02 December 2009

Diamond Miners Band Together To Lower Prices Of Rough-Cut Stones

Wall Street Journal

ANTWERP, Belgium— The world's top diamond miners plan to slowly increase output to tamp down prices of the rough gemstones. The cautious move aims to appease customers who have been squeezed by flat retail prices.

The delicate choreography comes even as the top four diamond producers fret that demographic and other changes threaten to permanently sap demand for the gems and create a long-term crisis for the industry.

Prices for rough, uncut rocks have risen more than 40% since February. Meanwhile, retail sales are falling, to $65 billion this year from $74 billion in 2008, RBC said.

"A lot of companies are going to be out" of business because of higher rough prices, said Eyal Atzmon, whose Antwerp-based company El-Ran polishes and trades diamonds.

As the financial crisis crushed the luxury-goods market, De Beers Group, Rio Tinto, BHP Billiton and Alrosa Co. slashed production this year. The four diamond miners control 90% of global production and influence prices through a Byzantine yet legal system of closed sales, secret long-term contracts and a few auctions.

De Beers, for example, slashed output by more than 90% in the first quarter.

And Alrosa sold all its production to the Russian state in the first half, rather then sell rough diamonds to its regular customers who cut and polish the stones for sale to consumers.

Global diamond-mine production is forecast to fall to $8 billion this year from $13.1 billion last year, according to Toronto-based RBC Capital Markets.

With manufacturers and polishers complaining of vanishing profit margins, the big four miners pledged Monday to ease their pain.

"We had to avoid a large-scale and catastrophic collapse of our industry," Sergey Oulin, vice president of Alrosa, said Monday at an industry conference in this port city, the center of the world diamond trade.

While the miners are loath to see prices for uncut diamonds drop too sharply, they are also worried that they might put some of their customers out of business if prices stay high.

"There is a consensus that rough prices have gone too high," said Des Kilalea, an RBC analyst. "But what everybody craves in this business is stability."

The miners plan to increase production gradually to avoid destabilizing the market. Alrosa holds more than $1 billion of diamonds, but won't sell it all at once, Mr. Oulin said.

Production "all depends on what demand will look like in the future," said Tim Dabson, a De Beers executive director.

Any increase poses risks for the miners. Short-term retail demand was hit by the global recession. But even as economic growth resumes, the industry faces other longer-term challenges, particularly in the U.S., which accounts for 40% of retail sales.

"We know people over 55 treasure diamonds…but that's not so clear for the iPod generation," Mr. Dabson said. "We need to tap into that market."Other risks include the tendency of consumers in the growing economies of India and China to favor less-expensive gems than what sell elsewhere.

The industry also is contending with what Mr. Dabson called "ethical consumerism," the linking of diamonds to war, corruption and environmental degradation. The industry participates in the Kimberley Process, an effort to ensure that diamonds traded internationally aren't used to finance rebel groups.

The industry needs protection for "when we're hit by a crisis like the 'Blood Diamond' movie," said BHP Billiton marketing director Chris Ryder, referring to the 2006 Leonardo Di Caprio film about diamond mining in war-torn Sierre Leone.

He also said the industry needs to mount general "demand defense." De Beers, the biggest diamond producer, has said it would reduce its advertising budget, worrying executives throughout the industry. The big miners have discussed a collaborative $200 million ad campaign, but have yet to commit.

Mr. Dabson drew applause, however, by playing a De Beers TV commercial for the U.S. that features a couple ice-skating on a frozen pond.

Retailers are worried as well. Zale Corp., which operates 1,930 retail jewelry locations across the U.S., Canada and Puerto Rico, reported a net loss of $189.5 million for the fiscal year ending July 31 and a 16.8% drop in revenue. "Diamond fashion has been extremely hard hit," David Sternblitz, vice president and treasurer of Zale, said, adding that demand for diamonds has decreased commensurate with overall jewelry demand on account of the recession.

But while most diamond retailers face what Zale CEO Neal Goldberg has called "the most difficult year in retailing in memory," other diamond sellers are doing well. Blue Nile Inc., one of the U.S.'s largest online diamond retailers, has remained profitable and gained market share at an accelerated pace in the recession, as customers turned to the Web for discounts, said CEO Diane Irvine.

The recession has also been advantageous for diamond sellers in the very upper echelons, where customers are investing in million-dollar diamonds as safe investment alternatives. "It's a refuge for your money if you have the cash available," Henri Barguirdjian, CEO of Graff USA, said, adding that his company, where the average sale is $150,000, was 20% ahead of last year's retail sales in the U.S. market.

Despite such exceptions, most diamond retailers are suffering, with some of the larger U.S. jewelers – such as Fortunoff and Finlay Enterprises Inc. – filing for bankruptcy this year. Even if economic growth resumes, other longer-term challenges face the diamond industry, executives in Antwerp said.


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Seenath Kumar said...

Really great information we really need to increase the output of gemstones.So that we can increase the retail sales at jewelry stores new york

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