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Let us go back to the magic – Stéphane Fischler

09 february 2015

stephane_fischler_xx.jpgOn February 1 to 3, Antwerp hosted the sixth Antwerp Diamond Trade Fair (ADTF) welcoming hundreds of buyers not only from the world’s established jewelry markets, but this time also from the markets, which until recently remained largely unexplored. In his address during the opening ceremony, AWDC President Stéphane Fischler said the ADTF was an important link in Antwerp's annual promotional and marketing campaigns. On the 2 of February, having arrived to Moscow to bid last farewell to Fyodor Andreev, ex-President of ALROSA, Stéphane Fischler gave an interview to Rough & Polished, in which, speaking about the Antwerp Diamond Trade Fair, raised a number of other issues of current concern to the global diamond industry.

Now that the sixth edition of the Antwerp Diamond Trade Fair is an accomplished event, it looks as if the convenience of doing business from computer-burdened offices is giving way to the good old pattern set on a new foundation. What are the reasons behind this kind of ‘renaissance’?

Well, first I would like to comment on the term “renaissance” contained in your question. We might have been less “visible” from the outside, but our performance over the years, clearly indicates that we never ceased to be very active. We are just pursuing our continuous improvement strategy to strengthen Antwerp’s competitive advantage. Going back to the Antwerp Diamond Trade Fair, I feel personally that relying solely on “cold” technology is certainly not enough and not, I would say, fitting for the diamond business. At the end of the day, we sell diamonds. We don’t sell any other commodities, which come in uniform size, shapes and so on. I believe that any time you sell a diamond to a consumer, there is a story behind it to be told. I believe overreliance on technology takes away the Magic.
The magic that is so unique to diamonds. And I believe that diamonds have a unique “touch and feel” to them. It is about people, about taking a diamond in ones hands, admire it, get a feel of it.  Of course, technology allows you to transfer an information “package”– but will never convey the magic of what diamonds are about. So, in that sense I think the physical encounter between a buyer, a diamond and a seller is after all what ensures the ultimate commitment to diamonds. And that’s exactly what the Antwerp Diamond Trade Fair is offering. That is why I believe it is successful.
I would like to point also to the upcoming rough diamond trade fair organized by the Diamond Kring, the only diamond bourse in the world solely devoted to rough diamonds. Which is a “first” worldwide, again in Antwerp, and powered by the AWDC.  It will have its second edition this month. The first was an overwhelming success.

Antwerp was the initiator of this trading pattern, which now seems to be reproduced by other global diamond centers in their own ways. Do you think it may deprive your venture of its attraction?

They say that imitation is the sincerest form of flattery. Yes indeed, Antwerp was the innovator as in many other aspects of our industry. Again, I want to give credit to the bourses for having jump-started this local bourses’ based trade fair process, which was sorely needed, I must say. But they took up the challenge and they are doing it, which is to be commended. We at the AWDC stand behind them one hundred percent and will continue to provide our support as to any other added value venture. I’m happy to see other centers joining in. I see it in Israel, I see it in New York, I see it in other places. The main requirement is – adding value to the business, and to the members.
On the other hand, I see a lot of press releases going around the world every week. I hope the amount of added value realized is at least equal to a fraction of the amount of press releases that we see floating around.
So, I think people should focus more on providing good service and value for their members than spending time and money to issue so many press releases.

We know that today you were to give a press conference in Antwerp to announce trade figures reflecting the performance of Antwerp’s diamond sector, but instead came to Moscow to attend the funeral of Fyodor Andreev, ex-President of ALROSA. Could you say now if 2014 was better or worse compared with 2013 and in what regard?

Yes is it is true. I traveled to Moscow to pay my respect to Fyodor Andreev, his family and to the people of Alrosa.

Coming back to your question related to our 2014 trade figures. It was both. 58.8 billion U.S. dollars, is a record. It is the highest figure we ever reached in Antwerp, which in a sense is testimony to the strength of Antwerp in terms of its ability to continue attracting new business and maintain growth. On the other hand, the result of 2014 for the large majority of companies was very challenging, even negative for some. I mean, if we look at manufacturers and wholesale traders, especially on the polished side, but I believe also - certainly in the second half - on the rough side, it was simply disappointing. So, you have growing volumes and lower profitability, if not negative results. It is worrying, and I believe something has to be done. But this requires a collective reflection and solutions including all stakeholders. I am a little bit concerned that there is no concerted movement to really start sitting down and look at all those issues that impact profitability. We know that the main issue is, of course, the discrepancy between the price of rough and the price of polished. There are many issues impacting this situation, but I believe that dialogue should be started. I understand some producers may be not very interested in this dialogue, but I believe it is to their advantage that the industry starts to challenge the current dynamic of the last few years. Again, I would hope for concerted action. I think that it is urgently needed. One part is, of course, a natural process, about variance in improved efficiencies creating better margins for some and increasing their market share. I believe as long as it is the result of higher efficiency, better marketing, better sales, better overall management that’s fine. But if it is the result of negative conduct by some participants in the industry, then we have serious concern.

