms of demand, our market is the least similar to a roulette. This is not the gold market, which depends on the mood in which investors and speculators wake up to the new day. The diamond market has quite a clear seasonality tied to the major world festivals and the wedding season. In summer, there is always a lull. In autumn, diamond trade is always gathering pace and the peak of sales falls on November and December, while starting from January diamantaires are re-stocking their inventories having sold all their goods during Christmas and Saint Valentine’s Day. This trend exists as much time as the tradition of giving jewelry to your beloved.

Nevertheless, in recent years the phrase “We do not undertake to give forecasts” seems to be voiced on the market even more frequently than the word ‘mazal.’ Some industry journalists are joking that their questions about market prospects are perceived as a request to do something indecent. “Conservative forecast” and “stable situation” – that’s the new motto of our time. For mining companies, it seems easier not to make predictions at all and to work as an airport – “by the actual weather.” And if you happen to sell more – well, let’s celebrate it.

Diamantaires do not hear any definite plans from diamond producers. But they see the situation in the market and remember well the past crises, when diamond producers began to force up rough prices at the first signs of a revival in trade. Under these circumstances, diamantaires are essentially left the only way out – to buy as much rough as possible from the very beginning of the year, while prices are still low. It is better to let it lie in the inventory, waiting in the wings. It seems that the re-stocking of the first half of the year follows this very scenario, because diamond manufacturing is not growing as fast as rough sales.

The Russian folklore has a well-known fable about a swan, crayfish and pike, which are asked to pull a cart with goods. Not agreeing between themselves, they started to pull the cart in different directions. As a result, all got exhausted, terribly tired, but the cart with goods remained where it was. The current diamond market reminds me very much of this child’s fairy tale. All genuinely want the situation to improve, but without understanding the direction and without dialogue, we continue to tread water.

Diamond in the informational rough

Attempts to predict and explain at least something in the diamond industry are totally buried in a windflaw of negative information.

The global diamond market is very small. Annual production of rough diamonds is estimated about $ 15 billion, while sales of jewelry reach $ 80 billion. Oil producers earn such a sum in a couple of months, even without taking into account the cost of further processing. Nevertheless, by the level of politicization and the number of “horror stories” our market is hardly to give much ground to the oil market.

Taking into consideration the history of the diamond industry and in the first place its African aspect, diamonds have become a successful topic for political and reputational dividends. For example, the Kimberley Process during the 15 years of its existence has made tremendous efforts to eradicate more than 99% of conflict diamonds. But there will always be people who will take more interest and more advantage in blaming the market of the remaining fraction of a percent, rather than admitting some progress. The recently voiced calls to recognize as conflict any diamonds “violating human rights” will only provide more reasons for informational manipulation. Just because anything can be tied to such a wide wording. As we know, now it is possible to attribute a cup of cold coffee and a too old video game console in the prison cell of a Norwegian terrorist to violation of human rights.

The very existence of the Kimberley Process (at least, in its usual form) is now under threat because of the fundamental disagreement of NGOs with the fact that Dubai presides over its Certification Scheme this year. Civil Society Coalition boycotted KP meetings and the certification scheme itself. For several months, the parties continue to ‘exchange courtesies,’ rather than achieve a consensus by way of a dialogue, while some NGOs accuse other NGOs of being biased. It is not at all obvious who is now benefiting from this scandal, but the industry as a whole will suffer a significant reputational blow, if it becomes clear that human rights organizations have abandoned the fight against conflict diamonds.

Beneficiation is another endless topic. Given the huge role of diamonds in the economy of entire regions, it is quite understandable that some political forces want to turn diamond mining into a platform for mega-projects – whether it is nationalization of existing industries or creation of new industries. However, populist slogans are not always based on at least some semblance of economic or market substantiation.

All of these controversial themes find enthusiastic support in the media. But we should not blame journalists for being one-sided and biased. All they do in their work is just following the precepts of the American media magnate Hearst: “Sex, scandal, death!” Successful journalistic material must affect and awaken feelings and not convey facts. Nobody will want to read a story saying that everything goes well in the market, but if you add a bit of someone’s suffering to your article, it will at once get a huge circulation.

Consumer distrust and failure to understand

Now imagine a modern consumer of jewelry – that same ‘millennial’ who is now targeted by all diamond mining companies. As a child, he watched the “Blood Diamond” movie and a lot of films about how bad guys were trying to steal diamonds. He grew up in an era when a person receives new information more often than inhales. TV tells him that diamonds help to finance terrorism and launder money. On the Internet, he reads statements from Human Rights Watch that human rights are often violated in the diamond fields.

