When it comes to profit margins, the middle man always gets squeezed. From a diamond industry perspective, this is easily assessed with a quick look at the financial statements of companies operating in the various sectors along the pipeline. Simply put, margins are far stronger at the mining and retail ends of the market, while manufacturers have borne the brunt of lower margins in their trading environment.
Therefore, reports that De Beers raised prices on certain items of rough at the May Diamond Trading Company (DTC) sight was by no means met with enthusiasm by the trade. Even as DTC adjusted prices downwards on other less popular goods, many argue that any increase cannot be justified given the current state of the polished market.
Indeed, market feedback has indicated that polished trading has quieted in the past two weeks, thus adding to the manufacturing profit margin concern. Indian liquidity is tight and global buyer uncertainty is prevalent.
By way of comparison, the RapNet Diamond Index (RAPI™) for 1-carat certified diamonds fell 2.9 percent in the first four months of the year, according to the recently released Rapaport April Research Report: “Conservative Markets.” During the same period, rough diamond prices increased by approximately 7 percent to 9 percent, according to Rapaport estimates.
The disparity between rough and polished prices is not unusual. Polished prices often lag behind the pace of rough price increases. But the notion that high rough prices should translate into higher polished is misguided. To repeat a point made by this column before, the rough market should be taking its cues from the polished market and not the other way round (see editorial “Rough Economies” published on April 20, 2012).
However, the rough client landscape has changed, which, to an extent, is enabling higher rough prices. Today, among the largest purchasers of rough diamonds are in fact jewelry retailers, who enjoy higher margins, sell their resulting product to the end consumer, and are thus better able to absorb the higher rough costs.
DTC supply to its retail clients is set to increase in the current contract period that started on April 1. Gitanjali Gems gained a new sight and Chow Tai Fook received an additional sight in Botswana. Other such sightholders include Tiffany & Co. (Laurelton Diamonds), Graff Diamonds (SAFDICO), and Chow Sang Sang. Chow Tai Fook, Tiffany & Co. and Graff Diamonds each have multiple sights across DTC’s distribution centers. In addition, many of the powerful Indian manufacturers such as Rosy Blue and Shrenuj & Co have successfully ventured into the jewelry and retail space. Others have effectively formed partnerships with retailers.
Tiffany & Co. stated in its 2011 annual report that it expects to purchase approximately $200 million worth of rough in 2012. In addition to purchasing through DTC and Rio Tinto, Tiffany & Co. has penned various supply agreements with mining companies for defined portions of their output. For example, the jeweler has an off-take agreement with Gem Diamonds for yellow diamonds mined at the Ellendale mine. Tiffany & Co. also said it intends to purchase rough diamonds from other suppliers where it has no contractual obligation.
Chow Tai Fook, which is also a Rio Tinto Select Diamantaire, estimated that about 40 percent of polished diamonds used in its vast jewelry retail empire are manufactured in-house. “The broad range of our activities provides us with firsthand knowledge of the diamond market as we directly experience how supply and demand dynamics impact our business,” Kent Wong, Chow Tai Fook’s managing director said in an interview with Martin Rapaport published in the May 2012 issue of the Rapaport Magazine.
For wholesale manufacturers, this means they are competing on an uneven playing field and it appears that a two-tier system may have developed within the sightholder community. On a more significant level, mining companies selling their goods on contract may be basing their rough price hikes on how efficiently the resulting polished can be sold at the retail rather than the wholesale level.
This surely does not reflect the reality of the trade. It also makes it even more difficult for the vast majority of manufacturers to profit on their rough purchases.
For its part, DTC maintains that it takes into account a number of factors in its pricing policy, including the flow of information from De Beers Diamdel auctions, feedback from the polished market, as well as retail and economic trends. The company has also stated that it has become more flexible to make short-term price adjustments, up or down, than it was in the past.
Still, the push toward branding will help maintain a price uptrend. For its part DTC has been pushing sightholders to diversify further along the supply chain for a number of years through its supplier of choice program. As one sightholder told Rapaport News, not only do you have to show your brand value to get a sight, but today you need to have a strong brand to make money off the sight. He explains that in contrast to generic diamonds, branded products offer sufficient premiums to profit from current high rough prices.
Certainly the consumer penchant is rapidly moving toward branded products, and tremendous branding opportunities are emerging, particularly in developing countries like China and India.
De Beers itself has been pushing its own brand for over a decade now. The company continues to expand its retail footprint through its De Beers Diamond Jewellery stores, and continues to ramp up development of the Forevermark brand. Having shelved its own generic advertising spend, the company has encouraged branded advertising as the preferred method to spur demand. As De Beers has moved downstream, so it has expected sightholders to move upstream along the pipeline.
By no means is the development of diamond brands a bad thing. However, the ability of diamond cutters to effectively enter the brand landscape is questionable. Many have tried and failed. Developing a brand requires considerable investment and know-how. Ultimately, diamond manufacturers find themselves competing for attention among retailers. In turn, retailers have a choice to effectively represent their supplier’s brand or develop their own. In a fiercely brand-focused world, it will always be the retailer who has the upper hand given his access to the end consumer. And that puts added pressure on the manufacturing sector.
But for De Beers and others the concept has come full circle. With more branded retailers sourcing rough diamonds at prices only they can afford, the market appears to be working to coerce manufacturers into branding, enabling mining companies to maintain higher rough prices in a soft polished trading environment.
Whether diamond cutters are, or even should be up to the branding task, is questionable. Certainly the vast majority will not be. To ease their burden and maintain a vibrant manufacturing and rough trading sector requires a rough pricing policy that reflects the generic, rather than branded diamond market.