Chaim Evan-Zohar

Despair in the Diamond Market

Isaac Mostovicz writes that diamonds as investments could destabolize the market...

Chaim Even-Zohar’s latest memo reveals the diamond industry in despair. At the moment Diamonds are not being sold to the market of consumer and what we see is inter-trading only. Banks do not see new money coming in, and while they hail the fact that debt went down by 20%, how much was due to real sales and how much was due to squeezing the empty pockets of the industry? The cancer has reached the producers, who act irresponsibly and pour billions of dollars into the market with the only short-term goal of survival. Alrosa lost half a billion dollars this year and De Beers struggles to finance its debt. All in all, somewhere along the line the industry forgot the consumer.

We all know the truth about diamonds for investment (short answer: they’re not), but the new trend that big players want to establish just shows their level of despair, trying to play on the world’s ignorance. This is not the first time that the trade, championed by De Beers, has done so. The world has believed that “all diamonds come from De Beers” and if you do not have a De Beers diamond, something is wrong with your diamond. I do not blame De Beers for not correcting this perception, but they were happy with this ignorance. What we see now, this attempt to attract investors, is something really dangerous. This raises some painful memories. During the heydays of the diamond boom before 1980, a Belgian worker decided to buy some diamonds for investment. When he came to us some ten years later with his parcel, we looked at it and literally had tears in our eyes. Here was a hard worker with a permanent layer of dirt under his nails and who had bought diamonds with full faith that his purchase was a good value that would appreciate. In actuality if he got 5% of his investment, he would have been lucky.

This was not an isolated case–I have a personal example: When my uncle left our company in 1975, he took, as part his compensation, a few parcels of polished goods that were estimated well below market price. When he tried to sell these goods twenty years later, he hardly recovered his investment even after repolishing and regrading many of the goods.

We also can’t forget the $1 trillion of goods at market price that are in the hands of consumers — these goods will be worth much less when consumers try to dispose of them. Jewellers pay about a third less on average for the same goods when going to their suppliers. When they buy from the consumer market, they pay a lot less for several reasons: they have to pay cash, the goods won’t always sell easily, and sourcing from the consumer market is not always steady.

On top of this, the jewellers’ market is very narrow and quite often they will try to move it up the supply chain to their supplier or supplier’s supplier, reducing the value they can offer even further. If the market tries to market diamonds for investment, they are literally cheating the market. Most of the goods that will be sold will fetch only a fraction of the investment when they are resold, even without any more mining. And even extraordinary large and special diamonds, which might have been a good investment in the past, won’t be a good investment if many of them are sold later on at lost or close to par.

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The End of Sightholder Exclusivity

Isaac Mostovicz writes...

I read this week’s Memo from Chaim Even-Zohar with great interest. I think that Chaim is finally willing to be a bit more honest and less diplomatic about the current state of diamond industry. Nevertheless, despite the data is in his article, the collapse of the industry did not suddenly happen–it was a long process.

Chaim sees the one side of the equation –the oversupply of rough, because his focus is, as always, on the rough market. I believe that the problem is the growing under-demand. One way or another, the financial result is the same. No money is left in the industry: there’s $45-50 Bn of unsold polished stock, which amounts to a three-year supply (as I previously estimated), and huge debt which is only partially covered by diamonds that nobody wants or can buy at any price. Now De Beers is planning to lose its last proper luxury marketing element – the exclusivity of the sightholder.

They do not understand the value of the asset they plan to dispose–once it’s gone, it’s gone for good. If we look at this cynically, sightholder exclusivity allowed De Beers to wash a good amount of unneeded goods at premium prices in the last ten years. They used their clout and influence; now there’s nothing left. The Emperor is Naked. Unfortunately, this time the onlookers do not laugh.

[…] with every solution, there are new issues raised.  This blog has an interesting argument that selling “outside” the system might “devalue” a company’s […]

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Diamond Summit insiders predict 10% fall in demand

Isaac Mostovicz writes...

500 diamond industry insiders gathered over the weekend at in Antwerp, forming workgroups and discussion groups to discuss the way forward for the industry – prior to the industry’s emergency Diamond Summit on Monday.

