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We Will Get Through This Too

11 april 2012

Having just recovered from a global economic crisis, we now find ourselves in a new crisis, this time - of the industry, writes Moti Ganz, Chairman of the Israel Diamond Institute, in his article posted on www.israelidiamond.co.il.

It's difficult and challenging, to say the least, but we can take comfort in the fact that crises and recoveries are part of the regular cycle of our industry. Cautious, wise conduct will take us through this crisis, too.

At a seminar held recently by De Beer's Diamond Trade Company -the DTC Business Excellence Seminar - De Beers' CEO, Philippe Mellier, said that the current crisis is not like that of September 2008. While listening to him, I thought to myself: The situation is even worse than the crisis of 2008. During the last financial crisis, we initially referred to it as a V-shaped problem - a slump and a rise, and later we spoke of a W shape -a decline, a rise, another decline and another rise. But the present crisis seems to be shaped like a Y - a large, deep slump, which at the moment is blocking the light at the end of the tunnel. In the following I will try to examine why we are experiencing this type of crisis, what its main features are and why, despite the current difficulties, I believe we can all be confident that this time, too, things will improve and we will bounce back.

Industry-wide, Not Global

A major difference between the two crises is that in 9/2008, we experienced a global economic crisis, while in 2011 we are going through an industry crisis. True, the media is full of reports, analyses and commentaries on the serious financial situation in Europe, which has suffered the full force of crisis this year. Greece, Portugal, Spain and Italy have fallen one after another, much like a row of dominoes. The situation in Europe is certainly cause for concern, but it is not relevant to us as diamantaires, since the European diamond market is tiny. If we look at Tacy's 2010 Diamond Pipeline, we see that Europe is not represented as a category in the retail diamond sales of 18.2 billion dollars, nor in the retail sales of diamond jewelry of 60.1 billion dollars. Europe is important to a few of us who specialize in that market, but not for the industry as a whole. Our focus is on developments in the US and Hong Kong, which have been and remain our central marketing destinations, and the fast-growing markets in India and China.

The Main Difference

However, from our point of few, the most significant difference between the two crises lies in the conduct of the rough producers, on the one hand, and of the polished manufacturers and dealers, on the other hand. This difference can be summed up in a few words: the rough producers have learned their lesson and we have not. Whereas the 9/2008 crisis caught the rough producers with vaults full of stock, bank accounts in heavy debt and unimpressive balance sheets, the 2011 crisis caught them without inventory, free of bank debts and with tremendous profits. One could say, then, that the rough producers did their homework, learned their lessons, drew conclusions and were ready and prepared when the new crisis arrived. And what about us? Whereas the 9/2008 crisis caught us clear-headed: some of us having foreseen the crisis and prepared accordingly and others adjusting quickly by halting business, reducing bank debts and shifting into a state of hold - not buying, not selling and not making commitments to suppliers - the 2011 crisis caught us unprepared, with large stocks purchased at high prices. We saw the crisis coming and refused to believe our eyes. In the second half of 2011, when the signs of crisis were already clear, we continued to go about our business as usual. We saw that polished was 30-35 percent less expensive than rough, but we thought this would pass and continued to buy rough at the asking price. It was only towards the end of the last quarter of the year - when we saw that the rough prices were still high, the polished market had come to a standstill and the future was unclear - that we recognized the situation as a crisis that wasn't about to pass within a day or two.

An Optimistic Forecast

As we deal with the daily situation, which is not easy for any of us, it is worthwhile to read the optimistic forecast published by the analyst firm, Bain, the company that was responsible in the late 1990s for De Beers' new strategic analysis, which led to the Supplier of Choice program and far-reaching changes in the world diamond industry. According to Bain, which developed a forecast up to 2020, we can expect the annual world demand for diamonds to increase by 6.4% in carats and by 6.6% in dollar value. Bain predicts that the main thrust of the improvement will derive from considerable growth of the middle class looking for way to spend their growing disposable income in India and China, which in 2010 surpassed Japan as the second largest market for diamond consumption - after the United States. The market will also benefit another trend - the growth in diamond purchases for investment.

According to the report, which takes into account large mining projects that are already in the development stage and assumes no significant new discoveries, rough supply will increase in the upcoming decade by 2.8%. The difference between the growth in demand for diamonds and the modest growth in rough supply will lead to a rise in prices.

At the time of writing, we have already seen the encouraging Thanksgiving sales - almost 14 percent of the over 130 million American who purchased holiday gifts chose to buy jewelry, an increase of 10 percent compared with last year. The Christmas sales are also looking good, with a forecast of jewelry sales in the US of about 4.7 billion dollars (according to IBISWorld) - an increase of about 7% compared with last year. According to the industry research firm, luxury spending is driving the recovery of the American economy.

In Good Shape

More than any other diamond center in the world, the Israeli diamond center has demonstrated correct reading of the situation. As evidence, the level of Israel's diamond industry debt to the banks that finance the industry has not changed since 2009, when it stood at 40 percent less than the peak level of 2008. The diamantaires that are not bound by long-term contracts with mining firms such as De Beers, ALROSA, Rio Tinto and BHP Billiton are able to sit on the sidelines and wait for the right buying opportunities. For our part, we must continue to exercise moderation and caution, and avoid adventures and commitments, but it is clear that recovery from the crisis depends solely on the balanced and responsible conduct of the rough producers. It seems that in recent months De Beers has recognized the severity of the situation and will make every effort not to flood the market with goods. In the last sight we already saw that the DTC was careful to supply its clients with the essential minimum according to the contracts and no more, even to those who requested it. I hope and trust that the other rough producers will also demonstrate good judgment.

At any rate, I also hope that this industry crisis will serve as a clear signal to the rough producers that they should not rely too much on supply by tender. If the supply were conducted through the central channels alone, all the diamantaires could sit on the sidelines and refrain from buying rough. The fact that some are contractually committed to purchase rough saved the rough producers from the last crisis. Sale by contract and not tenders alone is a win-win situation for all sides.