Diamond Cutters Approaching Era of Disruption


Source: Rapaport
Author: Ronen Schnidman

RAPAPORT… Diamond manufacturers are entering an era of fierce competition as the looming decline in rough diamond supply is expected to place additional pressure on their already razor-thin profit margins.

“A manufacturer always operates with a benchmark margin, which is the minimum he needs to make a reasonable return on equity,” explains Vishal Doshi, the executive director of the manufacturer Shrenuj & Co. “In spite of all the efficiencies, we have reached the border between the business being either sustainable or unsustainable.”

Some manufacturers are already adapting their business models to cope with this problem, in ways that industry observers believe will alter how the entire diamond pipeline operates in the coming years.

Differentiate or Disappear

However, Dinesh Navadiya, the president of the Surat Diamond Association (SDA), notes that manufacturers have limited options to cut costs and improve margins. While they tend to expand their labor force when rough supplies grow, cutters avoid retrenchments when the profits run dry, he explains.

“Employers never lay off workers,” Navadiya says. “There is a scarcity of artisans in the industry so the question of layoffs does not arise.”

Even during the 2008 financial crisis, factory owners in Surat tried to avoid layoffs, preferring to retain their workers by instituting temporary salary cuts.

Navadiya further dismisses the likelihood that factory owners will increase profits by absorbing smaller or weaker companies to reduce competition. He states that no notable consolidations have occurred in Surat in recent years and that he does not expect significant consolidation to occur in the future.

Consequently, the only way that manufacturers will be able to contend with tightening profit margins is through product differentiation and factory closures, concludes Mike Aggett, the managing director of H. Goldie & Company, a De Beers accredited broker.

Aggett notes that the diamond manufacturing sector is undergoing some consolidation, but this is occurring at a slow pace and largely through companies exiting the industry. He attributes this to the fact that the industry is predominantly made up of family-run businesses that find consolidation more difficult than would purely corporate entities.

“Certainly in India a number of smaller operations have disappeared,” he says. “It will be a slow, ongoing process but the less sustainable businesses will disappear.”

Aggett stresses that manufacturers who wish to remain in the industry will have to focus their efforts on design and branding as a means to improve their profit margins. Consumers are becoming increasingly price conscious, and the only way to make price secondary in their buying decisions is by presenting them with a differentiated product, he explains.

Emanuel Namdar, the general manager of S.N. Asia, a diamond manufacturer, agrees with Aggett and adds that branding is essential because the jewelry marketplace is already crowded and intensely competitive even in emerging markets.

“When you head out to the Far East and pass the jewelry displays on the street, you can see that every consumer interested in buying a diamond ring has hundreds to choose from within a 10-minute walk,” Namdar says. “You must add value through branding. Otherwise, the competition at the consumer level is too fierce.”

Doshi notes that many diamond manufacturers are integrating downstream to achieve that added value and differentiate their product and services.

“The more you can sell diamonds in jewelry, the more your gross margins will go up,” he explained in an interview with Rapaport News earlier this year. “But not everyone can execute it because it’s a different business with a different mindset and a different business model.”

Declining Rough Supply

Most manufacturers who spoke with Rapaport News agreed that manufacturing rough into polished alone is not sufficient to cope with high rough prices and the further forecasted increases.

According to industry consultants at Bain & Company, diamond prices are expected to rise in the long term as supply is forecast to decline from 2018 onward, while demand continues to grow.

De Beers expects that global rough diamond supply will peak at slightly over 160 million carats in 2018 but will plummet to 120 million carats around 2025. This constitutes a 25 percent drop from peak production in less than a decade. De Beers estimates that approximately 146 million carats were recovered in 2013.

De Beers attributes this drop in production to a lack of new mining projects expected to come on stream after 2025 that have potential production volume large enough to impact the overall market. Even if new, large mines are discovered, De Beers noted in its recently published Diamond Insight Report that these would not be developed fast enough to prevent the contraction in supply. The company estimates that the latest generation of large diamond mines have taken on average 22 years to reach production from their initial discovery.

Rough Financing Impacting Pipeline

Bain expects that the demand-supply gap will further squeeze manufacturers’ profit margins at a time when it is becoming increasingly difficult to obtain financing for the working capital needed to reap efficiency gains.

Des Kilalea, a diamond mining analyst for RBC Capital Markets, suggests that it is this lack of financing for rough purchases that will be the final nail in the coffin for smaller, family-owned manufacturing operations.

Kilalea cautions that the entire diamond pipeline has entered an unhealthy situation whereby manufacturers are financing the profitability of the miners and retailers with their bank credit. He predicts that the diamond pipeline will address the problem by evolving toward simpler supply lines with fewer, larger players.

“The longer-term issue is that the miners are not really going to be able to dictate any price to the market because the banks aren’t going to continue financing it,” he says. “Manufacturers will [then] become more reticent to pay high rough prices [in cash] and they will stop extending such crazy credit terms to their own buyers. Why should the guy in the middle be the bankers for the guys on the ends?”

