Emerging From Crisis

RAPAPORT… Responsibility, transparency and sustainability were on the minds of industry players as they met in July in Russia — first for the 34th World Diamond Congress in Moscow and then for the seventh annual diamond summit in St. Petersburg. Participants were understandably anxious to move on from, and never return to, the turmoil the industry faced in 2008 and 2009. Discussions on how to apply the lessons learned during that financial upheaval took center stage at the meetings, second only to the immediate issue of diamond exports from Zimbabwe.

“Without a doubt, the past 18 months represent the most difficult economic period that any of us currently working in the diamond sector remember but, at the same time, we can be proud that our industry came through in relatively good shape,” said Avi Paz, president of the World Federation of Diamond Bourses (WFDB). WFDB, along with the International Diamond Manufacturers Association (IDMA), stressed the need to adopt more responsible business practices. “Future growth is through sustainability,” said Ronnie VanderLinden from IDMA’s executive committee. “It’s being smart with production levels, smart in demand levels and not overpaying for merchandise.”

Changing Practices

World Diamond Council (WDC) members agreed that the crisis pointed out the need to change selling practices all along the pipeline. The WFDB called on rough diamond producers to sell more of their merchandise outside of tenders. Shmuel Schnitzer, honorary life president of the WFDB, called auctions one of the “sicknesses” of the industry, noting that they “remove small and medium-sized companies from the industry.” With rough prices rising and difficult to predict, it is increasingly hard for manufacturers to do long-term planning. “After the shows, people often tell me on the plane going home ‘You know, I sold polished, but I don’t know if I would buy the rough again,” said Shlomo Eshed, president of Israel’s Precious Stones & Diamonds Exchange. The idea of allocating less stock in tender trading was supported by ALROSA, Russia’s largest miner. “Selling all diamonds through auctions is unacceptable; only long-term contracts give stability to manufacturers,” said ALROSA President Fyodor Andreev.

Noting manufacturers have to pay cash for rough but sell polished on credit, Paz urged WFDB members to greatly reduce dependence upon memo sales and lengthy terms of credit. Victor van der Kwast, chief executive officer (CEO) of ABN AMRO’s International Diamond and Jewelry Group, said that before the economic crisis, the term for collecting receivables had moved to an unacceptable 240 days, giving diamond manufacturers “the longest credit window.” The crisis showed that receivables must be collected much faster for the companies to survive as the amount of credit available is down. David Rosenberg from the Diamond Bourse of Southeast United States said “Ninety days would be a more reasonable term for diamantaires at different levels.”

Collecting receivables from retailers is equally problematic, said Alex Popov, president of the Moscow Diamond Bourse, partly due to “the outrageous position of buyers in the U.S. who squeeze the suppliers with 180-day terms for payment for goods.” Dione Kenyon from the Jewelers Board of Trade (JBT) believes one way to break this cycle is for manufacturers and dealers to stop “doing business the old way” when high profit margins could compensate them for waiting.

Van der Kwast said the amount of credit available for the diamond industry shrunk from $13 billion before the crisis to $8 billion during the worst of the downturn, but that it has bounced back to between $10 billion and $11 billion in 2010. The banks became more selective about who they give credit to. “Our industry is healthier than a year ago,” said Ronald Friedman from the Diamond Manufacturers and Importers Association of America (DMIA). “Those who are doing the best are those who were not heavily leveraged. The banks are much better off now in financing receivables than they were in financing inventories.”

Transparency

The issue of transparency was ever present at the meetings, whether in relations with banks or consumers or in the formation of rough prices. “The lack of transparency in the industry, the lack of transparency in price formation — all this we need to change,” Andreev said in his opening speech at the congress, noting that this issue hampered the industry’s relations with banks during the economic crisis.

Van der Kwast said although diamond industry transparency has improved, there’s still not enough data available sometimes. However, stricter bank and government regulations are forcing the industry to open up. Kenyon said there’s still too much secrecy in relations between companies, which she experienced in collecting information for the JBT database. Ari Epstein, deputy CEO of Antwerp World Diamond Centre (AWDC), said tougher regulations have increased transparency in the diamond world but that the industry needs “to put effort into showing we are transparent.”

