The High Seas and Safe Harbors of 2012

Edahn Golan

It still feels like a new year, but we are deep enough into 2012 to have an initial understanding of where it is going, and it may not be all that good.  Consumer demand looks positive, but it has its threats.

The U.S. and Chinese economies are stable, and both are expected to grow this year. China’s GDP is predicted to grow by 8.7 percent and the U.S.’s by 2.9 percent. For China this is a slowdown compared to 2011, the U.S. is below the global average of 3.6 percent.  In Europe, the situation is tricky. Europeans are largely affluent, and the business news’ headlines have focused less on Europe in the last few weeks. However, real economic issues are still there. The continuously looming crisis is keeping many shoppers cautious when it comes to their luxury spending.

After a double-digit growth in polished diamond imports last year, the wave of interest in diamond jewelry may be diminishing in Japan. In India, consumers have disappointed high expectations. They have been buying more, but not much more than in the past.

At the other end of the pipeline, goods are flowing in from Zimbabwe, satisfying a need for low-cost large goods. In Canada, Stornoway is moving closer to starting operations at Renard and Alrosa is still bent on increasing production in Russia.

On the other hand, De Beers did not release a very positive outlook for 2012, and Rio Tinto won’t start underground mining at Argyle this year. BHP is looking to sell its sole diamond mine, and it has good reasons for making this move.

Rough diamond supply, especially the desired 2 carats and larger category, is expected to be less available in 2012. In the polished sector of the pipeline, the positive sentiment created at the recent Hong Kong show, has evaporated. In India, traders are worried, and their nervousness is being felt elsewhere. The rise in polished prices after that tradeshow now looks like a bump on the price index. Prices have mellowed.

We are two rough cycles into the year, and nobody is falling over themselves in a rush to buy goods. With high inventories of polished, and a steady supply of rough, polished prices have calmed. There is no point trying to nail down the direction of prices, however, considering the above, moderate prices can be expected in the short-term for both rough and polished.

The banks have money to offer the industry. At the same time, from manufacturing to retail, financing is considered in short supply. Banks are stricter about whom they loan to, making money available to fewer borrowers. The money that is available does not trickle down very far. Diamond traders are not willing to provide the long-term payment schedules last seen in 2008. Rough is still only available for cash.

Local concerns may also take their toll. The tax-related investigations in Israel are far from over, a high profile trial is starting in Antwerp and reputational issues will continue to haunt the global diamond industry.

The map of 2012 has not been fully charted. External issues are out of our control. We cannot change the winds, but we can mange the sails. Prudent inventory control, bargaining for better bank terms, keeping our hands clean, spending on R&D and improving the quality of product are internal issues and in the industry’s control.

There is a need for larger investments in marketing. Generic diamond marketing is essentially gone. Now is the time to pick an ad agency or a good marketing team, decide on a direction, and to press hard to get consumers’ attention. Have no doubt, some in the industry will do extremely well. The goal is to make these “some” encompass as many as possible.