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Is diamond era nearing its sunset?

10 march 2020

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Image credit: Pixloger (Pixabay)

Outwardly, mining companies comment on the decline in the global demand with Olympian calmness: there are temporary issues with the distribution of the excess supply formed in the market earlier, shortage of lending to the industry, slowdown of the Chinese economy, trade war between the USA and China, etc. In short, everything is temporary, comes and goes ...

And at the same time, as if just in case, they assure that synthetic diamonds have already carved out their niche, having attracted their own separate consumer, and it seems that they do not particularly interfere with the development of the natural diamond market. Moreover, the separation measures have already been taken - from administrative (introducing separate product codes at the government levels, extending the ‘price over volume’ policies, etc.) to technological measures (developing devices like D-Secure). And what remains to be done by the key participants in the diamond market - just to rely on ‘temporary challenges’ and take measures traditional for a ‘bad cycle’ period?

Let's try to consider a more extensive set of drivers that supports or results in the diamond industry decline, with a special emphasis on the particular situation of the diamond mining leader ALROSA.

1. Threats from the synthetic diamonds

1.1. The acceptance of the synthetic diamonds by the society is an actual indifference of people to the ‘end of the cult of the natural diamonds’.

1.2. Even the global jewelry industry is practically indifferent to the decline in the status of the natural diamonds - they are simply replaced by the synthetic diamonds.

1.3. The constant decline in prices, and, as a result, an increase in the production of synthetic gem-quality diamonds cut to make polished diamonds.

1.4. Sales without much risk of the cut and polished synthetic diamonds passed as polished diamonds made from natural rough diamonds.

1.5. The difficulty of identifying (especially by buyers and in jewelry pieces) that the diamonds are synthetic stones, not natural ones.

1.6. The actual equal status of the polished diamonds made from natural rough diamonds and the cut and polished synthetic diamonds at the regulatory level, which is established by the Federal Trade Commission in the USA.

1.7. An aggressive marketing support for the synthetic rough diamonds promotion - stimulating the perception of the synthetic diamonds by young people as ‘innovative’ and ‘green’.

1.8. the lack of effective advertising and marketing counteraction to the synthetic rough diamond promotion campaigns.

1.9. The fulfillment by De Beers, that de facto is a key driver of the diamond market development, of its own synthetic diamond programme (which is a betrayal of the principle of maintaining a shortage in the diamond market).

2. Threats from the changed consumer consumption pattern

2.1. A decline in the interest in jewelry, the replacement of the cult of material values ​​among young people with ‘collecting experiences’.

2.2. The emergence of new markets for popular household goods (gadgets) that distract the attention and resources of the young people from jewelry.

2.3. The general desire of people to start living ‘spending rationally’.

2.4. People are not confident in their ‘tomorrow’ due to the instability - trade wars, etc., and they are not confident in the polished diamonds as a value storage tool.

2.5. The failure of the diamond industry to provide a rough diamond with the real status of an investment tool - the lack of measures to maintain the investment interest in rough and polished diamonds (the world’s gold and currency reserves do not perceive rough and polished diamonds and as the gold and currency reserves, there is no concept for buying diamonds, the Rapaport's pricelists are conventional).

3. Threats from the changes in the global economy

3.1. Trade wars.

3.2. Devaluations of currencies of the developing countries against the dollar.

3.3. As a result, there is no confidence in the diamond business success, resulting in tightened lending to the diamond business in the developing countries.

4. Specific threats to ALROSA

4.1. The actual absence of the domestic Russian market for the sale of mined diamonds (this was the case in the past, too).

4.2. The further decline in the retail purchasing power of the Russians.

4.3. The absence of any popular national jewelry brands in Russia ready to finance maintaining the public interest in the diamond jewellery as a commodity item (to finance generic advertising).

4.4. The absence of any secondary polished diamond market in Russia further reduces the interest of the Russians in diamonds - the circulation of uncertified loose diamonds is prohibited by law (Article 191 of the Criminal Code of the RF). At best, polished diamonds from an old jewellery piece can be sold to a buy-up or pawn shop at a maximum price of $200/ct.

4.5. There is a danger of losing almost all sales markets (except for the Ministry of Finance of Russia) if an extraterritorial ban from the United States on the transactions with ALROSA is introduced under any set of sanctions, which will be easy to do using the Kimberley Process (think back to recent bans on rubies from Myanmar, etc. )

The problems of the diamond industry should probably be addressed in a comprehensive manner, taking urgent measures aimed at each of the threats. It is clear that not all threats can be mitigated at least somehow, but some of them can certainly be.

Alas, the jewelry industry of the planet is not the salvation for the diamond industry. There is not much difference for jewelers to produce and sell products with natural stones or synthetic ones, including diamonds. As there is no such difference for cutters, either. Of course, the diamond mining companies are well aware of this, but what are they actually doing in this situation?

In the United States, they could not even lobby for the ban on the actual setting synthetic diamonds equal to natural ones – the FTC introduced such an equalization. And in Russia, ALROSA allegedly divided the flows of goods of the natural and the synthetic polished diamonds, introducing some norms into the Russian legislation. But for ALROSA, Russia is a sales market for only 5.5% of its rough diamonds by weight and 11.9% by value (2018). That is, on a company-wide scale, the effect of such measures is negligible. But for the Russian jewelry trade, the costs of this ‘differentiation’ are tangible. Was it worth it?

