The boomerang of speculation

Rough and Polished

As president of the International Diamond Manufacturers Association, I would like to express the pain and shout out in the name of all the diamond manufacturers the world over, says Moti Ganz, Israel Diamond Institute chair and Honorary IDMA president, in his article posted by the Israel Diamond Institute portal at


This is one in a series of articles and speeches, Moti Ganz writes, in which I have tried to persuade the rough producers that today’s profit is tomorrow’s loss. Speculation has died – I shout in their ears. Soon there won’t be any more manufacturers with factories and obligations to employees and commitments to rough suppliers. And then what will you do with the rough?

Until now all my calls have been like a voice in the wilderness. Everyone understood exactly what I was talking about but it was more comfortable for them to put their hands over their eyes, ears and mouth – knowing nothing, seeing nothing, hearing nothing – especially as the cash register kept ringing. So that no one gets tired before we get to the main point, I’ll begin with the bottom line of what I have to say:

The age of speculation is over. No longer can one base one’s business on the purchase of rough by parties that have no interest in manufacturing. The rough producers must wake up before they are left without manufacturers that are capable of buying their goods. The manufacturers are not about to collapse – they are in the midst of a collapse. They are on a sharp and painful fall into an inescapable abyss. Diamonds without manufacturers are diamonds without a market. Diamonds without a market are diamonds that can, at most, be used for playing a children’s game, perhaps like the stone that Erasmus Jacobs found in 1866 on the banks of the Orange River in South Africa. Once removed from the consumer’s mind, diamonds will not get back there. Pearls and gem stones will not wait patiently. They are beautiful, attractive and valuable. Before you can say “Jack Robinson,” they will take over the display windows. And if consumers nevertheless want diamonds they will quickly realize (they are already starting to realize) that synthetic diamonds are no less beautiful than natural ones, and perhaps even more so. They will be able to get them at comfortable prices, easily match pairs and sets and we – the manufacturers – can finally gain something! And then what will happen to rough diamonds? Will they remain in the depths of the earth? Who will want them? And now that I have shouted the message of the world diamond industry so loudly and clearly, I’ll take a deep breath and return to an orderly explanation.

There was a time

There was a time when a single – or almost single – supplier dominated the world of diamonds, determined the quantities supplied, the prices and the fate of all parties in the market. This rough supplier – and it is no secret that its name is De Beers – was careful to check where the rough it sold went. Its representatives would visit the clients periodically and check whether each one was indeed using the rough for the manufacturing purposes for which it was intended. The world of diamonds was orderly and clear, governed with a strict hand.

Although the past is always considered something to yearn for, we remember clearly, and sometimes painfully, that along with the great advantages of having an all-powerful conglomerate, there were also some major drawbacks. We benefited from its existence, but we also complained. Among the drawbacks were the constant differences between the monopolistic rough market and the free polished market, the profit immediately taken when we invented sophisticated technology that improved our manufacturing capabilities, the uncompromising requirement to take rough in any quantity and at any price offered us, even when times were very tough, and the need to constantly come up with new creative ideas, sometimes “schemes,” in order to live with the demands of the supplier.

When new parties arrived on the rough scene – first Australia with the direct marketing of Argyle goods, then Canada and later direct supply from Russia – and in light of the unsatisfactory share performance, De Beers had to give up its past customs and adapt to the new dynamics. Today, although it is considered a very dominant and influential rough producer, one can no longer attribute all the troubles of the market – nor all its successes – to De Beers.

I wouldn’t be mentioning this history if I didn’t want to convey a message, which I will get to soon.

The emergence of speculation

The deep change in the diamond industry took place as the year 2000 approached. We flowed with the changes, increased efficiency, updated, cut back, expanded, made connections downstream and upstream on the pipeline, developed brands, set up jewelry companies, joined jewelry partnerships, split, merged, adapted our companies to best business practices in the diamond industry, set up manufacturing plants in countries with low labor costs at one end of the world map and in countries that promised rough supply at the other end. We worked hard, we sweated, we thought, we were creative – all in order to adapt to the new order in the world diamond industry, and boost it as much as we could.

We did excellent work. It seems to me that despite some slumps and difficulties, we felt great confidence in our industry. We knew we were moving forward.

