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17 February 2010

From synthetic diamonds through beneficiation and on to diamond cartels, Chaim Even-Zohar provides the Israel Diamond Institute's news portal with an exclusive analysis of the industry's last decade and insight into the new one.

The diamond industry has known ups and downs in the last decade. The past year is considered the worst crisis that the global diamond industry and the Israeli Diamond Industry have undergone since the 1980's. We asked worldwide diamond expert Chaim Even-Zohar to summarize developments in the global diamond industry during the past decade.

Q: The millennium opened with great hopes for the world economy in general and the diamond industry in particular. Would you say that the last decade (aside from the last year) was indeed a good one for the diamond industry?

A: The last decade was probably the industry's most traumatic decade since World War II. Throughout the last ten years, we saw a fundamental, structural transformation within the industry; for instance, we saw the almost 100-year-long cartel structure come to an end. De Beers was rather reluctant to let go of its controls, and through Supplier of Choice, it changed its controls on the supplies of rough diamonds. By doing so, the company attempted to control the behavior and corporate structure of its clients by demanding vertical integration and causing companies to conclude ill-fated partnerships with jewelry manufacturers or jewelry retailers.

Some well meaning but inadequately prepared De Beers employees sat in judgment of rough diamond marketing programs, which in some cases were drawn up by McKinsey or other major consultancies, only to find them often lacking. At the end of the day, the Supplier of Choice system did not perform. 

Then there was a second phenomenon: Mining companies became competitors of their own clients by seeking ways to get a direct hold of the consumers' pockets. The diamond producers went into polished manufacturing and retailing - where they still are today. 

In this post-cartel environment, basically all of the producers, including the Russians, Australians, Africans and even the new Canadians, started to experiment with new rough diamond marketing distribution mechanisms. Nothing was really permanent or predictable. The rise of rough tenders and auctions turned rough diamond supplies into a major lottery.

It was a crazy decade from a financial perspective. Cheap, subsidized Indian credit became a commodity in and of itself. I never understood whether people were selling diamonds with credit or were actually selling credit with diamonds.

And then there was the additional factor of so-called beneficiation, where producer countries (not only in Africa but also in Russia, Canada and elsewhere) wanted their own manufacturing sectors fully and totally financed, and largely owned, by foreigners from the traditional centers. In some instances (a cynic might say in all instances), the economic feasibility, or at least the sustainability, of beneficiation may have been questionable. But as these propositions were tied to rough diamond allocations, many diamantaires were eager to accept the challenge of beneficiation.

All these structural changes and transformational processes are still with us as we enter into our second decade.

Q: Over the recent decade relatively few new diamond mines were discovered worldwide. Do you believe that new mines will be discovered in the coming years? If not, how will this affect rough diamond prices?

In the last 20 years, no major world-class mine has been discovered. A few small additions that we are seeing and will be seeing will not compensate for the fading out of many of the large diamond mines that are coming to the end of their producing lives.

Mines such as the Cullinan have been in operation since 1904; Tanzania's mine started already in 1940, while Botswana's mines date back to the 1970s or early 1980s; some of the Russian mines date back to the 1950s. Finding new mines takes time, and money for exploration is scarce, and even when a deposit is finally found, it may take 10 years or more before the deposit becomes a productive mine. 

So, yes, we are entering into a period in which diamond production will go down from the 2008 level of 165 million carats to a plateau of 120 million carats annually up until 2020. Then, we will very likely see further declines.

It is an oversimplification to argue that reduced supplies must lead to increased rough diamond prices. This is not necessarily so. In the current day and age, one may not jump to conclusions on the demand side. We shouldn't take for granted that the consumers will always be there or are willing to pay higher prices.

People don't like to hear about synthetics, but they are already a fact of life. They will become a far more powerful factor in the world. Personally, I'm convinced that sooner or later, De Beers itself will become the single largest, most powerful seller of gem-quality synthetics.

All this makes it kind of hazardous to predict that rough diamond prices can only go up.

Q: De Beers once controlled the diamond industry almost singlehandedly - this has changed drastically over the years, with other major players entering the field. How do you envision the industry from this aspect in the coming years?

A: For the foreseeable future, three or four mining companies will still control some 70% of the market. This is not going to change so quickly. What will continue to change, however, are the rough diamond marketing structures. We will probably see the end of the Diamond Trading Company within a few years. We will also most likely see that the governments of Botswana, Namibia and South Africa will control their own marketing mechanisms, just as the governments of Angola and Russia are doing today. Rough diamond marketing may ostensibly be in the hands of private companies, but it will definitely be more government-controlled.

The dismantling of the cartel has created a power vacuum that is now being filled by governments. For instance, in the future, diamond players in Tel Aviv will increasingly need to interact with foreign government officials. During the crisis of the last years, some industry old timers longed to return to the good old cartel days. These are gone forever.

Q: How has the price of rough diamonds fluctuated over the past decade? Do you believe rough diamond prices will keep on rising?

A: We normally talk in nominal dollar terms, and we tend to forget that we ought to look at diamond prices in real terms. Rough diamond supplies have quadrupled in the last 30 years, but the diamond jewelry market has grown far less. Rough diamond prices have fluctuated widely and in many categories. We are below the 1989 record levels. A few months ago, someone made a comparison between the Rapaport Price Lists in 2003 and in 2008; in many areas, prices were higher in 2003. So we are really deluding ourselves if we believe that diamond prices will continue to rise. 

On the other hand, that doesn't matter. The industry doesn't buy diamonds for investment purposes; the industry buys diamonds to work (i.e. trade and/or manufacture and/or sell) and not to speculate. As long as we are sure that we don't overpay for rough diamonds, the long-term price trends are really not so important. Lately, we are seeing that too many people are willing to purchase rough diamonds in order to speculate and not in order to work. If one markets the rough diamond market as an alternative to the stock market or the real estate market, it is legitimate and often money can be made. But it is also risky and certainly not healthy for the industry as a whole.

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