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Varda Shine: 2010-2020 will be a Diamond Decade

19 july 2010

Varda Shine, Managing Director of Diamond Trading Company (DTC), met our correspondent in London shortly before the World Diamond Congress in Moscow for this interview where she shared some of her views on the current state of affairs in the diamond industry.

What is the anticipation of De Beers for price movement in the short term (2010) and long term (5-8 years)?

I am very happy to talk about it. I’ve been saying since the beginning of this year that we are starting a new decade, 2010-2020, which, as we very strongly believe, is going to be a diamond decade. If you look at those ten years you have going demand in China and India, which is to continue going very rapidly. There are small steps of recovery in the United States, but it is still not out of the recession. However, within these ten years America is going to come out of the recession.

So when we take consumer demand in China and India and the rest of the world - you know, Brazil, Russia, other places, then America coming back out of the recession - and then at the same time we look at the supply picture saying that no new mines have been found and the diamond mines existing today are all quite of age, while supply is stagnant and demand growing, there is going to be a gap between supply and demand. Therefore, you believe that the decade is to be very good for diamonds.

So in the mid-term I am very optimistic about diamonds and diamond prices and what is going to happen. I think that this year we’ll see a really good bounce-back, because what happened in the beginning of the year was because retailers were re-stocking while the last year retailers didn’t really buy a lot of diamonds.

I think what we have seen in the market is overreaction. We call it the ripple effect. When there is demand at one end, and then it goes back one step whereas people think there is more demand, so if you look at what is happening it is exactly the other way around. At the end of 2008, in the recession, consumer demand in the U.S. went down by 20%. Demand for rough went down by 80%.

What we are seeing now is the opposite. There has been more re-stocking, but this was overreaction in the rough activity in the first half of the year. We believe the second half is going to be good, but we are more cautious.

What is your forecast for diamond jewelry demand in major consumer countries?

We look, as I said before, at markets like China and India which over the last few years have seen double-digit growth every year, even during the recession. So what that basically means is that there is a big growing market in China and India, although it starts from a small base. And we believe it is going to grow this year as well. So China and India are going to see a nice growth. I think that in the U.S. we have to assume a very small growth, but still a growth. Altogether we believe the year is going to be positive.

De Beers traditionally used to generate marketing ideas and recently, last autumn, it was Everlon. Now it is not generating anything. Is it dangerous for the market, to your mind? Is it possible to establish an organization of major diamond producers for joint work in this field?

De Beers for the last 60 years has been advertising diamonds and creating consumer demand. We’ve spent billions of dollars on that. When we had a bigger market share it was worth our while doing it and creating generic demand. With a today’s market share of 35%-40% we are basically not able and do not want to carry on. Is it dangerous? Yes, because we do deal with a luxury product. You know, it’s not oil. If you drive your car, you need to fill in petrol. A it’s not bread. It’s a luxury product.

Therefore we believe it is dangerous and it needs some marketing, generic marketing to encourage people to consume diamonds. Which body should be doing it? There actually were some discussions which were initiated by ALROSA, funny enough. In 2008, it was initiated by ALROSA to create an International Diamond Board. And that International Diamond Board was going to be of major rough producers plus their customers with everyone contributing money and having a body that basically creates demand for diamonds.

You know, in the United States there is the Milk Board which has big campaigns to drink milk. Every milk company does its advertising. But they still have a generic campaign for drinking milk to make sure that everyone benefits. This is exactly the same thing since we actually look to it that there is something similar to encourage people to consume diamonds.

And then Tiffany can market their own thing and Cartier can market their own thing, but you have an umbrella that talks about consuming diamonds, about why actually to consume diamonds, what’s the benefit of consuming diamonds. So we would love to see the IDB being re-instated and the idea taking further.

I think it would be interesting to see what ALROSA thinks of that because I think ALROSA was not really certain about it. So we’ll have to see where it comes to, but we believe generic marketing creating demand for our product is a very important thing.

We have huge competition now. Just look at how much marketing there is now for iPad! Now iPad costs $800. It’s real competition to diamonds. When you think about what you will buy for Christmas present you have an iPad versus a piece of diamond jewelry. And because you see more and more advertising for iPad a lot of people will go for iPad.

And we know that over the last few years we’ve lost our market share to iPhones, to iPods, to all this new technology. Holidays are a big competitor. Expensive holidays, spa holidays – all of that is big competition to us. And also gold and handbags. Women like new handbags and the price of handbags is higher than that of diamonds. So the reality is that we have big competition in the luxury market today and if we keep quiet, if we don’t make enough noise about why it is really good to buy diamonds, it’s not going to happen automatically.

