New year, new challenges for the diamond industry

By Ehud Arye Laniado
www.ehudlaniado.com
New Year, New Challenges
for the Diamond Industry

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Presentation by Ehud Arye Laniado
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Looking back at 2015, I would like to go
over what we achieved, what we are in
the process of correcting, and what still
needs to be addressed.
A link to the full article can be found on the
last slide of the presentation
December 2015
The views expressed here are solely those of the author in his private capacity. None of the information made
available here shall constitute in any manner an offer or invitation or promotion to buy or to sell diamonds. No one
should act upon any opinion or information in this website (including with respect to diamonds values) without
consulting a professional qualified adviser.

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New Year, New Challenges for the Diamond Industry
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Transparency
September 2015

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• Transparency is of the outmost importance. It is needed to
gain the full trust of consumers. Their confidence in our
product is essential to getting us back on track and growing
our businesses. Our aim is to make sure that the buyer’s
appetite for diamonds never dwindles.
• We also need transparency in order to expand our offerings
to new outlets. Investment firms, financial institutions,
personal equity funds, private investors and even run-of-the
mill jewelry buyers will consider diamonds as a wealth
preservation vehicle if we disclose all characteristics of a
diamond to them – and create a new reason for them to buy
diamonds.
December 2015

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• We need transparency to regain the trust of the banks and
encourage them to finance the industry.
• We must implement transparency throughout the diamond
pipeline. Banks operate under heavy regulations that require full
transparency and compliance with Basel II and III.
• At the same time, there are some banks, operating where the
majority of the pipeline comes from, which seem to operate with
less strict enforcement of the regulations and easier access to
credit lines based on projection. That is creating an uneven
playing field. Added to that are the emotional and irrational
behavior patterns of some players in the pipeline.
December 2015

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Transparency is an issue we still need to address. There is a long
road ahead of us and we should not waste time adopting necessary
standards that will bring us to where we need to go.
December 2015

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Financing
December 2015

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• Financing and cash flow are among the most important issues
we will have to address in the coming year. We need to resist
the uneven playing field where some companies get financed
against projections rather than against real-life business
acumen.
• This is a fundamental component of the industry, specifically in
the midstream. We must correct this or else we will all pay a
price. As long as financing is provided against projections,
smartly-operated companies that need the financing will
continue to have less access to it, rough diamond prices will
continue to be pushed up, and polished diamond prices will
keep being pushed down – making any chance of working in a
sane and healthy environment near impossible.
December 2015

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• Over-capacity of financing is certainly the biggest issue in the
manufacturing sector of the diamond pipeline today. It creates an
oversupply of polished diamonds from huge factories, leading to
constant polished diamond price drops and forcing the midstream
to continue to buy unprofitable rough diamonds to feed the vicious
cycle.
• We asked if the midstream is working as a polisher for the whole
pipeline or if it is working as a broker for its banks and the mining
companies, shifting funds from one to the other, remaining in
between with no profitability.
• Without correcting the unequal financing throughout the pipeline,
business will shift to one side of the globe, putting their competitors
out of business.
December 2015

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Marketing
December 2015

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It used to be that De Beers ran and managed generic diamond
marketing for the entire diamond industry, and then, after
relinquishing its role as the custodian of the market, it rolled that
responsibility onto Sightholders with the Supplier of Choice
program.
Midstream players and retailers were not the right fit for the job
and the result was that diamond jewelry marketing fell to the
wayside. The natural outcome was a decline in interest in
diamond jewelry and the drop in sales we have experienced
since late 2014.
December 2015

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Our marketing efforts might have a two-pronged approach:
romance and value. The first, romance, continues the age-old
approach of lasting love symbolized by a unique and lasting
diamond.
The other approach emphasizes that there is no need to view
purchasing a diamond as an expense. Here we discuss the full
characteristics of a natural polished diamond, the tracked value
history, and provide consumers with the knowledge and confidence
that is needed before a large purchase. This will transform the
purchase from an expense to an asset.
December 2015

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Currently, generic diamond advertising by De Beers promotes
Forevermark with a strong message that Forevermark diamonds
are the most ethical. That is true, but the rest of De Beers’ polished
diamonds are also ethical, as are the diamonds coming from other
mining companies. Diamonds should therefore be promoted
generically as ethical, because most of the diamonds in the world
today are ethically sourced.
We must emphasize the exchange value of natural diamonds and
that diamonds are not necessarily an expense. In doing so, we
should highlight the fact that exchange value is more about the
quality of natural diamonds, quality that laboratory-grown diamonds
can never match.
December 2015

