The diamond bubble: an email conversation (Part 3)

Isaac Mostovicz writes...

This is the third of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Randy Pearson
Sent: Monday, October 09, 2006 5:22 PM
To: Isaac Mostovicz

Is this trend leading to a “new diamond market” where diamonds become once again unobtainable to the masses? At the end of the day, there is little room for efficiency gains, so prices must go up. If indeed the market forces operating on De Beers are such that once they pay for African empowerment, government taxes, extraction costs, exploration costs, stockholder demands, etc. that they simply can not afford to produce on such a large scale, then maybe their future is a smaller scale profitable business that charges what is necessary to make profit. The same is true all through the food chain from the rough dealer to the retailer. Maybe the world should consider that diamonds may be forever, but maybe not for everyone.

Is it healthier in the end to have a much smaller, but healthier industry that supports presenting diamonds to those who can afford to buy them? I know it sounds simplistic, but for the past 40 years the industry has been extending the definition of what diamonds should be accepted by the jewelry buying public and the status of diamond as a luxury statement has eroded by the same magnitude. When Wal-Mart is the world’s largest purveyor of diamonds then we all can smell that something is wrong.

Anyway, this is one of many outcomes possible; emerging markets will play a big role as China is an untapped market and many more exist. De Beers may be able to hold things together, but in my opinion they will need to make some big moves. When SoC began, they needed to find sightholders who could move the type of rough that they were producing. So far, this type of diamond has not performed at the consumer level which is the unspoken problem. This under performance has lead to high debts and many of the current problems. It may be that consumers simply do not want these goods.

As for higher level goods, I see the problem as more short term. At some point the balance will tip and people will decide that it is better to produce less and sit and wait for a price where they can make profit. For those supporting programs, they will be forced to evaluate each individual client and make sure they are profitable on each one and eliminate those who fail. Only then can they justify the investment required to support the initiative.

Anyway, just thoughts from the street level.

Randy Pearson
S. Muller & Sons


Once again, check back at the same time tomorrow for the next installment.

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