Some Thoughts on Our Industry

Comments by IDMA President Maxim Shkadov on the eve of the forthcoming Presidents Meeting  in Istanbul.It seems that we have all now gotten used to thinking that the industry is in a state of permanent crisis. Nevertheless, none of us is doing anything to put an end to the crisis and to start building a strong and stable future.

Mining companies, while dealing their own problems, keep forgetting that market regulation is the chief prerequisite for growth and stability in the industry. As we know, our market, which trades in rough and polished diamonds, also trades in dreams! For dreams to be sustained, people need to be in an optimistic frame of mind to respond to the marketing of feel-good products, such as diamonds and diamond jewellery.

However, the 'feel-good factor' has to emanate first and foremost from the direct clients of the mining companies. It seems to me that the mining companies should be thinking about -- and listening to -- their clients.

For diamond manufacturers, winning a sight, or a contract, has always been an achievement, something that gave you confidence in the future, that would instill the illusion of success.

But today, a sight or contract now looks more like a punishment. For the first six months of this year sightholders and contract holders received their illusory two to three percent profit while over the next six months they basically invest in mining as they are bearing their losses. The balance is clearly not in their favour... As we know, refusing a purchase is scary and not really an option, as it may lead to losing the contract with the supplier and thus losing business. At the same time, mining companies annually report -- double digit -- record profits.

Clearly, there is something very wrong here. A storm is brewing. For some time now, - and I am writing this during the month of May - we have a growing feeling of deja vu.

The green shoots of stability and profit that appeared during the first quarter withered and died very soon as the producers of rough diamonds, in their wisdom, started increasing prices, making the manufacturers lose faith once again here on the brink of summer. Waiting for the autumn, hoping for a jump start in the market has no real basis and I'm afraid we are again to experience the same pessimism as we did last year.

Since the abolition of the single channel diamond distribution, certain challenges have become apparent. No-one, however, has come up with an adequate response to them. As I see it, the challenges are as follows:
  1. The absence of any generic diamond advertising, inevitably leading to a loss of market share for polished diamonds in the luxury consumer goods market
  2. Volatility in rough prices, mostly unpredictable and unmanageable, provoking the emergence of speculative bubbles and destroying the manufacturers' margins while also complicating the availability off inancing by the banks.
Fruitless discussions on these and many other issues have gone on now for nearly ten years. It is obvious that the market is suffering due to the absence of a regulator which could undertake generic marketing, get rid of, or, at least reduce, the volatility of rough pricing, replacing it with the stable gradual growth that is central to our concept of what diamonds are, and guarantee the purity of the product with the most demanding business ethics principles.

As things stand now, none of the producing companies can take upon itself a task of this scale. They are all competitors, and the market share of each player will not allow any of them to become an industry regulator or manage and control the ethics issue.

By contrast, an alliance of leading producer countries - Russia, Botswana, South Africa and Angola - would be perfectly able to assume the role of industry regulator. Together, these countries own a majority stake in global diamond production, both in volume/carats and in value/dollars.

Diamond mining in these countries is largely under government control, with well-developed and effective institutions and legislation in place. Legitimate state control of the industry guarantees ethical production to the highest standards, certainly greater than any corporate controls. Intergovernmental agreements would allow us to establish a price regulation mechanism, based on production quotas and common management of stocks. This, in turn, will allow the creation of a sales system that will reduce volatility and please the banks. Certainly, an alliance of this kind could take upon itself the role of generic marketing in order to secure a leading position for diamonds among other luxury goods.

The oil market went through a similar transformation - from a cartel of leading oil companies in the 1930s to the founding of OPEC in 1960. Oil and diamonds are very different products, of course, but an analogy can nevertheless be made.

I think IDMA, with the support of WDFB, will be able take the initiative to start the process and produce a position paper on behalf of the industry on this issue. Otherwise we will all continue this painful struggle to find answers to the question of 'What is to be done'.