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We should highlight in advertising the resell value of natural
diamonds, that they are rare and hard to find, and that the economy
of rarity applies to them.
Advertising should target the new generation of buyers, who have a
different mindset. The traditional diamond industry must adapt to
consumers more exposed to other luxury items.
This is another issue that has not yet been addressed by the
industry at large. The diamond miners association that was formed
in the past year was meant to address marketing, but has not yet
done so. We are looking forward to change in this regard, and are
already rolling up our sleeves to take an active role in making this
change, as detailed below.
December 2015

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Gatekeepers
December 2015

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The Awakening of Diamonds in China
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As alluded to above, the rise of financing against business
projections in the midstream has helped push up prices of rough
diamonds. It is also in the hands of the midstream to restrain these
runaway rough diamond prices.
We suggested that the consumer market for diamond jewelry is
shrinking. Conventional wisdom puts the annual value of mining
production at around $15-17 billion worth of rough diamonds.
Manufacturing output is about $21 billion in polished diamonds,
and consumer consumption in polished diamonds at wholesale
prices sits at around $22-23 billion annually.
December 2015

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According to these figures, the midstream has about $6 billion in
revenue annually. With an estimated margin of 5% (if that), the
entire diamond industry makes $300 million in total profits. Divided
by about 5000 active midstream companies, that amounts to just
$60,000 per company per annum. Is this still the case?
We would argue that it is not. In the past I stated that global
consumption has declined from $22-23 billion to $17-18 billion
annually. Today, as the year is about to end, we at Mercury
Diamond™ believe market demand has declined even further, to
about $14 billion.
December 2015

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In the last six months of the year, rough diamond supply to the
midstream by miners and other sources decreased to $300 million
per month or $1.8 billion for the six month period in response to
the drop in demand. Assuming margins remained unchanged at
5%, the midstream’s margin was $90 million, or $18,000 on
average per midstream company. These figures express the
structural problems of the diamond industry as a whole and the
midstream in particular.
At the same time, midstream inventory has increased to $6-$7
billion at the onset of the current crisis.
December 2015

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• Part of the issue is that rough diamond prices rose when the
market was better and those prices have not declined with
polished diamond prices. Prices didn’t decline because there
was always someone willing to pay for the goods. That is why I
called on the midstream to utilize a new logic – that of reverse
engineering the wholesale price of polished diamonds.
• This approach dictates that if you take wholesale polished
prices, and subtract the cost of manufacturing from the
manufacturer’s margin, you reach the maximum cost
manufacturers should pay for rough diamonds. They have to act
asgatekeepers because of their technical knowledge and refuse
pay more. This will serve as a way to balance miners’ tendency
to raise prices in disconnection from polished prices.
December 2015

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• We believe that the midstream should act as gatekeepers of the
pipeline, and take only economically rational decisions and
refuse high rough prices. We showed an example of an
unprofitable box that we analyzed and how to avoid such high
rough prices. The midstream should say no to the $16.5 billion
annual cost of high-estimated rough. The entire polished
wholesale yield is worth $22 billion.
• During the past year, it seems that manufacturers took more
calculated decisions and refused high-priced rough. When the
market improves (and the only way to know is by a better
polished diamond inventory with the right ratio), they should
remember that they have the ability to keep rough diamond
prices in tow and stick to rational and economical decisions for
the long-term.
December 2015

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The Awakening of Diamonds in China
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• We believe that the midstream should act as gatekeepers of the
pipeline, and take only economically rational decisions and
refuse high rough prices. We showed an example of an
unprofitable box that we analyzed and how to avoid such high
rough prices. The midstream should say no to the $16.5 billion
annual cost of high-estimated rough. The entire polished
wholesale yield is worth $22 billion. This means revenue of only
$5 billion that nets at best a profit of 5% divided by 5000
midstream companies.
December 2015

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• During the past year, it seems that manufacturers took more
calculated decisions and refused high-priced rough. When the
market improves (and the only way to know is by a better
polished diamond inventory with the right ratio), they should
remember that they have the ability to keep rough diamond
prices in tow and stick to rational and economical decisions for
the long-term. That is why we argued that a deep change is
required and we still believe that it is required.
December 2015

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Laboratory-grown
goods
December 2015

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• We witnessed in the past year the continued rise of laboratory-
grown diamonds.This is inevitable and there is no point fighting
it.
• My vision of diamond consumption, and the role of laboratory-
grown goods, has three parts. The first is the traditional market
of diamond jewelry. This market should maintain a popular price
point, made possible by the falling costs of natural diamond
production. It may face some competition from laboratory-grown
goods, which are already priced at around 30% below natural
diamonds. This is a niche market with its own economic
behavior.
December 2015