Negative conduct, what do you mean by that?

I mean what we have seen for some time, for example the issue of abuse of grading standards. We have seen and heard about the criminal introduction of synthetics in the pipeline. We see banks being more and more concerned and aggressive in detecting so-called round tripping. All these issues are contributing to create and sustain “ghost” margins for some in the industry and distort competition. If this is what is contributing to continuous speculation, then it is a very serious challenge and the industry should take the lead to address it. I believe some people in the industry are nervous or afraid to confront these various issues, including some in elected positions. Let me be here on the record: to those who are afraid to confront these, step aside and let those, who are really focused on trying to find solutions and re-establishing a fair play in this business, lead.

There seems to be another problem, which is the apparent rift between miners and manufacturers. Recently, Philippe Mellier of De Beers was cited as saying that his company believed there was money to be made with the rough stones sold by De Beers, but it was down to the sightholders to do what it takes to make money. On the other hand, Maxim Shkadov of IDMA said that the system of sales, where clients were cajoled into buying at prices that they knew were not going to make them money, was flawed. What is your take on this situation?

Yes, to come back to Mr. Mellier’s [remarks] and based on what was reported in Rob Bates’ interview, I think it was totally out of order and was extremely disrespectful in the manner he approached the issue. One can talk about his or her business model and opportunities, but one should respect its customers and especially those who transform rough into polished. I think that Mr. Mellier should understand that without rough being transformed into polished it will remain a chunk of coal, like Henry Kissinger would say. And there would be no Botswana success story as well as benefits to so many other African producers, if not for the people, who cut and polish rough into polished gems.

The other issue is that the diamond industry, say, roughly fifteen-twenty years ago, had a sight system but with a genuine dialogue between producers, manufacturers and traders.
Now, let’s not kid ourselves, everybody looks after his own interests first, that is only normal. But having said that, everybody should realize that our interests are interlinked. The lack of profitability in the industry the last few years is impacting very strongly the ability of bankers to finance the industry. I would question the viability of a sales system for rough diamonds without the long-term commitment of the banks based on profitable manufacturers.

Time to re-enter into a dialogue with the industry and since your question is directed at De Beers, the need to look at what is the best for their shareholders in general, their partners in Botswana, and for the diamond mining industry as a whole in terms of sustainability of rough prices. I am well aware about the very high financial requirements that investment in first class mining command – we are talking about huge amounts. On the other hand, to ensure that sufficient margins are generated to make these investments sustainable; it must remain so along the whole value chain.

Do you think these investments should also go into generic advertising or they should be used for miners’ own brands, as it is, for example, being done by De Beers to promote Forevermark?

Well, like every company De Beers has its own interests in mind. They have to consider, if their interest are best served in focusing exclusively on their own brand, meaning Forevermark, De Beers Diamond Jewelers and so on. If they believe that is the way the diamond business will evolve - by going alone, I beg to differ. In the sense that I believe diamonds are part commodity (I agree), but mainly a luxury product required to be marketed in a sustained manner. Brand marketing can only play an important but limited role.
There has been an attempt to create a kind of cross-industry fund for generically marketing diamonds.  Maybe this attempt should be revived. I sense that the whole industry knows that there is a lack of generic marketing, next to brand marketing. Besides attempts to launch diamond based investment products, diamonds as a luxury item remains a one-hundred-percent emotional commodity that should be safeguarded from being associated with negative conduct and impact. Certain marketing campaigns are focusing in part on these “negatives” to differentiate themselves. As being so-called “conflict free” trying to imply by default that all the others are somewhat tainted. That is unacceptable, because we all know that the diamond industry working hard within the Kimberley Process has managed to reduce the impact of diamonds on conflict to a very, very small percentage. We must never rest on our laurels but nevertheless be proud of our collective achievements. So again, to continuously promote by means of differentiation these branded diamonds as being conflict-free, ecologically safe and so on, I think it goes against the grain of what the collective best interest of the industry is. De Beers is free to promote its own brand of diamonds as it wishes, but I would still think that as a leading producer, it is in their own best interest to pick up the challenge in concert with the whole industry.

Now that ALROSA is increasing its supplies of rough to India, does it affect the Antwerp diamond market in some way?