The Chair of that meeting, industry guru Chaim Evan Zohar, predicted a 10% downturn in diamond sales…

He said:

“This crisis…

…will translate to a decrease in demand for loose polished diamonds at wholesale of about 20 percent, and a 35 percent fall in the amount of rough diamonds required. [But] Let us keep things in perspective …under current circumstances, a 10 percent fall in demand at retail is not the end of the world.

He’s is right of course.  When the car industry is imploding and being bailed by government, 10% sounds pretty good.  Even so a market shrinking by an optimistic 10% is still going to be the end of the road for many cash-strapped jewellers and over-leveraged wholesalers.  And let’s face it, no government is going to bail out the diamond industry. We have to find our own solution..  As Chaim has previously said in his memo at diamondintelligence:

A review of major industry bankruptcies in recent years shows that these were triggered by a combination of mismanagement of assets (money, stocks) and the resultant cash flow problems – exacerbated often by a bank that tries to be the first to put hands on collateral. Too many diamonds – too little cash.

The Antwerp council was productive on many fronts, but the most positive thing to emerge from this session was the debate prior to the event.  It was clear to me that there is a groundswell of desire among participants to return to marketing generic diamonds, something I have long-advocated.

And this in turn, creates a necessity for new forms of collective and collaborative leadership.

We cannot simply ignore the reality of the situation.  As I wrote in Strategic Change magazine…

It is vital for the industry to rally around a new breed of leader, and a new self aware and confident style of engagement. The diamond industry must find a leader who is able to guide the industry’s actors to examine and share their appreciation of these paradoxes, rather than merely cope with, or suppress them.

Looking into ’09 I remain optimistic that we can climb out of this mess.  But not by pretending it doesn’t exist.  We must take a blank sheet of paper and draw ourselves a better future…

This was a good, constructive and hopeful event for the industry.  I am off to buy a new, and brighter-coloured pencil.

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Genie out of the bottle – more transparency in diamonds?

Isaac Mostovicz writes...


Sightholder status from the Diamond Trading Company (DTC) is bestowed the world’s top diamantaires (as chosen by the DTC) for “their ability to market diamonds effectively and distribute them efficiently.” DTC Sightholders get access to rough diamond supplies, and in return “deliver specified diamonds in predictable quantities, assure the quality and integrity of their diamonds, and provide value-added marketing support.” (Both quotes from the DTC’s site here)

Recently, six companies lost their DTC Sightholder status following the result a criminal case in Antwerp. On December 6, 2007, the Antwerp Correctional Court convicted these diamantaires (and seven others) of fraud, fictitious invoicing and smuggling between 1994 -1999.

The judges refused to approve a settlement between the Belgian prosecution and the thirteen diamantaires, and gave the companies a six months suspended jail sentence. The DTC is also suspending these companies’ diamond supplies.

This editorial, “The Genie is out of the Bottle,” by Chaim Even-Zohar, makes an interesting argument that it wasn’t so much fraud as industry practice at the time that these (relatively small) companies were doing–they were actually increasing their taxable income by moving values that were ‘hidden in inventories’ to actual revenues, which the law now makes companies do. Their conviction is merely for show when larger companies with greater transgressions at the time were not targeted in the lawsuit. In any case, Even-Zohar believes the decision will accelerate growth of transparency, good governance, and Best Practice Principles in the diamond industry. Do you agree?

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Can commoditisation be good for diamond prices? Part 1.

Isaac Mostovicz writes...


Two critical diamond industry events have thus far passed under the radar of mainstream media. They deserve an airing here as they signal a shift to open-access, transparent, and globalised diamond trading – a far cry from the industry’s heritage in tight handshake-based relationships.

First: The creation of a $400m Diamond Circle Capital Fund, an investment fund which will invest in $1m+ high end diamond. The fund is the brainchild of commodity asset management specialist Diapason.

Second: The development of a diamond futures market by industry ‘wild child’ Martin Rappaport, based on ‘bread and butter’ brilliant diamonds – high quality rounds between 1.01 and 1.19 carats. The classic engagement ring ingredient.

Both measures aim to address fundamental weaknesses in the existing diamond trade: while consumer demand is solid (if not exactly strong) and extraction capacity is solid (if not exactly strong), the centre of the diamond pipeline is in deep trouble. The distribution arteries of the industry are clogged. Rough dealers, manufacturers and polished wholesalers are finding it hard to breathe. Both stock and debt levels are at record highs.