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• The second market is that of fine and high-end diamond jewelry.
These niche market items are expertly designed and are fit for
the bridal and the luxury sector. The cost of these jewelry items
is comparable to other high-ticket luxury items and will compete
with them in the store.
• The third venue, and the one with growing importance, is
diamonds that have the potential for wealth perseveration: a tool
to store value. These diamonds will be bought and treated
specifically for that purpose, with a new methodology that is
based on the economy of rarity. In this category, lab-grown
diamonds do not pose any competition. This will be a separate
market, with its own economic behavior
December 2015

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• This last venue is yet to be established as a widely-used
category. It is the venue that will pull the diamond industry out of
the current rut and climate of uncertainty it is in.
• After creating a clear differentiation between natural diamonds
and laboratory-grown goods, highlighting the exchange of value
would be possible. According to a recent survey by the Diamond
Federation of Hong Kong 77% of female respondents said they
would “feel disappointed” if a diamond gifted to them turned out
to be synthetic and 47.5% of total respondents would not wear
it. About 87% said that it is important that diamond jewelry
purchased for them be natural. However, 95% of all the men
and women polled said an engagement ring ought to have a
natural diamond in it.
December 2015

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• Clearly, the women answering this survey feel that laboratory-
grown do not carry the long-lasting value that natural diamonds
do.
• Another issue encountered in the past was that of undisclosed
laboratory-grown goods mixed with natural diamonds. This
apparently fraudulent behavior prompted the diamond industry
to act. Today, parcels and individual diamonds are carefully
screened and as a result we hear a lot less about this issue.
• The appearance of laboratory-grown diamonds requires
differentiation from natural diamonds on two levels: its beauty
and its value of exchange. Without transparency, we will not be
able to apply the above suggestions.
December 2015

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Pricing
December 2015

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• This is the issue I discussed the most over the past year, as it
encompasses all the topics above, and is at the core of
elevating rational decision-making for the diamond industry at
every part of the diamond pipeline.
• This applies whether times are good or bad, whether there is a
crisis or not, or if asking prices are dropped every Friday.
December 2015

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• As stated above, there should be three diamond outlet
categories: diamonds for fashion jewelry, diamonds as a high-
luxury product, and the crystal clear value of diamonds as a tool
for wealth preservation. The Crystal Clear value proposition has
the potential of becoming a game changer, transforming the
face of the diamond industry. Backed by full transparency, it has
the power to change banks' attitude towards the industry as well
as add to our profitability while keeping the end users interested
in consuming diamonds.
December 2015

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• To achieve these goals, we need a new concept of price list. I’m
not talking about a benchmark, but rather of a price list based
on transactions. This has the power to transform the language
we speak in the market, moving away from “discounts” and
“rough and polished price disconnect” to an empowered
position of transparency, knowledge and accurate pricing all
along the diamond value chain.
• This will allow a consumer to decide on a budget and then walk
into a store with an understanding not only of what can be
bought for that budget, but also what is the value proposition of
each option.
December 2015

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• It will allow buyers focused primarily on long-term value to
identify diamonds fit to store that value. These diamonds will
need to be purchased in the right part of the diamond pipeline,
be purchased correctly, and have an accurate grading report.
This report should go beyond the 4Cs, into the irregularities and
the differences that exist between stones of the same grade, to
serve as a tool to store value and to further the idea of capital
preservation.
• For the midstream, this concept provides the tools they need to
act as gatekeepers, and for miners it serves as an essential tool
for pricing rough, and communicating accurately to financing
institutions the potential of advanced exploration projects.
December 2015

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• I’m happy to say that in this regard there is already change. A
few weeks agoMercury Diamond™ announced that it is
launching a price list, putting it up for the consideration of the
diamond community.
• My feeling is that it is not enough to talk - you also need to do.
This is my contribution to the diamond industry.
• I hope that we soon find a way out of the current crisis,
addressing and improving the structural issues that are pulling
us down, and recreating a sound new structure on which we
can go far beyond what we have achieved already.
December 2015

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My best wishes to you all. May we begin
2016 with renewed energies and an
enhanced inspiration to ignite the
coming year with great profitability and
success.
December 2015

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The views expressed here are solely those of the author in his private capacity. None of the information made
available here shall constitute in any manner an offer or invitation or promotion to buy or to sell diamonds. No one
should act upon any opinion or information in this website (including with respect to diamonds values) without
consulting a professional qualified adviser.
A full version of the article can be found here:
http://www.ehudlaniado.com/home/index.php/news/entry/new-year-new-challenges-for-
the-diamond-industry
December 2015

New year, new challenges for the diamond industry

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