Kilalea expects that the larger manufacturers will address the finance issue by increasingly raising funding from the stock and bond markets to finance their working capital.

Moreover, Kilalea forecasts that as banks reduce their credit lines for rough purchases, the mining and retail segments will be forced to ensure that their profits are not affected if manufacturers go bankrupt.

“The big retailers with financial muscle want to secure the rough and ensure that there are no financial interruptions,” Kilalea says. He explains that retailers are worried that their diamond suppliers may go bankrupt and leave them in the lurch without merchandise. Moreover, the retailers have an easier time of financing their working capital, often paying lower interest rates than their own suppliers.

As a result, Kilalea expects that more large-scale retailers will pursue arrangements similar to those of Tiffany & Co. The New York-based retailer has its own polishing division that procures rough through sight contracts with De Beers and ALROSA and also holds off-take agreements with junior miners Kimberley Diamonds and DiamondCorp to fulfill some of its specific rough requirements.

Bain said in its 2013 industry report that the trend of retailers integrating upstream along the diamond value chain is likely to continue, creating additional pressure on manufacturers as retailers compete for rough with their own polished suppliers.

Survival Not Guaranteed

The consulting company therefore expects further consolidation and integration in the middle of the diamond pipeline as manufacturers seek to maximize their profit margins through efficiencies of scale and scope.

Some manufacturers already predict that there will be consolidation in the cutting and polishing industry even if polished prices rise in the coming decade.

Namdar expects that polished prices will rise significantly in the next decade but diamantaires will need to continually find ways to add value along the pipeline in order to survive and benefit from these higher prices.

“There will be an industry and people will work hard because the ones that won’t work hard won’t be around in 10 years’ time,” he says. “I can’t even guarantee that I will be there, but I know that many good companies that are here today have a roadmap to get there.”

Sarin buying out Light Performance Technology

We publish courtesy of Diamond World

Sarin Technologies Ltd. has acquired the Light Performance Technology (‘LPT’) from Overseas Diamonds Technologies NV (“ODT”). The ODT LPT is a light performance system, enabling the automatic, independent and accurate measurement of a polished diamond’s appearance by assessing its light performance characteristics – brilliance (how much light is reflected back through its crown); fire(how much light is broken into colored splashes); scintillation / sparkle (how pronounced the diamond sparkles); symmetry – how symmetric is the play of light returned from the diamond. Uzi Levami, Chief Executive Officer of Sarin, said “This acquisition is part of the Group’s strategy to expand into additional segments of the diamond industry, and we expect this acquisition to bolster Sarin’s brand recognition in the retail and consumer end of the pipeline.”

The LPT system is projected at giving diamond retailers an attractive sales tool to simplify and enhance the consumer’s diamond jewelry buying experience. The company believes ‘The retailer will more easily connect with the individual customer utilising a striking visual means designed to view, compare and evaluate the diamonds being considered, and thus offer each buyer a diamond that will best suit his or her taste and budget.’

Besides retailers, Sarin believes LPT would add value to its deliverables to manufacturers and wholesalers. “We expect Sarin to be in a unique position of being able to provide manufacturers and wholesale traders with both an advanced light performance measurement device and relevant planning and polishing instructions.’ ‘It will enable industry players to better plan, manufacture and trade in diamonds in accordance with light performance criteria – more and more being accepted, in addition to the traditional 4 C’s.’

Upon completion of the diamond’s polishing, Sarin’s LPT will also provide the manufacturer and/or wholesale trader with a verification report on its light performance parameters, which the company “expects this verification report service to contribute as an additional future source of recurring service income for the Group, especially as more and smaller-sized diamonds are evaluated and documented primarily for their light performance.’

The term of the deal between Sarin and ODT state that Sarin will pay US$650,000 in cash, with additional contingent consideration due in the form of royalties for a period up to 14 years, derived on a sliding scale from the actual future net revenues. Sarin plans to launch the LPT later in 2011 after augmenting the acquired core technology to adapt it to retail markets, which is fairly a new segment for the company.


India determined to keep upper hand in diamond cutting and polishing

We publish courtesy of Mineweb

Author: Shivom Seth


The Chinese assault on the Indian diamond polishing business, a front opened up some months ago, has raised somewhat of an alarm in the Indian diamond industry. The Chinese have set eyes on the global diamond market and hope to dig their way into India’s 80% share of the world’s diamond cutting and polishing business.

Though the Chinese have officially denied any such move, Indian diamond cutters, most of whom are based in the State of Gujarat, to buttress their point, direct attention to the Chinese efforts to secure a line of supply of the uncut gems from the African continent, eliminating middlemen from Antwerp and Israel.

The Indian exporters are worried that if China succeeds, eventually it could upset their hold on the industry, BizCommunity.com reports. Indians say that China was returning the favour to the African nations by supplying free health aid and infrastructure works.
Liu Jianhua, Deputy Secretary-General of Diamond Branch, the Gems and Jewelry Trade Association of China, told the Global Times recently that there were definitely no such deals or actions between China and some African nations.

On a visit to Africa in January this year, Chinese commerce minister Chen Deming had said that China and African nations always treated each other equally and that years of aid provided by China for infrastructure construction in Africa had been conducted without any political or economic preconditions.

India’s worry

The Indian side has been actively campaigning with its own government, asking it to strike up deals similar to the ones by the Chinese government, in order to procure its own line of rough diamonds from the Congo and other African nations. The campaign is spearheaded by India’s Gem and Jewellery Export Promotion Council.

The size of the Indian gems and jewellery industry is expected to cross $31 billion in 2010-2011. Surat itself is expected to process $18 billion worth of the glittering gems this financial year. But these figures are not helping much to dispel the doomsday predictions in the industry, because of the Chinese assault.

The Indian side fears that if the Indian government does not wake up now, China may soon have the upper hand.

India spends $10 per carat on the polishing and cutting of diamonds, against China’s $17. Expectedly, India wants to retain this edge. But the fact that China itself is a major consumer of polished diamonds besides Hong Kong, US and India, is adding fuel to the onging fire. Polished diamond exports to the Chinese mainland and Hong Kong during the first quarter of 2010 equalled $727 million, 28% higher than the same period a year earlier, according to the Antwerp World Diamond Center.

The Indian diamond story has so far been one of grit and determination. From a mere $8 billion worth of exports in 1999-2000, the Indian gems and jewellery industry has captured about 80% of the global polished diamond share.

Vasant Mehta, chairman of the Gems and Jewellery Export Promotion Council said earlier this week that they expected gems and jewellery exports to cross $31 billion by the end of this fiscal year, coupled with a strong demand for polished diamonds to key export destinations. And everything does not seem to be lost for India.

The Indian government has responded to the efforts of its diamond industry and is now contemplating beating the Chinese at their own game. India and Africa have a long history of trade and commerce, and the Indian government hopes to leverage off this.
India may soon be able to source rough diamonds directly from Botswana, the largest diamond producer in the world, cutting out the middlemen. Earlier this year, Indian Vice President, Hamid Ansari, had also visited Botswana to lay the ground work to facilitate direct procurement of rough diamonds by Indian companies.

Both the nations also signed an agreement to the effect. It will be a couple of years though before the direct line between Botswana and India starts functioning. At present, Botswana’s diamond mining industry is dominated by ‘Debswana’, a  joint venture between De beers and the Botswana government, but if India’s efforts of opening up a direct line does bear fruit, it would fuel growth for the Indian diamond manufacturers in the future.

Setting up base

The Confederation of Indian Industry (CII)’s South Gujarat Zonal Council Chairman Aagam Sanghvi, is of the same opinion saying if the rough diamonds from Botswana came to India directly, it would assist in value addition. The CII is an organisation that caters to the business community.

Botswana is not the only country India has been eyeing. For some time now, India has been trying to procure rough diamonds from South Africa, Namibia and Angola.

Zimbabwe, for example, is believed to be sitting on one of the world’s largest diamond reserves that are estimated to be around 25% of the world’s total resources.

Both India and China are actively chasing that country for a stake in the pie. But the African country’s diamond sector has been mired in controversy over human rights issues in the diamond mines near the border with Mozambique, resulting in most buyers from Western countries ordering a boycott of stones from Zimbabwe.

Frequent political instability in other African nations like Seirra Leone and Ivory Coast do not make them viable options to nations like Botswana, which is Africa’s topmost miner of diamonds. Still, the Indian polishing industry is not averse in taking efforts to keep the supply line flowing smoothly with the other, lesser known African nations.
That is not to say that diamonds are not driving economic growth in the region. The diamond mining industry generates over 40% of Namibia’s annual export earnings and diamond revenues enable every child in Botswana to receive free education up to the age of 13.

Diamonds also account for 33% of the GDP of Botswana. Since diamonds were discovered in Botswana, GDP annual growth rate has averaged 7%. In addition, the revenue from diamonds is instrumental in the fight against the HIV/AIDS pandemic.
Keeping this in mind, the start of the year witnessed a rush among Surat-based companies to set up diamond cutting and polishing units in Africa, in order to secure assured supply of rough diamonds. Russia is another rough producing country where Indian companies have set up units.

“Earlier, Indian diamond companies were setting up manufacturing units only in South Africa,” said Aagam Sanghavi, director, Sanghavi Exports. “But many Indian companies are now eyeing operations in Botswana, Angola and other African countries that produce roughs.”

The director of Sanghavi Exports, which exports polished diamonds, said that this strategy would benefit not only the Indian companies, but also the African nations as their economies depend largely on diamonds.

Shrenuj & Company, whose main diamond cutting and manufacturing facility is in Surat, opened a diamond cutting factory in Botswana in May this year. “Opening a factory in a rough diamond producing country was an important objective to take forward our global manufacturing strategy,” said the company’s chairman, Shreyas Doshi.

As the next step, the company also plans to set up a jewellery manufacturing unit in Botswana.