Exploring the Upstream Diamond Pipeline

Mar 20, 2017

The Opening Session of the International Diamond Conference – Mines to Market focussed mainly on the mining segment of the industry.

Chaim Evan-Zohar, veteran industry analyst, journalist and author  set the context with his overview of the diamond industry today which included his signature Diamond Pipeline.

Evan-Zohar outlined several pertinent pointers at the outset which, he said would set the agenda for the discussions that followed. The central question was how to   grow and ensure the prosperity of an industry in which rough production is set to decline. Amongst the issues he outlined  were:   unprecedented price and supply volatility which was threatening the stability of  the market; prolonged unprofitability in the midstream; and synthetics making significant in-roads in retail stores; financial institutions exiting the industry; loss of trust in the industry by governments in  some centres.

Through a detailed analysis of his Diamond Pipeline and other graphs, Evan-Zohar pointed out that the major profitability in the pipeline was at the mining end. The midstream was utterly squeezed for profits. “After zero profits in 2015, midstream earned  US$ 0.9 billion in 2016. In 2017 the models forecast US$ 0.2 billion  profit,” he said.

He pointed out that there had been a   dip  of 32% from peak  rough production in 2005 to that in 2014; with a nominal growth over 2015 and estimated 2016-17 mining  production.   Real rough prices have outperformed real polished prices in the last few years too. He stressed that jewellery demand had underperformed compared to Nominal World GDP and even the Inflation Index.

Saying that it was now a time for “India First” and  without India’s enormous skills, infrastructure, marketing acumen, financial strengths, labour force and Government support, the producers couldn’t do anything with their output,   Evan-Zohar urged   the Indian diamond industry  to “Negotiate a better deal!” 

Paul Rowley, Executive Vice President Global Sightholder Sales, De Beers opened his remarks saying:  “India is the  heartbeat of the industry. And the heart of the industry is in slightly better shape.”

 Rowley’s presentation titled   “Dictating Your Diamond Destiny: Sustaining Success in an Unpredictable world” outlined several key factors to operating in an uncertain world. These, he said  are:   Strong Relationships; Access to Information; Operational Flexibility; Robust and Transparent Finances; Understanding You Own Strengths; and Confidence.

Rowley cited  the example of De Beers relationship with its own partners  Namibia and Botswana and how the Company had nurtured these relations. He called upon businesses to follow a customer-centric approach. He also pointed out the extent of money and effort De Beers spent in researching the market in order to have robust data. Rowley    gave the example of both production cuts and the reduction of sales in 2015 when De Beers had undertaken to support the midstream at a time when the  market was severely challenged pointing out to their flexibility. 

Emphasising the need for robust and transparent finances, Rowley said it was important to build healthy financial reserves.  “One must remember not to over-extend oneself,” he advised.  

Finally, Rowley concluded saying: “We must live up to diamonds.”  

Andrey Polyakov, Vice President, ALROSA  in his presentation “Defending the True Value of a Diamond”, spoke at length about synthetics in relation to natural diamonds.  “When buying a diamond, what do consumers actually choose?” he asked.  His answer was that the consumers’ individuality was the  driving force of demand today.

He said that diamond is  the only product invested with emotional value. Furthemore,  this emotional  value has been strengthened with strong marketing campaigns in  major consumer markets. He also pointed out to the immense beneficial impact that the diamond industry has had on economies and peoples of the countries it is operative in.  “Synthetics  target the socially  and environmentally  conscious (people) by creating ‘virtual’ myths,” Polyakov said referring to, and illustrating his point with various ads put out by the makers of synthetics.

 He   elaborated on the DPA promotions which emphasises that diamond is a miracle of nature. He called on the  diamond industry to keep alive the Diamond Dream.

 Des  Kilalea, Director,   RBC Capital Markets, gave a detailed understanding of the supply situation in the diamond industry. His presentation postulated that though rough diamond supply looks challenged in the medium term, there was no shortage in the near term.

He stressed that kimberlites are limited and located in remote areas and hard to find; and that economic kimberlites are scarce and take a long time to bring to production. There is also less investment being made  in exploration as major miners are pulling back, he pointed out.

Kilalea showed through graphs that production was set to rise (with a couple of new mines coming into production) in the next five years and then go into decline as old ones decline.

He  contended that diamond mining is profitable, and that margins remain strong enough for prices to remain flat or even decline; and that within the pipeline they are skewed in favour of the  miners.  He also pointed out that it was the availability of finance and bank debt in the midstream  which had led to a spurt in diamond prices in the 2000s. 

In conclusion, Kilalea anticipated some changes in the scenario   including pressure on miner’s margins. He said there was an imperative need for growing diamond jewellery demand. Kilalea also stressed that while synthetics were a threat, undisclosed synthetics were a greater threat.

A panel discussion co-moderated by Evan-Zohar and Kilalea followed. The panel  included Rowley and  Polyakov; who were joined by  James  Pounds,  Executive Vice President Diamonds, Dominion Diamond Corporation; Vikram Merchant, Head of India Office, Rio Tinto Diamonds NV; and Rajiv Mehta, Director Dimexon.   The discussion raised some pertinent issues and questions, particularly from Mehta – the lone midstream voice. “I sometimes wonder,” he said, “if we are just stone manufacturers for the  miners or an industry?” His contention was that a system was needed which could ensure the generation of  margins, and thus the  ability  to invest back in the business.  

Two other speakers also spoke in the second half of  Day 1   of the conference – David Bouffard Vice President, Corporate Affairs Signet Jewelers  Ltd; and Rohan Shah,  legal luminary and specialist in international laws and compliances.

Bouffard outlined the efforts his Company made to  ensure product integrity demanded by their customers. He stressed the need to track back the supply chain and ensure that it was “clean” all the way. He also said that his company relies most  heavily on RJC certification.

Shah gave a fluent and masterful presentation on all the various laws across geographies that the diamond industry was subject to. He outlined the implications of them all and stressed that the industry was now functioning in an era where full compliance was a necessary condition to conducting one’s business.

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