In 2007-2008 the financial bubble in the world began growing. The diamond industry did not remain untouched, and became inflated as well, on the level of finances as well as stocks. The price rises were crazy, speculations as a result of the currency policies in South Africa and India caused a loss of any connection between the market price of rough and the price of polished. There were sightholders who used credit they received not to manufacture but instead to invest in real estate or the stock market. In 2008, long before the global credit crisis, I already came out in Hayahalom and in international forums against irresponsible increases in rough prices, which were driven by speculation. I warned that the unreasonable euphoria in the world diamond industry was leading to unreasonable demand for rough at unreasonable prices. At the World Diamond Congress held in 2010 in Moscow, I stressed the extremely serious risk of the unrestrained increases of rough prices and the danger lurking.

However, as long as there was money around, the wheels continued to turn and everyone enjoyed the party. Only a few, including myself, shouted out – Beware! In this game of musical chairs somebody will fall behind. Perhaps more than one. Perhaps everyone.

An abrupt halt

At the end of 2008 the world encountered the global economic crisis, the roots of which could be traced back to 2000, with the burst of the hi-tech bubble, which caused a preference for investing in the real estate market, in turn producing a new bubble of irresponsible use of inexpensive money by means of unfounded loans, which allowed unrestrained purchases of apartments and houses.

When the crisis broke out, everything stopped in place – activity in the financial market and activity in the diamond industry. The rough producers understood that they were the only ones who could regulate the market and reacted quickly. They reduced production and/or closed mines for a given period, and allowed their customers to leave goods on the table. The Russians activated their shock absorber – the Gochran (the state treasury), which purchased ALROSA’s production.

The global economic crisis exposed some of the fundamental weaknesses in the diamond business, particularly the accumulation of inventory and erroneous pricing. The suddenness of the global crisis highlighted the vulnerability of the diamond industry to external economic fluctuations.

Most of the banks in most of the centers acted with the utmost responsibility, supported by diamantaires who streamlined their activities and brought money from home.However, some banks chose to support the diamond centers by providing unreasonably generous credit lines – again the speculations flourished, again the prices of rough increased and again we found ourselves in a whirlwind.

I repeatedly called upon the diamantaires: Don’t buy rough at any price they ask. But rough continued being sold, the prices continued to rise and there was a festival of speculation. The rough producers – all the producers – benefited from their ringing cash registers. In order to maximize their profits even further, the rough producers embraced the tender method, in an effort to draw maximum benefit from the sale. The difference between the price of rough and that of polished dwindled to near nothing, as did the manufacturers’ profits.



The manufacturers, who buy rough in order to process it, are disappearing – cutting back manufacturing, closing factories temporarily or shutting them down all together. Even the well-established manufacturers have to close excellent, well-organized factories. Some are still holding on by the skin of their teeth. But how long can a manufacturer continue to buy rough if it means absorbing losses? A month? Two months? Three? Half a year? The situation is worrying.

I apologize that I can’t avoid quoting myself, but I articulated this in the past so well that there really is no need to reformulate it. I wish I could say these words are no longer relevant, but regrettably that is not the case. In 2010 (Hayahalom 193), I wrote: “In the mining world, annual reports and speeches stress the term ‘sustainable development.’ This refers to activities that have commercial viability in the long term. Somehow, too many producers seem to believe that when it comes to selling their product, the short-term optimization of revenues is more important than the long-term sustainable development of their clients’ businesses. However, just as there are fewer long-term commitments for supply to manufacturers, these manufacturers should realize every morning, over and over again, that every time we buy rough at irresponsibly high prices we are damaging our own long-term prospects. At the end of the day, those who overpay will disappear, and the rough supplier will simply find someone else who may await the same fate. It is easy to dismiss this with ‘it’s a free market.’ That isn’t totally true. We are not playing on an even, level field. Rough speculators may lose or win some money. Manufacturers, however, have huge investments in factories and infrastructure and a workforce to protect.

Recently the rough producers realized that if they didn’t lower their prices there wouldn’t be anyone to buy their goods. Reducing prices is a double-edged sword – it is essential because the manufacturers can’t pay the prices demanded anymore, but it is a blow for those who bought goods at high prices and benefits those who had the wisdom to leave those goods on the table.

It’s not the crisis

Our industry is stagnating. Not just in Israel, but all over the world. We tend to blame the economic crisis. There’s a recession in the United States, the European economy is collapsing, we say. But even in times of recession young people continue to get married and Christians continue to hang stockings on the Christmas tree. There are still occasions to celebrate. Moreover, the economic situation in the US is not bad at all. At any rate, it is not bad enough to cause a total halt – at the most, a slight decline. The reason lies in the diamond industry itself. As soon as it was no longer possible to use bank credit for speculation, and a market emerged of high rough prices that couldn’t be transformed into money, the rough buyers began to “choke” and realize their rough at 10 to 15 percent below the price demanded by the major suppliers. The manufacturers who had signed long-term contracts had to continue buying rough at high prices and meet the rest of their needs by purchasing rough at impossible prices through tenders.

