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19 september 2018

Gaetano Cavalieri: Over the long term, demand for diamonds is likely to grow at a steady pace

25 september 2017

gaetano_cavalieri_fullsize.jpgThe World Jewellery Confederation (CIBJO) represents the entire jewelry industry embracing a whole variety of companies, from those mining precious metals and gems to those, which are manufacturing and selling final products. The confederation members are national jewelry associations from more than 40 countries, including Russia. In 2006, the CIBJO was the only organization granted the official status of a consultant to the UN Economic and Social Council on the development of the global jewelry industry. Gaetano Cavalieri, President of CIBJO, has kindly agreed to give this interview to Rough&Polished and to talk about his vision of the situation in the diamond industry.

What will be the key issues on the agenda for the diamond industry when CIBJO meets at its annual congress in Bangkok at the beginning of November?

There are number of important issues, certain of which will be addressed in general session and others by our Diamond Commission.

Issues that will be raised in general session relate largely to Corporate Social Responsibility, and more specifically to the measures that are required to defend the integrity of the industry’s chain of supply. In CIBJO, which covers the entire jewellery industry, we take a panoramic view of the challenge, realizing that it is not only diamonds whose integrity needs to be protected, but also coloured gemstones, precious metals, pearls and coral. This is based on the understanding that, if the integrity of any component in an item of jewellery is at risk, then so is the value of the entire piece.

Our Diamond Commission’s session will be considerably more focused, discussing issues that are specific to the diamond sector, including updating our Blue Book of grading standards and nomenclature, as we do from year to year. At this congress, a special emphasis will be place on the language used to define and describe diamonds, which is an absolutely critical component in the campaign to properly differentiate between natural and synthetic goods.

How could the new EU conflict minerals legislation impact on the jewellery trade?

The European Commission will only issue proper guidance most probably early next year, but the intention of the new legislation is that at least 95 percent of imports of gold into the EU will be covered by the new law.

What this means is that only smaller companies falling below a certain threshold, which still needs to be set and presumably be adjusted periodically, will be obliged to institute means of due diligence that comply with a system approved by the European Commission. And, if they buy from non-EC-approved smelters or refiners, they also will have to undergo independent third-party monitoring.

So, it is not clear at this stage what percentage of European jewellers will be impacted, but unlike the Dodd Frank act in the United States, the EU law will not only affect publicly-listed companies.

The 95 percent threshold will depend on the volume of imports in any given year. Consequently, when it is adjusted jewellers could find themselves included or suddenly exempt. Furthermore, like Dodd Frank any company supplying an EU importer who is subject to the regulations will itself need to do due diligence itself, in order to demonstrate that its supply is not tainted by conflict. This means that the new law is significant not only in Europe, but internationally as well.

Because of this degree of uncertainty, our advice is that every company merchandising gold or gold jewellery components to companies based in the EU become familiar with the law, and we are working hard to educate the industry. As part of this effort, we are co-organizing a seminar on September 24 in Vicenza with the Italian Exhibition Group, and developing with UL a toolkit that will help jewellers understand and become compliant with the new legislation.

Can we say that the diamond market has finally recovered after the market dive in 2014-15?

It depends where you look. In the United States there certainly was growth, and in fact the strength of the U.S. dollar suppressed growth elsewhere.

In principle, however, China and Japan looked more promising, and even Europe is showing signs of recovery. But the markets remain depressed in the Gulf region and also India, although there the government’s demonetization policy was a factor in 2016, and that does not really reflect on basic consumer demand.

Do you think that future rough diamond shortfall is possible?

In principle it certainly is possible, although it most probably will not come as quickly as some have predicted, in part because of the slowdown in the market over the past two years.

But over the long term, demand for diamonds is likely grow at a steady pace, driven by rising wealth in markets like China and India. And, if that is coupled with an insufficient rise in rough diamond supply, then a shortfall could result.

What is the best way to keep the existing balance between supply and demand?

I don’t think there are magic solutions. There was a time when the rough diamond market was operated like a cartel, and, as the single dominant supplier of rough goods, De Beers could adjust supply to meet what it believed was market demand, meaning that prices would remain stable or rise at a steady pace. But those days are long gone.

As is the case with any product, it should be the market that regulates supply and demand. If there is, as suggested, a shortfall in rough supply, prices will rise. But, because we are talking about a non-essential product, there is a point at which the consumer will decide that prices are too high. This interplay should create the correct balance.

I say “should be,” because there are weaker links in the chain of supply that distort the process. For example, there is a strong school of thought that believes both rough producers and jewellery retailers are taking advantage of the midstream, allowing it to absorb much of the imbalance.

Do you agree with the opinion that, since polished diamonds are not at all articles of daily necessity, it is highly probable that, in case of even slight growth in disposable income, people would prefer to buy some living essentials or choose any other popular luxury item?

First, my assumption would be that disposable income includes only that capital that remains after essentials have been purchased. As a luxury product, however, diamond jewellery has proven itself to resilient over the long term, and that should remain so as long as we do not drop the ball from a marketing perspective.

It does not have to be an “either-or” choice. Consumers can buy electronics and exotic vacations, as well as jewellery. Our job is to convince the market that there are times that jewellery is always the appropriate choice.

What is required to support the reputation of diamonds?

Simply stated, do business in proper and transparent way, and ensure that the interests of all our stakeholders, along the entire chain of distribution, are reasonably protected.

This means more than just ensuring that rough diamonds are Kimberley Process compliant. It means that you are also compliant with AML regulations, you are taking proper anti-corruptions measures, you are ensuring the health and safety of workers, you are complying with accepted labour practices, you are practicing sound environmental policies, you are fully disclosing the presence of synthetics and treated diamonds, and you are taking an active interest in looking out for the wellbeing of our industry’s stakeholders, particularly in the mining and production countries.

Do you share the view that diamond industry faces growing challenge from recycled diamonds?

We need to make sure that recycling does not challenge the industry, but rather provides opportunity, particularly in a market where adequate rough supply may become an issue.

But, as is the case with so many things, our success in marketing natural diamonds will play a critical role. As long that as the diamond retains its emotional value as an everlasting symbol of love and commitment, it is unlikely that uncontrolled volumes of recycled goods will flow back into the market.

Do you expect an increasing share of the diamond jewellery market?

It depends on what you are referring to. If you are talking about diamond jewellery’ share of jewellery sales in general, I do not expect it to take a larger share, even though the volume of diamond jewellery sold is likely to rise quite considerably. Where we could see an increase in share is in terms of value, if diamond prices outpace the rise in the prices of gold and platinum.

If a you are referring to the share of diamond jewellery relative to the sale of luxury goods in general, we could see an increase, and this is more likely to occur in the faster developing markets like China and India. Once again, this will depend on how successful we are in the marketing arena.

Can we say that the global gems and jewellery business facing liquidity issues?

The midstream is definitely under pressure for a variety of reasons, including the Basel III banking rules, which tend to discriminate against smaller and medium sized firms.

But, ultimately, what has created this situation is the way in which the midstream has been required, through no choice of its own, to underwrite much of the finance driving the trade. This is a result of rough suppliers demanding that midstream players pay cash, while the retailers expect to receive from the midstream polished goods on consignment, as well as generous terms of payment. The result has been a consistent squeezing of the midstream’s profits and, by extension, its bankability.

Until this problem is properly addressed, liquidity is likely to remain an issue.

Alex Shishlo, Editor in Chief of the European Bureau, Rough&Polished