Shifting ground rocks diamond industry
Antwerp’s Square Mile is an assortment of tired office blocks and shops. Groups of men talking business congregate in the streets. But the main clue to what brings them to the city is the heavy security at the entrances to the rundown buildings.
Inside, they will pore over rough diamonds – gems that could easily be mistaken for lumps of glass or stone. Some will spend hours using high-tech equipment to analyse their potential. Others use a handheld loupe, or magnifying glass, to eyeball what polished stones they think they can cut from the misshapen rocks.
“It is like a piece of art,” says Johnny Kneller, chief executive of Safdico, the diamond manufacturer that was cofounded by Laurence Graff and that is part of his high-end jewellery and retail empire. “Then there is the commerciality. You can choose to give up weight because you like the product.”
The Lesotho Promise, a 603-carat stone from Gem Diamonds’ Letseng mine, sold for $12.4m and was cut into 26 stones for one necklace, now on sale with a rumoured price tag of $75m. Another, the 478-carat Light of Letseng, produced the first flawless round brilliant cut to exceed 100 carats.
Many cutters and polishers have left Antwerp but about 80 per cent of the world’s rough diamonds still pass through the city. This year has been a difficult one, both for the miners and the diamentaires who transform rough stones to polished ones.
The economic slump has hurt demand for jewellery while a squeeze on financing has limited diamentaires’ ability to stock up on rough stones. Rough diamond prices, estimates Royal Bank of Canada, are down about 15-20 per cent this year after a volatile 2011, when prices leapt sharply only to plummet.
The diamond industry also faces a period of considerable change.
Soaring demand from China, where the share of brides receiving diamond engagement rings has risen from about 1 per cent in the early 1990s to 31 per cent in 2010 – a similar pattern to the US in the 1940s – means a buoyant outlook despite the short-term ructions.
Rough diamonds unshackled
Volatility in the rough diamond market is a relatively new phenomenon, writes Helen Thomas. Until 1999, De Beers – which still accounts for about 35 per cent of the global diamond market – effectively controlled the supply of precious stones by buying competitors’ production.
Through its own production and those third-party purchases, the miner – founded by Cecil Rhodes in South Africa in 1888 – accounted for as much as 80 per cent of global supply.
As scrutiny over so-called “blood diamonds”, or stones from conflict zones, mounted and under pressure from regulators and upstart competitors, the company changed tack in 2000.
The miner ceased outside buying and began to sell down its $5bn stockpile of stones. It switched to the so-called supplier of choice model, vetting 75 sightholders – or buyers of rough stones – who would then be eligible to buy De Beers stones at its 10 sales, or “sights”, each year.
But the resulting shift to a demand-based industry exposed diamonds to the same global economic pressures that buffet other commodities, causing the unshackling of rough diamond prices in times of stress from their polished counterparts.
Miners also could no longer rely on De Beers spending about $200m each year, carefully cultivating the notion of a diamond as the only-acceptable token of everlasting love.
De Beers in 2001 agreed a joint venture with LVMH, the luxury goods group, to establish De Beers Diamond Jewellers, aiming to put its brand to use in the retail market.
In 2008, the company made another move to decommoditise its stones. De Beers launched Forevermark, a diamond branding process that inscribes each diamond with a unique icon – one 5000th of a human hair deep and imperceptible to the naked eye – indicating that it has been responsibly sourced and is of a certain quality.
Forevermark now has a retail jewellery collection and was launched in South Africa and the United Arab Emirates this year.
Yet both BHP Billiton and Rio Tinto are trying to sell their diamond mines. With the market still tightly held and few large discoveries in the past two decades, the mining groups have struggled to expand their market share.
Accounting for less than 1 per cent of the miners’ profits, the diamond operations are not large enough to justify management’s time on a sector that shares few attributes with their larger segments.
“Each rough diamond is unique and the valuation of rough diamonds therefore will always be expert and have a subjective element to it,” says Brian Menell, mining entrepreneur and diamond industry veteran. “The dynamics of marketing diamonds will always be unique relative to other mined commodities.”
De Beers, now controlled by Anglo American, famously values its diamonds according to 12,000 different price points. And since the industry leader relinquished its stranglehold on the market (see box), miners are rethinking how they market their output, extracting more value as a stone moves from mine to finger.
“The diamond mining industry historically has worked on the premise that its business stopped at the mine gate,” says Glenn Turner, chief legal and commercial officer at London-listed Gem, in which Graff also has a 15 per cent stake. “But we’ve found a significant margin that we can give to shareholders.”
Gem, whose Letseng mine boasts a prodigious output of very large, high-quality diamonds, last year started “smart-selling”, keeping a selection of stones either to manufacture themselves or cut in partnership with a diamentaire. The aim is to share in the midstream profits for 50 per cent of production value by 2017.
“The profitability of cutting and polishing is much better in these large, high-quality stones,” says Stephen Wetherall, Gem’s group sales and marketing executive. “We are in the box seat in terms of production to do this, whether it is in partnership with jewellers or manufacturing ourselves.”
The migration of miners downstream is matched by attempts by luxury retailers and jewellers to secure supplies of precious gems. Tiffany has signed numerous offtake agreements – contracts to buy the output of a mine – with producers to help fill its famous blue boxes.
Harry Winston, the Canada-listed group, combines high-end jewellery stores with a 40 per cent stake in Rio’s Diavik mine and is trying to acquire further mining assets.
Its “book ends” strategy – which argues that most value accrues to the miner and the retailer, rather than the high-volume, low margin processes in between – means its two divisions buy and sell into the market, not to each other, prompting some analysts to question the model’s merits.
But the group maintains that seeing both sides of the market has its advantages and hints at more vertical integration to come.
As Jean-Marc Lieberherr, chief commercial officer for Rio’s diamond division, puts it: “Miners are getting closer to retailers and retailers are getting closer to miners. We are shortening the pipeline and getting closer to the end consumer, which also gives us gives us a channel to work on bringing different dimensions to the consumer experience.”
Rio’s programmes focus on transparency – tracking a customer’s diamond from mine to the shop – and, in some instances, playing up the cultural or social story around the stone.
That can mean building a brand or retail presence around one particular mine – something Gem is considering for Letseng.
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But Rio also recently launched a collection of sustainable jewellery, Nature’s Beauty, testing customers’ appetite for baubles with a certified ethical and environmental pedigree. Elsewhere, the company works with jewellers, such as China’s Chow Tai Fook, developing new markets such as the fashion jewellery segment – for diamond purposes, anything under about $5,000.
Not everyone is a fan. Some analysts argue that miners are increasing their risk by holding on to stones, rather than selling for cash.
While sharing in important gems makes sense, they add, the competitive world of diamentaires is fraught with pitfalls – 60 per cent of a rough stone is typically lost in manufacturing and breakage is a constant threat – while branding is well outside miners’ expertise.
“The trend is misguided,” says industry veteran Mr Menell. “Miners attempting to go downstream into branding or retail and retailers trying to go upstream to secure supply will in most, if not all, instances corrode value. They are very different industries, with different cultures and different requirements for success. Companies will inevitably do one or both of them badly.”
But for the industry such experiments are part of attempts to sustain the demand for diamonds since De Beers moved away from championing the entire sector.
“Part of our business philosophy is to try to decommoditise diamonds and go beyond the four Cs,” says Mr Lieberherr, referring to traditional pricing based on cut, colour, clarity and carat.
“We think it is going to help sustain the appeal of the diamond category in the longer run.”