I would like to remind you what I said about tenders at the International Rough Conference held in Israel in 2008. Addressing the rough producers, I said: “You will surely ask why the manufacturer’s troubles should concern you? From our point of view, you’ll say, the situation is ideal. We produce rough, sell it at tenders, fetch prices we never could have dreamed of, and our profits leave no room for complaint.

A tender or an auction can be an excellent solution as a ‘window’ onto the market, or the sale of special diamonds. However, they cannot be a standard solution, because they harm the manufacturer.

… the rough diamond has no value on its own. The rough producer can’t do anything with these diamonds. There were attempts to turn diamond into a commodity. To try and make diamonds behave like gold, copper, iron or coffee. That attempt failed. The rough diamond is not worth money like metals are. Rough diamonds can’t be used like coffee beans can. The rough diamond is worth money only after it is polished. The rough diamond is valuable only to – the diamond manufacturer. Only I, the manufacturer, know what I am holding in my hand and what can be done with rough.

So that I, the manufacturer, will want the rough that you produce, I need to receive it consistently, on the basis of ongoing, regular sortings. That’s the only way I can make commitments to chains and to stores. That’s the only way I can commit to ‘programs.’ That’s the only way I can promise you that the rough you produce will be worth something to the customer in the store, and not only in the internal trade between us.”

When I finished speaking there was applause. That was very nice, but in practice – nothing changed. I barked and the profits of the rough producers continued to rise, at the expense of the manufacturers.

We can’t continue buying rough at a loss forever. It is impossible to continue manufacturing under the present conditions. Without manufacturing, there’s nothing to sell. If there’s nothing to sell – it won’t be long (perhaps the day has already come) before the display window will fill with more jewelry set with precious stones, pearls and synthetic diamonds. And if the public gets used to buying them – who will be able to turn the clock back? A closed door of a factory is a door that has no chance of opening. The storeowners are tired of hearing us whine and ask for higher prices while manufacturers of synthetic diamonds give them goods on memo – and with a significantly higher profit margin. At first they’ll show the synthetics in a corner of the store, but within a few years, they’ll display them throughout the store. Look what happened with pearls.

This is already happening. Many diamond manufacturers are now starting to manufacture synthetic. Many others are considering adapting their production lines to synthetic. The manufacturing system exists. The marketing system exists. Why use it to create losses when you can use it to make a profit? The infrastructure is there, and if the rough producers don’t quickly catch the manufacturers by the tail and keep them close to a profitable supply – they will be able to regret what happened but not change it. Only recently a well-established American diamond manufacturer told me that if he hadn’t opened a line for synthetic parallel to his regular system, he wouldn’t have survived, and that he’s considering adapting his entire manufacturing and marketing system to synthetics. Rough producers – is that the road you are hoping we will take?

Last call

Therefore, while until recently I addressed mainly the diamond manufacturers, asking them not to buy rough at unreasonable prices, I now turn mainly to the rough producers. Dear producers: Rough diamonds are meant to be polished for setting in jewelry. They can’t be eaten. They can’t be planted. They can’t even be used for speculative purposes any more. You can speculate for a year, or two years, but at the end of the day the mouth of that volcano opens up and destroys everything around it. The rough producers need to understand that a business in which speculation plays a major role is not a business. It is a bubble that has burst, and if it develops again – it will burst again. Rough producers and manufacturers are in the same boat – everyone wants steady business. Rough producers want to know that someone will buy the rough they produce. Rough producers have a duty to the countries in which the mines are located. They have a duty to the governments and to the people. They have goals they must meet. If they don’t have anyone to sell the rough to, they will have to get out of the mining business.

Therefore, the producers must find a way to support and encourage manufacturers. And here I repeat the lessons of the 1970s and 1980s. The rough producers must give the manufacturers very strong backing, enabling them to return to the sphere of work and establish themselves firmly in the market by assuring steady clients who can rely on regular, certain supply. The rough producers must also cultivate the dealers, so that they can appropriately help those who manufacture in small and medium volume and their employees, either by financing or by supplying smaller parcels in attractive sortings.

My advice to rough producers is this: The return of speculation is not the end of the manufacturers alone, but of the entire diamond industry.

Source Rough & Polished