What can really protect the diamond business from the invasion of a synthetic diamond business? First of all, the visual propaganda of the attributes of a natural diamond precisely as a unique gift of nature. The author of this article has already expressed the opinion that a synthetic diamond is essentially a fake for wealthy buyers, but it is unreasonably expensive for the market of low-end mass products (https://www.rough-polished.com/en/analytics/111445.html). It is clear that the further reduction in the synthetics’ price is just a matter of time, and probably, over time, small cut and polished synthetic diamonds will become slightly more expensive than other synthetic stones.

The synthetic stones will never become really exclusive. And this is their ‘heel of Achilles’. But here arises the question - is the global diamond industry sufficiently clear and convincing when it explains the exclusivity of the natural origin of the diamonds to the consumer?

What does a consumer see in a ring with a natural diamond? A sparkling insert, but it is cut by a man (no matter, maybe by a machine). That is, a person sees not a natural thing, but the product of a man's activity. And what does he or she see in a ring with a cut and polished synthetic diamond? Yes, the same, indeed...

However, at the same time, there is another market – that of collection minerals. Sometimes these two markets intersect for mutual benefit in the shop display of the jewelry stores, and this symbiosis gives a cumulative effect. Beautiful pieces of ores with natural crystals, in boxes or without them, make the jewelry studded with natural stones of the same name much more desirable for some buyers! Accordingly, some of the buyers of the jewelry with natural stones do not mind to own them, but in the form of a desktop sample - a crystal on kimberlite. Once, in one of the Singapore's jewelry stores, I happened to see two such double purchases at once within half an hour.

A mass display of stones in their natural form and in the form of a cut insert in a jewelry in one jewelry shop display is one of those initial steps that could contribute to the actual, rather than administrative separation of flows of the natural and synthetic gem-quality stones, - and of the rough diamonds in particular. A buyer, though not everyone, needs the visual confirmation that the stone in a jewellery piece is natural. Such a meticulous buyer is not completely ready to take a word – he or she would better see and touch the stone. Even if this is not the same sample that has already been cut and polished and inserted into the jewellery piece, but a similar one, it doesn’t matter.

Obviously, not all consumers will be inspired by such viewing the natural crystals and stimulated to buy the jewelry, but some of them will definitely be. But the costs of such marketing are small, and the effectiveness in promotion can be high. Today, a piece of kimberlite with a diamond crystal displayed in a shop is rarely seen in jewelry stores. And in vain this wonderful marketing tool is so rarely used.

However, in Russia, unfortunately, such a marketing tool cannot be applied - under the current legislation, it is absolutely forbidden to sell uncut gems in Russia (see https://www.rough-polished.com/en/analytics/112741.html). It is interesting that ALROSA was the main lobbyist for the complete ban on the circulation of uncut precious stones!

But by and large, in the era of total IT penetration into the society, a radical shift in life values ​​and priorities, the diamond industry does not have any particular chances except the potential investment component of the diamond jewelry.

Organizing the buyback of at least large diamonds at approximately Rapaport prices (with a reasonable discount), of course, could be the best driver of the natural diamond market as the investment objects. After all, the real consumer value of a natural polished diamond is no higher than that of a polished synthetic diamond. And only attributes give it an advantage. But attributes should be supported by the recognition of the piece value by the market, expressed, in its turn, in the global long-term price rise trend, which is now in great doubt. And these should be supported by high liquidity, which is not seen in the secondary market.

Well, the cyclical nature of any market process at times brings a drop in prices instead of a rise. As for liquidity, it is another, no less important factor for the investment attractiveness. Diamonds have always had problems with this. Diamantaires could argue that selling good diamonds is not a problem. However, ordinary consumers have a different opinion about the liquidity of diamonds in the secondary market. At least, the Russian jewelry consumers think so, for whom it was unrealistic to return a full sum of their money previously invested in the polished diamonds, even in the best years for diamonds.

It is clear that the diamond industry would generally prefer the self-liquidation of every polished diamond at a moment when someone wants to sell it ... Alas, material values ​​are not a ghost, they do not vanish in thin air. And if the problem did not acutely affect the growth trend, in the falling market it has become a problem for the diamond industry survival. And there are also synthetic diamonds...

There have been many attempts to launch the market of ‘investment caraters’ but there have been no really successful ones. However, the non-existing market of really investment diamonds and the available polished diamond liquidity in the secondary market are not the same things.

Is it really impossible to organize the repurchase of large-size natural polished diamonds at reasonable prices? It does not matter who exactly could lead such a buyback. It would be much better if this process could be organized on a global scale.

For the domestic Russian market, it would be better to solve at least the minimum tasks. Let's say, to provide an opportunity to re-cut the old-cut diamonds from the grandmothers' jewelry collections. Today in Russia, it is practically impossible to do even this without risking to break the law. Is this really beneficial to the Russian natural diamond market?

Vladimir Zboikov for Rough&Polished