Consumer Confidence

Regaining people’s trust in diamonds and promoting the industry in the eyes of consumers were top issues at the meetings. Industry participants cited conflict diamonds, business practices during the crisis and lack of promotion as among the factors that led to dwindling consumer trust.

“The evolution that we face today and that we embrace is going from B to B — business to business — mode to B to C — business to consumer — mode,” said Stephane Fischler, the chairman of International Diamond Council (IDC). To do that, he points out, supporting consumer confidence is critical.

“Confidence in businesses and government is at an all-time low,” said Matthew Runci, president and CEO of the Jewelers of America (JA). At the meeting in St. Petersburg, he presented consumer behavior observations by jewelers and retailers in the U.S. — from Tiffany to big stores to middle-size companies. “Customers come into our stores every day asking us to explain the basis for the trust we ask them to place in our stores and our products,” he quoted one very large midmarket chain as saying.

“Our industry is overcriticized compared to others,” said jeweler Roberto Coin, noting that of all the stones he uses in his jewelry production, only diamonds and rubies from Myanmar provoke strong feelings with customers. “We need to re-create the credibility of the diamonds all the way down the pipeline,” he said.

Another widely shared concern in the industry is that diamonds are losing their market share to other luxury products. “If one can buy three diamond rings for $1,000, it’s not normal,” said Sergey Oulin, president of the Russian Diamond Chamber. “Louis Vuitton has managed to incite passion for things that live for one or two seasons, but we are so much behind here.” Building up the image of the diamond as a precious item is regarded as another task for the industry. “Discounts on diamonds that were offered during the crisis created a lot of damage in the industry,” said Coin.

The need for generic diamond advertising was raised once again at the conclaves in both Moscow and St. Petersburg. Two years ago, the industry’s champions agreed to create an International Diamond Board (IDB) to work on the campaign, but it didn’t come to fruition. Their stalled efforts made many question if IDB was still a viable idea. “Generic marketing is very important, but should it be IDB or another organization, I don’t know,” said Epstein. “If IDB is not created today, we will create something else.”

IDB was supported by such trade organizations as WFDB and IDMA. “It seems that all parties that have been asked to support this important venture understand the value of creating an entity that will advance generic diamond promotion and advertising projects in the global diamond jewelry consumer markets,’’ said IDMA’s president Moti Ganz. “IDMA sincerely hopes that the parties involved will make significant progress soon.’’ However, the only progress made at this latest round of meetings was a commitment to continue to discuss the issue.

Oulin said IDB was conceived as “a way to organize dialogue without getting bogged down in bureaucracy.” Yet one stumbling block to its implementation was different visions on how much governments should be involved in the industry — with some players favoring the free market approach and others insisting a certain degree of state interference is necessary. “We saw during the crisis what painful results reliance on the market has,” said Fischler, adding that debate is essential to finding a solution.

“IDB was a fantastic exercise for us to learn what we have to work on and where we are going,” said Chaim Even-Zohar, trade consultant, in whose view IDB is long dead.

New Member Category

Although the KP debate overshadowed other talks during the meetings in Moscow and St. Petersburg, two events are worth noting. At the congress, the WFDB welcomed a new member — South Korea — and accepted for the first time in its history representatives of governments of diamond-producing countries as “nation-affiliated members.” That designation would allow them to participate in World Diamond Congresses and Presidents’ Meetings. There have been a number of concerns about the participation of the countries due to their different legal status. However, Schnitzer said. “If the country is ready to adhere to our rules, it’s more than welcome; it’s not ‘mission impossible.’ Any cooperation between the industry and the producing counties benefits the industry.”

Jae Kim, the president of the South Korea Diamond Exchange, said that participation in WFDB would help bring the diamond business in his country out of the gray area. He described the South Korean market as “quite big,” but said that about 80 percent of it is still done under the table. “There is a need for cutting facilities right now,” he said. “Consumer confidence is so low that we want international companies to come in with their names.”