Do you think he will be anxious to buy a diamond after that?

Well, let us suppose that the traditions got the best of it and our millennial begins to look for a stone. He comes to a store and asks, “Where does this diamond come from?“. To this, the seller will honestly reply “I do not know,” because no one obliges merchants to track and disclose the origin of stones being sold. “But can anyone confirm that this is a normal stone?” our millennial asks because he does not want to give something potentially associated with tears to his girlfriend. “Oh, of course,” the seller says. “The manufacturer of these rings is certified by the RJC. And these goods are confirmed by the D-SRSP protocol. And those stones are from South Africa, there is even a picture – but this one stone is not from the bad lot, it is from the good lot.”

If I were our millennial I would have turned around and went to buy a new iPhone for the girl. Or a trip to some islands. Just because the gadget and the trip or a new designer bag are much more understandable than the entire amount of contradictory and confusing information that falls as an avalanche on the head of anyone who tries to understand the origin of diamonds and their “ethical purity.”

The Diamond Producers Association (DPA) has emerged quite in time and was prompt enough to introduce a marketing platform to the diamond market under the slogan “Real is rare. Real is a diamond.” But its launch and promotion will take some time, and real results will be seen only after a few years. Besides, generic marketing may only help return the desire to purchase diamonds to buyers, but does not eliminate the issues associated with the origin of stones, conflicts and human rights.

Viribus units

No marketing program, be it even the most brilliant, will help restore consumer confidence in the market, if it is unclear even to its own members.

We have already talked about forecasting problems. The absence of any clear forecasts not only makes the entire industry live “every day as the last one. It is also the main reason that banks will never take our industry seriously. Any bank wants to have a good understanding of guarantees that the money it lent will return and multiply. Banks are forced to have such guarantees not only by the Basel 3 regulations, but also by trivial business interests. How can a bank lend money to the diamond trade, if even diamond traders cannot predict how their industry will develop? Predict not even prices for rough, but at least demand for their goods. In recent years, many of the classic diamond banks abandoned the market, and if the industry does not learn to provide them with information, this exodus will continue.

We must predict not only demand, but also supply. Everything is clear regarding major companies, they post regular reports on production and sales of rough. But there are small producers, whose activities and strategies seem to be known even less than Mars. What will finally happen to the diamond industry of Zimbabwe, in what way will they sell their rough, at what price and how much official will it be? And what tactics for their sales will be chosen by Namibia and Botswana, which received the right to sell 15% of mined diamonds independently? How will act CAR and Venezuela, which have embarked on the path leading to their return to the Kimberley Process? May it happen that their diamonds will have the same kind of discounts that was already observed in the first years after lifting the ban on trade in Zimbabwean diamonds? So far, there are no answers to these questions, and such answers will generally not be given, as long as there is no single regulator stipulating diamond-mining and diamond-trading issues at the level of nations.

Market information should be conveyed not only between market stakeholders, but also to consumers. If market stakeholders will not begin explaining to the public that the current diamond production is very different from the Africa of the early 20th century, we shall not get rid of comparisons with the “Blood Diamond” movie. Objectively, the market has what it can be proud of: modern diamond mining is a high-tech operation comprising scientific achievements, tens of thousands of jobs and large-scale social programs. But the entire information about responsible business practices somehow remains dormant in correspondence between sightholders and producersб when they prove to each other that they are qualified for doing business. Confirmation of the responsible supply chain should be as open as possible and extended to the entire diamond pipeline.

By the way, this confirmation would only gain if it had some clear common standards. So far, the buyer can learn about the origin of a diamond only if he or she buys special branded stones (such programs are, for example, run by Rio Tinto). But the proportion of such stones in the bulk is negligible. RJC or WDC (System of Warranties) could potentially become a single system, confirming the comprehensive immaculacy of a stone purchased by a buyer.

It is sad to realize it, but in terms of unity there is something to be learned by diamond market stakeholders from producers of synthetic stones. DPA emerged after a whole century passed since the start of diamond mining, while synthetics producers formed their association in just a couple of years. And all of them (mind it) adhere to a unified perspective, coherent and well-oriented to the customer: their products do not pollute the environment, they do not require digging kilometer-deep holes in the earth and they are guaranteed not to have exploited slave labor under the scorching sun. Even Leonardo DiCaprio, who having once played only one role in a movie made more for the promotion of the Kimberley Process than any PR-agency, today positions himself as an advocate of synthetic stones. While we are producing a variety of opinions discussing the prospects of price movement in our market and who is more responsible for it, producers of synthetics are creating a market for themselves.

Source Rough&Polished