Seeking New Markets

RAPAPORT… Despite the worsening U.S. economy and numerous challenges facing Israeli diamantaires this year, exporters are still hopeful that the holiday season will deliver the goods. Diamantaires are counting on strong market demand for larger, higher-quality items to offset increasingly low profit margins, delayed payments — or even no payments — and the rising cost of rough.

Slow Momentum

Although wary because of the U.S. real estate shake-up and credit crunch, Israeli exporters say Christmas-related sales are slowly starting to pick up momentum. “It’s a little quiet at the moment, but every day you see movement in the market,” said Zvi Or, owner of Zvi-Or Diamonds, a manufacturer of high-quality rounds, emeralds and fancy shape diamonds. “Things are going up, and by December, Christmas time, things will definitely be stronger. We are expecting a significant rise in sales from last year.”

Yoram Bernstein, chief executive officer (CEO) of Z.Y. Bernstein, manufacturer and exporter of fancy cut diamonds, is also confident. “There is a lot of money in the market and this will be evident through Christmas,” predicted Bernstein. “I believe the downturn in the U.S. economy will only show after the holidays,” he added.

Bernstein is looking at stones from D to K color and from VVS2 to SI2 clarity as the big sellers come Christmas time, while flawless to VVS1 stones are experiencing less demand due to their higher price bracket.

Rough Market

Or believes the time for princess cuts has come this season, and said that his company has focused on preparing princesses of quarter-to-half caraters to export, especially during the holiday period. Still, others are banking on larger, high-end items to boost profits, with 2 carats and up and 5 carats and up being very hot this season.

Prices of these larger stones are expected to continue to rise mainly due to the shortage of rough in the market. In addition, David Lustig, CEO of Lustig Bros., explained that because these stones are generally in “stronger” hands than other goods, sellers can afford to hold onto them until they get their ideal price.

The scarcity of rough and resulting price hike has severely cut profit margins, presenting the biggest concern for Israeli diamantaires during Christmas 2007.“Profits are extremely low at the moment,” said Bernstein. “So our biggest challenge is not necessarily to increase the volume of sales, but to extend our profits.”

Dan Eizenstien, a manager at the family-run manufacturer Avner Eizenstien Diamonds, agrees. “The main problem is price,” he said. “The orders are coming in, but profit margins are lower, so our profit on each sale will be less…but I expect turnover to be bigger.” Eizenstien, whose company exports to the U.S. and Europe, said the European market was still rather static, whereas he was already receiving Christmas orders from the other side of the Atlantic, where consumers were “less conservative.”

Hedging the Christmas Risk

Eizenstien downplayed, however, the role that Christmas plays in the sales cycle, maintaining a “year-round” approach to his business. “You need to work every day of the year, and if sales slacken at any time, you need to go out and get new clients,” he said. “So we generally don’t maintain high expectations for Christmas.”

Growth in the consumer markets of India and China has also allowed Israeli businesses to spread their risk, explained Itay Levy, marketing director at Moshe Levy Diamonds, a manufacturer of fancy stones. “We are also active in Asia — Japan and China — so we have other markets to fall back on if Christmas in the U.S. is not as successful as we hoped,” Levy said.

Much of that risk is born from an increasing habit among U.S. buyers to delay payments, and growing pressure on manufacturers to give longer credit terms. Eizenstien explained that extended credit periods have become a necessity for Israeli and Belgian businesses to compete with the rise of India as a manufacturing center. Lustig added that the cash flow problem was particularly prevalent in the U.S. and that nonpayments were more widespread than ever before.

Levy is nevertheless upbeat for the Christmas season and his company has prepared a layout of calibrated stones for the jewelry market, and will embark on an advertising campaign in the U.S. print media and on the internet to capitalize on the busy season.

“We feel the market picking up now already, after the [summer] vacation period,” he said. “We expect the Christmas season to be strong — busier than last year.”

The Marketplace

• Market is stable, despite slowdowns in Israel’s two largest markets, Hong Kong and the U.S.
• Hong Kong show was successful but the market was saturated in the aftermath, causing the once-hot market for fancy colors to go very quiet.
• Demand is good for 3 carat+, while 5 carat+ remain hot.
• Clean goods and colors in the lowest and highest categories are most popular across the board.
• There is less enthusiasm for color grades in the middle and low to middle clarities.