What caused the decision to move diamond aggregation from London to Botswana and when is it to happen?

Our decision to move aggregation to Botswana was made because most of our diamonds today come from Southern Africa – Botswana, Namibia and South Africa, our biggest producers. Between them they produce the biggest part of our production. We have a few diamonds from Canada. But really most of our diamonds come from Southern Africa.

We have just built a state-of-the art building in Botswana which has the latest technology for sorting, which has the best equipment. So therefore we though it makes sense to actually create a Southern African hub. As far as we are concerned and Botswana being our biggest producer and our partner for the last forty years this was our choice there. When is aggregation going to move? Probably some time at the beginning of the next year, the first quarter of the next year. That’s the plan. And Paul [Rowley] and his team are working on that to make sure that happens

What is your position on Botswana’s wish to organize separate rough sales in Gaborone?

There are a lot of rumors in newspapers and there is a lot of noise in the market. I wouldn’t know what is right and what is not because that information comes from articles in newspapers. I think we do have great partnership with Botswana as I said over the last forty years. We are looking at the partnership, at how we move things forward into the future. We recognize Botswana’s aspirations to become a diamond hub and we will work with them to achieve as much as possible.

What could you say about modernization of the Kimberley Process? What will such modernization consist in?

It’s a great question. You know that in a week’s time in Saint Petersburg there will be a World Diamond Council meeting to discuss the Kimberley Process. And actually a week before there is the World Diamond Congress in Moscow in which they are going to discuss the Kimberley Process.

I think what is really important to remind ourselves as an industry is that when we introduced the Kimberley Process there were some real wars taking place in Africa where hundreds of thousands of people were dying. There were some real conflicts and over the last 7-8 years that the Kimberley Process was working it actually made a real difference. It made a real change.

So when you look at what is happening today you don’t really have any wars and rebel forces using diamonds for weapons. I mean the situation in Sierra Leone and Angola and Congo is much better. So as an industry we have a real important achievement. Also the Kimberley Process gives us a great umbrella, because there is no other industry where you have governments, NGOs and companies sitting round a table and looking after ethical behavior of the industry. So I think we need to be proud about what the Kimberley Process is doing and achieving and the fact that it has given the consumer confidence.

Looking into the future I think it is going to be important to see – if we don’t have all those big wars – what is the next step for the Kimberley Process. Of course, everything they are doing today is to continue, but what else can be added to that? And I think those are the conversations they are currently having. Hopefully when they will meet in Saint Petersburg next week we will hear more about their decisions.

Are you going there?

Unfortunately I can’t. We are going to be in Canada next week. But there will be a representative of the DTC there.

Have you ever been to Moscow?

Yes, a couple of times, it was fantastic.

And the last question. Indian banks, they continue to practice their preferential credits for buying rough diamonds, mostly Indian goods. Is there a risk that such practice can cause a new economic bubble as it was two years ago? Is it necessary to take measures and which to limit speculation in rough diamonds?

I don’t think that just Indian banks, I would call that question “liquidity.” So the fact is there is more liquidity available for people to buy diamonds. Is that going to create speculative behavior? I think that is really the question, whether it is Indian banks or Israeli banks or Russian banks or American banks. As long as you can get access to liquidity is that going to create speculative behavior or a bubble?

I think what we have seen is that over the last six months people were very much chasing rough trying to buy as much rough as possible because there was a perception of shortage and people used liquidity from banks, people brought equity into the business, people used money they could lay their hands on in order to buy rough as much as they can.

I think that is why we have such a good first six months. Is it sustainable? We don’t think so. We think that the second half is going to be much more considered, much more responsible. People are going to actually look at what they are buying, they are not just going to buy everything and therefore I hope and I believe that the behavior of the industry in the second half is going to balance the first half and therefore we will not see a bubble and we will not repeat [what was] two years ago and the problems that we had then.

I also think it is important to remember that what happened two years ago didn’t really start with the diamond industry. It was the banking industry, it was the insurance industry, it was the whole world - there was recession in the world. People were losing their jobs, companies that were big names were shutting down and people stopped buying luxury. So that is what impacted our business. It wasn’t the diamond industry that created the recession, it was the recession outside the diamond industry that impacted luxury goods and diamonds were no different being part of the luxury business and therefore we were impacted as well. So I believe that we are to see a more cautious second half which is going to avoid a bubble. But you know the reality is known as a crystal ball and we all have to wait and see and maybe we meet again next year and know better.

Galina Semyonova, Rough&Polished, London