We need to look exactly at what ‘increased supply’ means and I congratulate, of course, my Indian colleagues about their efforts, and these are real but marginal increases. We still, as you well know, receive the bulk of the goods of ALROSA for very objective and solid arguments and I see no reason why this would change in the future. Antwerp has developed itself into a highly professional infrastructure, combining transparency, solid competition and efficiency, which I believe we have no equal yet in the world. We have the confidence of the bankers.  Although, I admit, this confidence is a bit shaken by the wind-down of the ADB, unrelated to the state of the industry. It does remain a big challenge to us and we are busy addressing it. On the other hand, we see bankers coming to Antwerp, and some starting to enter the business. They seem to be quite encouraged by what they hear and what they see. I can testify that the active banks in Antwerp are also fully supportive of our efforts and we are thankful for that.  But it can only happen if we maintain this course of focusing on transparency and strict application of the Bourses’ disciplinary measures. That is also a condition to continuously motivate the producers to bring their goods to Antwerp in such volumes as we see today.

In your opinion, are there any new opportunities for ALROSA to expand its ties with Belgian diamond companies?

I think so, absolutely. I think there are excellent diamond companies in Antwerp, financially strong and highly professional in their processes. Antwerp has recently launched what they call the Young Diamantaires Club, which is a Bourse initiative to focus specifically on a new generation of diamantaires, whether they have strong family ties or not this is the future of Antwerp. It is a challenge that must be met, as in India for example; a new and talented generation is entering the business. I think we realize in Antwerp that we left this issue a little bit on the side, which was an error, and it is now being addressed with the right vigor. By convening them together we just now realize the asset Antwerp has. Certainly, the AWDC will give its full support to the bourses to fulfill this objective, supporting and nurturing this new generation.

How many people do you have there in that Club?

I believe around fifty young diamantaires, which is a good start.

Do you think if the cost of labor in Russia turns cheaper for export-oriented diamond manufacturers on the backdrop of a weaker ruble, this may help them to increase their margins?

Of course, it is a factor. An unfortunate and hopefully short-lived, but it is. Being well aware of the situation, I believe that with adequate continuous investment programs the Russian cutting industry can be very competitive. But as far as I know, the laws of the market are as valid for them as for any other manufacturing center. It is a very competitive environment. So managing to create margins is the bottom line for survival. The rule of thumb is simple. If your cost of labor is no higher than 10% of the cost of the rough, coupled with the right mix of infrastructure and skills you are competitive.

And the bottom level is two grainers?

Yes, the bottom level is around better sawables 2-3 grainers, which I believe makes the Russian manufacturers competitive with the Chinese industry for this range of better quality goods and higher. For more expensive goods, roughly around 800$/ct and higher, and under the conditions mentioned above, Russia is competitive versus their Indian counterparts.
Again, the need to manage continuous improvement programs and secure timely investment in hard- and software is essential. But I believe that the skills are there.
All of this of course dependent on the highly competitive rough market and the resulting polish prices. So, efficiency is now simply the bottom line that everybody must secure in order to be able to survive.

I think that in broader terms, the main challenge is that the industry secures its margins out of cost control and financial management rather that added value. However, it is easier said than done. We are stuck between price lists and grading certificates, two independent parameters that are dictating the price and the quality of our polished diamonds. We have to – and it is very important – break this “glass ceiling” on prices, to quote Charles Wyndham. Otherwise, it will become extremely difficult for the industry to be sustainable.
With regard to the grading itself – maybe it is the first time that I share this opinion, but I believe that we went too far into the description of diamonds. I believe we lost “touch” with diamonds. These days we sell more “paper” than “dream”.
We must change, go back to diamonds and leave paper aside simply as “documentation”. Information is necessary; too much information is confusing and sometimes an opportunity for abuse.
So, in a sense I call to the industry to go back to diamonds and leave all these descriptions and papers more to the side. “Let us go back to the magic” is my motto.
We have to change our attitude. I think it is essential.

I would like to take this opportunity to say a few words about Fyodor Andreev.
He was a man worthy of respect, warm and charming. I believe he had a remarkably clear view of the future. He was very focused on the company while maintaining a long- term vision. Besides having re-enforced the leadership position of ALROSA, he was confident to open up all its processes to outside investors and so realizing a very successful IPO. I believe, and it is my personal opinion, that the IPO was not solely about bringing money into the company, but more than that – opening the company itself to the scrutiny of outside investors and to show anyone how strong and well managed the company was, how good its people were. He was very passionate about it, about pushing it forward, going outside of Russia and make people respect the company for being a leader in its field. Though my Russian is unfortunately far from what it should be, I sensed by the numerous speeches I heard this morning [at the funeral], including the speeches of people who just came forward, the very high respect and emotion conveyed. Even more so by expressions of strength and belief in the future thanks to him and each and everyone at ALROSA.

