SoC

The diamond bubble: an email conversation (Part 5)

Isaac Mostovicz writes...

This is the fifth 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 8:55 PM
To: Isaac Mostovicz

To extend this a bit more, I see this point as one example of how SoC has worked as intended. DTC had a problem of stock that was unsuitable. Their existing sightholder base was not equipped to produce and distribute these type of goods that they had stockpiled. By bringing in “new sightholders” they were able to move out these goods and leave it to the banks and these clients to find a way to cash these goods. The banks took the sightholder status as collateral for the loans based on the experiences of the past and now they have a problem. These goods were consumed into the marketplace via the sightholder transfer of ownership from DTC to the SOC, but then we have a bottleneck as there was low demand at the consumer level for this article (that’s why they stockpiled them in the first place – remember there was no reason for them to stockpile other than low demand back in 1999 as markets were healthy). In one viewpoint, their tactic was brilliant as they did this on the backs of these “new SOC sightholders”, but on the other the banks that support the industry will suffer.

Of course, I do not have privy to how gets which box and assortment of goods, but you can get a clue based on who the new players are and who was eliminated. New Indian companies and new firms that polish in Africa. If they divert this unsuitable rough to these firms then they satisfy the political problems while liquidating dead assets.

Yes the standard of what is jewelry quality has slipped greatly. There is no doubt of this point. It has opened markets to the masses, but I would argue has greatly damaged the diamond dream and the symbolic value of diamond. On one hand you can argue that everyone should share in this dream and I tend to agree, but at what cost and where do you draw the line. Recall the decision of DTC in 1999 regarding the Millennium Diamond. They set a standard of rarity that was far higher than their average production. Do you imagine they did this without research to indicate that if you place the range too low it would not appeal to certain demographics or targets? Why did they not select smaller goods in promotional quality range? Were they concerned about the image of diamond as a symbol?

These are just thoughts, but it may very well come to pass that we have further segmentation in the industry when the dust settles. I would much prefer to be selling our range of goods than bags full of promotional goods selling on a volume basis during the next few years.

One question to explore is, “what is the definition of a diamond that represents the symbolic diamond dream?” Where is that line and how do we know if it is crossed?

Randy Pearson
S. Muller & Sons


Don’t forget to check back at the same time tomorrow for the final installment.

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The diamond bubble: an email conversation (Part 4)

Isaac Mostovicz writes...

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


From: Isaac Mostovicz
Sent: 10/9/2006 6:24:12 PM
To: Randy Pearson

I think that Randy raises a point that needs a further exploration. Until the 60s the range of what were considered diamonds suitable for jewellery was much more restricted. The Indians learned how to produce rough that was previously considered unsuitable for jewellery. I raise the following question: is it possible that the market became too large in the sense that many of the goods that are offered are unsuitable for consumption? In other words, the production of real diamonds is very limited and if we manage to market only these goods, the offer will be limited but we will be able to raise prices to very high levels as the availability will not be there.

One of the reasons for the SoC was the unsold stockpile of $5bn (US). The claim of the shareholders was that the worth of this stockpile is nil, something that the DTC tried to prove wrong by selling the stockpile for the price they wanted. However, selling the stockpile was not an indication that the need for these goods exists. To take an analogy from what we have on hand, we, at Allied, have plenty of goods but if we want to be faithful to our program, only a limited part of this stockpile is suitable as need satisfiers. Nevertheless, it is our responsibility to find ways for using these goods for satisfying clear and existing needs.

Another example is Patek Phillipe that produces only 18000 watches per year regardless to more markets that open. It is very tempting to try and to cater to the entire world but there are other ways for making money and mass marketing may not be suitable for diamonds.

The last point that Randy raises is interesting. Good manufacturers burned their fingers in the last years by manufacturing. It is possible that people will try to slow down manufacturing as keep prices of rough at bay and gain from selling his existing stock, effectively lowering the level of stock. I am not sure that all will follow but as a different policy is the way of those manufacturers who might suffer and even close down, we are facing an interesting period.

Isaac


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

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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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