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17 december 2012

The rough and polished diamond market had been limping throughout the year as the Euro-debt crisis, sluggish economic recovery in the U.S and tight liquidity continues.

Tacy president Chaim Even-Zohar said demand for diamonds was also going down as the industry competes with consumables such as iPads and iPhones.

He said that diamond consumers in the U.S and China were also going for low quality diamonds.

Even-Zohar, who spoke to Rough&Polished African Bureau Editor-In-Chief Mathew Nyaungwa on the sidelines of the inaugural Zimbabwe diamond conference, which was held recently in the resort town of Victoria Falls, said prices for rough were expected to drop by 13 to 15 percent in the years to come before stabilising in 2016.

Factors currently dogging the industry, he said, were expected to remain in place.

He also said that Anglo American overpaid $1 billion when it acquired the Oppenheimer’s 40 percent stake in De Beers earlier this year for $5.2 billion, slightly more than initially estimated to push its stake in the diamond giant to 85 percent.

Below are the excerpts.

Can you comment on the current state of the rough diamond market?

Last year we made it very clear that prices of rough will go down. I said…prices of rough will have to go down by 13 to 15 percent. According to our models the prices of rough still have to [continue going] down somewhat and then stabilise not before 2016, where we will see the strengthening of rough prices.

The weakness of the rough prices is a reflection of the situation in the market and that is really the answer. We don’t see very much change [that] 2013 will be better than 2012 from a diamond industry perspective.

We have to be very careful. We have to interpret what is happening in the right way and don’t speak to old perceptions. I presented graphs here at the conference showing a tremendous supply and demand gap.

There was a linkage in the past between demand and the Gross Domestic Product (GDP) but since the early 1990s, throughout the 1990s and throughout the last decade, the growth in GDP have been far more than the growth of diamond demand and the gap is widening. We are losing the wallet. Why are we losing the wallet? Competing items such as iPads, iPhones and other priorities. To some extend the lack of advertising, there is no money in the business…it will remain a difficult market for a while.

Even though you don’t expect a major shift, the rough and polished market normally improves towards the Christmas and New Year holidays. Do you expect the same trend this year?

You will get all kinds of glowing reports about the increase in diamond jewellery sales. You will see, I would assume an increase of diamond jewellery sales of 4 to 6 percent but in terms of polished content the increase is not going to be more than 1.5 percent. Why is that? Because we see downgrading, we have seen that jewelleries are simply using cheaper diamonds. If you look at the value of the diamonds in terms of the overall jewellery piece you will see that the diamond content that had gone up has gone down again…

I understand demand from China for rough and polished diamonds has dropped this year. What was the cause?

Demand in China has not so much dropped but it has gone down in terms of the quality of goods that they are buying. It’s a reflection of the economic reality. We [diamonds] are getting less important.

So what does this tell about the future of the diamond industry?

If you look at production in 2006 and today there is a 30 percent decline in carats. We have a decline in carats, a decline in work, a decline in polishing, and a decline in units of diamond jewellery. It’s very hard for the business to grow if the supplies are diminishing. I pointed out during my presentation that we had a doubling of rough prices at a time that we also had an increase of 10-11 percent in carats. So to grow the market you need products.

BHP sold its diamond mine to Harry Winston and Rio Tinto has also shown willingness to exit the industry. Do you think that is a vote of no confidence in the diamond industry?

I think things happen for different reasons but taken altogether it doesn’t look that good, I agree with you. Nicky Oppenheimer sold [shares in De Beers] for his reasons, but I don’t understand Russia. I don’t understand why the government, which fought all these years to get a 51 percent stake in ALROSA, would want to sell their stake or go public, I don’t understand but it’s the same thing.

Now that Anglo American has a controlling stake in De Beers, do you anticipate any major changes in the manner the company is run?

Let me say first that I think Anglo probably overpaid by at least a $1 billion. I also think that management made a great effort to justify the purchase and they will be highly motivated to make the success out of De Beers. They are not new to the diamond business.

Anglo has known De Beers all its life and they do have the skills, the know-how to take it forward. The question is how Anglo can move forward for they are over-leveled; their net debt is over $10 billion. Anyone who will come in there [as chief executive] will have to make changes and in order to change they will have to sell assets. I hope they will not touch De Beers. Perhaps they might go for some kind of a Chinese investor to buy De Beers, I don’t know but in principal I don’t think there will be any major changes and if there are any changes let’s assume it will be for the better.

Still, on De Beers, Botswana decided not to exercise its pre-emptive right to increase its stake in the diamond giant to 25 percent from 15 percent. Do you think they made a wise decision?

Even on beneficiation people are saying that it’s a wrong thing for the country to do because Botswana’s economy is too dependent on diamonds. When you run out of diamonds what do you do with all those factories? Maybe you should have invested in something else and the same is true for the other 10 percent.

It was too expensive for them and you don’t have more voting power when you have a 25 percent or 15 percent stake. 26 percent would have been nice. So they didn’t spend the money and I think they were right not to spend the money.

KP will be celebrating 10 years next year. On reflection, what is your assessment of the organisation?

I know everybody is congratulating us [KP] for a good job but I have mixed feelings. I don’t believe [it is] because of the Kimberley system the civil war in Angola…[and] Sierra Leone ended…but it has made the industry far more transparent, which is good.  

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished