Better Prospects For Direct Rough Diamond Supply – But Profits Are Still A Problem

The old order in the rough diamond distribution pipeline has changed. The centralized, closed-door, exclusive club that characterized the distribution and sale of rough diamonds from the mines is rapidly being abandoned. At the International Diamond Conference – Mines To Market 2007 hosted by India’s Gem & Jewellery Export Promotion Council (GJEPC), Angola’s Deputy Premier and head of its economic team Aguinaldo Jaime as well as the leading lights of Angola’s state-owned mining giant Endiama made it clear that a direct supply of rough to the giant Indian diamond processing machine was something they welcomed – even though Angolan law still mandates that all rough sales go through Endiama’s sales arm Sodiam. “Enter into joint ventures with us on exploration and mining and we’ll work something out,” was the message they passed on.

Conference moderator Chaim Even-Zohar, Rio Tinto managing director Steve Hodgson, Angola Dy. Premier Aguinaldo Jaime, Endiama chairman Manuel Arnaldo Calado, Alrosa’s Yuri Okoemov and Endiama director of planning & investment Alberto Fancony.

Yuri Okoemov, director general of Russian mining giant Alrosa’s United Selling Organisation (USO), stated categorically that Russia had abandoned its policy of favouring domestic cutting shops in the sale of rough diamonds. Alrosa would sell to the customers who served its interests best. In response to a question, he told India’s minister of state for commerce Jairam Ramesh that he saw many Indian firms as being direct clients for rough diamond supply.

Botswana minister for energy and water resources P.H.K. Kedikilwe, while making it clear that local cutting industry beneficiation was central to the way his government viewed the future of rough diamond sales from the world’s largest producing country, indicated strongly that something of a happy medium could be worked out for everyone if the Indian diamond industry got more involved in Botswana’s development process.

But one thing remained unchanged – the margins made by the diamond cutting industry are still uncomfortably thin and the conference threw up no new ideas on how to improve the situation. Given that diamond cutters pay cash up front for rough and then have to extend long credit when they sell the polished, Israeli diamond luminary Shmuel Schnitzer made an impassioned appeal to the mining companies to consider the extension of credit to cutting and polishing firms as one way of easing the situation. He thinks they should consider this because, as he put it, without a viable cutting industry, the mines will have nowhere to sell their product. I happen to think he is absolutely right. But as one questioner put it, why should the miners bother listening?

I came away from the conference with the same feeling – with thousands of cutting shops ready to do almost anything to secure a steady supply of rough, the miners know they call all the shots. Look at the way Rio Tinto minimized its risk and secured a guaranteed market for its product by making cutting and polishing firms to pay huge deposits up front before it even began the process of taking the giant Argyle mine underground. I don’t think the miners will extend credit to anyone in the near future.

The Indians have found out the expensive way that moving downstream into jewellery is not necessarily a way out. Many of those who started jewellery manufacturing units have shut them down again. The much-vaunted De Beers Diamond Trading Company (DTC) jewellery brands have only bled their participating clients white. Also, the move downstream doesn’t help improve the money-realisation period all that much. Mehul Choksi of Gitanjali told the conference that even by manufacturing and selling his own jewellery set with the diamonds he had polished, it took him some seven months to recover his money as against nine months when he sold his polished to someone else.

The De Beers Supplier Of Choice (SOC) vision of a short diamond pipeline with just a select few vertically integrated players from mine to market hasn’t worked out. Given the nature of the business and the vagaries of fashion and consumer demand, diamond cutting can’t be reduced to just a cost in the process of manufacturing jewellery. Diamond cutting will have to be a viable business on its own if diamond jewellery is to have a stable and prosperous future.

Here’s a thought for what it’s worth — what if Diamonds India Limited (DIL), the rough-buying company launched by a group of Indian diamantaires, partnered with a bank to extend credit to Indian firms buying rough? If it works, this could generate enough sales volume to make the idea economically viable. You tell me.