It’s the first move – the investment fund – that I want to address first.
According to industry commentator Chaim Evan-Zohar, these measures should attract much-needed external capital into the industry, and will enable manufacturers to shift goods which would otherwise get stuck in the distribution, or shifted on at a bargain rate; they need deep pockets to hold onto.

There are dozens of good diamond manufacturers who will not even try to compete for the truly large rough stones, because they cannot be sure that they have the right connections. The Diamond Circle Capital fund significantly widens opportunities for the trade to sell large polished stones.

As De Beers’s historic monopoly passes into history, a period of uncertainty emerged in which the industry needs new pathways to get goods to consumers.

After a long period in the dodrums, Chinese and Indian demand is on the rise for smaller goods, and oligarchs increasingly need something shiny to please their soon-to-be-ex-wives. The is now some hope that the industry may finally be emerging from its doldrums. This hope, and desparation at the status quo is encouraging a new wave of innovation.

Both these new measures rely upon the fact that diamonds can be traded as commodities. By picking narrowly defined segments – one highly volatile and one highly stable, the measures will introduce powerful, albeit potentially conflicting price signals into an opaque marketplace.

But the question is, who will this benefit. Does it really help manufacturers? Does it really help consumers? Critically, will it help investors?

For manufacturers there may well be be a one-time injection of funds as they sell difficult to shift of stock to the Diamond Circle fund, but thereafter, it’s unlikely the fund will have the sales capability to shift much stock. If it does, the potential for misleading transactions is immense. On the one hand it promises to set a benchmark by disclosing genuine sales figures rather than tax-cogniscent guesstimates. On the other hand, the integrity of these transactions will be very difficult to assure. What liquidity is there really in a rolling stock of 100 or 200 diamonds?

The proposed participants are actually rich rough dealers with little sales experience.
As one of the world’s leading retailers of large stone said to me:

Selling large diamonds is an art form, making the buyer feel like a queen. Manufacturers should stay well away.

Building on his observation, it’s not the business of a fund, or even, really, of an auction house to sell these diamonds. It’s quite possible that the fund may actually act to suppress value rather than enhance it.

Secondly, the fund is likely to have a disproportionate number of difficult to sell or ugly diamonds – if a dealer has a really quality large diamond he is likely to be able to find a more value-adding route for it.

The third point is that not all diamonds have value. Period. Some are just not saleable, at any price. Although the aggregation created by the fund is likely to smoothe out the risks of holding these diamonds, on average it will probably overvalue the diamonds it contains.

To conclude, and to challenge Chaim’s view, the simple truth is diamonds are NOT commodities. Treating them as such will not inflate value, it will only erode it…

The sooner the industry finds a way to step back from this abyss, the sooner it may regain a luxury premium.

I will comment on Martin Rappaport’s futures market in due course…wait for part II…

Jeremy Sulzbacher says of this article...

Please view my editorial on these issues in the latest volume of Diamond Finance

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The diamond bubble: an email conversation (Part 2)

Isaac Mostovicz writes...

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

From: Isaac Mostovicz
Sent: 10/8/2006 5:08:29 PM
To: Randy Pearson


It is very difficult to give such an estimate, as you know and comment. Some take 1ct or 0.5ct as a benchmark but this is not better either. Therefore, I preferred to rely on Even-Zohar as a source. He is honest enough to know the complexity of the market and provide these numbers as an illustration only. There are so many factors in building such a graph: the type of diamond (size and quality), the geographical market, the type of outlet, the time that the data was collected (now the situation is worse) and more. However, this complexity is more pronounced at the retail level.

You are correct about the squeeze at both ends, or throughout the pipeline. In the past, people were ready to suffer blows as they knew that in the long run they will win. This was the case with sightholders who were ready to overpay for their boxes, knowing that the DTC will pay back its loyal customers for the losses by offering special goods. Unfortunately, I believe that the DTC is not making money either, even when their mining operations are considered to be the most efficient in the market. De Beers is now a private company but did they stay a public company we’d see a hostile takeover. This article in IDEX confirms this squeezing trend.


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

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