No long ago, the AWDC held a seminar in Davos attended by international financial institutions and dedicated to the crediting problems experienced by industry players not abiding the new banking regulations in a changed diamond-financing environment. What was the aim of this seminar and what is the current situation with crediting in the Belgium diamond industry?

The aim of the seminar was primarily to inform the banking community of what the diamond business is about, present them with an insight in terms of the dynamics of our industry, financial flows/processes and so on. AWDC had a mission to broaden the banking landscape and attract more bankers into the industry. The only way to attract bankers is to share with them information, invite them to come to Antwerp, to visit the industry and so to start the learning process. What we feel, and I am sure it is shared by all my colleagues, is that few bankers understand the industry, because they see diamonds as a commodity, but without access to independent, reliable and solid data. It is a huge challenge. And it is something Fyodor Andreev identified and recognized as well. This objective data is absolutely crucial to any financial party in the sector. Anyone who wants to lend money would like to know its potential customer’ business, its numbers, and to be able to have access to independent and verifiable data to gauge the opportunity and risk. Without that, I am afraid, diamond banking will be less and less about opportunities and more about the risks with all the resulting consequences. We have to change this perception. There are very good opportunities in this business. There are a lot of excellent companies, and not only the huge multinational ones.
If you look at the risk indicators within our industry, the big multinational ones are not less risky than small and medium companies. Bankers should not exclusively focus themselves just on the top 50 or 100 in the industry.
This was one of our aims in Davos – to start the communication process with the banking world. And Davos is, of course, a unique opportunity to meet the right people in one place.

In the end of January, the AWDC hosted Bernardo Campos, the Chair of the Kimberley Process (KP). Could you elaborate on his mission to Antwerp?

Yes, it was, I believe the first mission abroad of Mr. Campos as the elected Chair of the Kimberley Process. He came to Antwerp for two reasons. First, to build on the discussions we had during our multiple visits to Luanda in 2014, where we shared our views on the KP and Angola’s chairmanship. Secondly, of course, to visit the secretariat of the KP Administrative Support Mechanism, headquartered in Antwerp. Mr. Campos was accompanied by Mr. Paulo M'vika and two other officials in charge of the KP chairmanship. We had some very good discussions, and were impressed by the wide-ranging and ambitious agenda presented. Including issues such as money laundering and human rights among others, that – let us be honest – were not always tackled openly. Angola is taking up the challenge, knows that these are issues that need to be addressed and expressed its firm willingness to put them on the table. So I think it has to be welcomed, and supported.

What is your outlook for the diamond market in 2015?

I think there is a consensus that the current inventories of polished will take time to rebalance itself.
Unfortunately, the volumes that were expected to be sold by the trade in the consumer markets, have not been realized. I believe there was a kind of over optimism and consequent overproduction of polished in India without due care for the actual demand. India of course being the main manufacturing center by far and thus its production has a disproportionate impact on supply. It is this overhang of production that now has an impact on cash flows and polished prices. Due to recent reduction of polished production in India – if my information is correct, we are talking about a 20-30-percent reduction – it will take a few months for the necessary tension [between supply and demand] to be reestablished. I believe for the better half of 2015 we expect to see a slow rebalancing and hopefully combined with improved prices for polished due to combination of diminishing production and healthy demand. Yes, the American market performed well, as China and India did, though below expectations. I am afraid the industry has been used to see China outperforming everyone, so we are back now to “good” growth patterns. China is a strong market, but we should stop dreaming that China can grow every year by 15-20 percent. Growing by 6-7 percent is a very healthy growth.
Both producers and manufacturers have to face off reality and measure very carefully market performance and adapt their planning to retail demand instead of relying on speculative movements. My guess is that we should be happy if in August or September when we will come back from holidays, the equilibrium will be re-established.
The diminishing production will gradually induce shortages in some categories. First signs are already apparent.

Do you think the accumulated polished inventories can affect the supply of rough?

The supply of rough does not depend on us, it depends on the producers…and the bankers. The producers can do three things. They can restrict their supply, they can re-assort their goods and they can lower their prices. I think it should be a mix of these three. If they use their means judiciously, carefully relying on objective market data, we’ll get there but only linked, obviously, to resurrected margins.

I would like to conclude with a message to the people at ALROSA and to the Russian industry in general. You have through sheer hard work and excellence risen together to the top of the industry. Fyodor Andreev had two passions known to me in his life: his family and you. When you pass away so young, very few people can claim they had such a large and meaningful impact on their country, on their company. Fyodor Andreev did and should be remembered for that.

This is all I had to ask, thank you very much.

Vladimir Malakhov, Rough&Polished, Moscow