Yair Shimansky CEO of the well known platinum and diamond Shimansky jewellery group has a deep knowledge of the diamond market and he says there are two groups in that chain who are kings, the diamond miners and the retailers.
The value chain for diamonds looks something like this: Annually, on a global basis, some US$12.5 billion worth of diamonds are taken from the ground. When polished the total value goes up to US$19 billion, and the wholesale diamond market is worth some US$30 billion. The retail value of these diamonds is somewhere between US$60 billion and US$70 billion.
Shimansky describes the diamond chain as a U shaped curve with those at the two ends in the best position. This is reflected in the trend whereby a number of diamond mining groups are opening their own retail outlets, among those De Beers. Another well known name in the diamond industry, Harry Winston, earns more from diamond retailing than diamond mining. “Increasingly miners of diamonds want to sell their stones as close to the end consumer as possible,” Shimansky says.
Conversely, the Shimansky group, which is well established in the retail sector with eight stores (11 counting the non Shimansky stores) in South Africa, and also has its own cutting and polishing facilities, is looking at becoming involved in the mining side of the business. Yair Shimansky says that one of the challenges faced by those down the chain is obtaining consistent supplies of diamonds. He expresses openness to investigating ventures with producers. There is branding advantage with the mining group having access to the Shimansky brand, but he says it also works the other way with the retailer able to brand according to the source of the diamonds.
While mining companies have to deal with governments wanting an increasing cut of the profits from diamond mines and the impact of increasing costs, there is no danger of miners of diamonds having the market turn against them. “There is a shortage of diamonds, and this will get worse. In China about 17% of couples currently purchase diamonds to commemorate marriages, but by 2012 with the marketing effort underway by the industry this will increase to 30%. These new consumers will translate to an expanded market of hundreds of millions of dollars, at least.” The Shimanksy group has four retailers in Asia and plans to expand this to nine or ten within 18 months.
“One cannot get consistent supplies on the open market, and it will get worse with a shortfall of over US$3 billion worth of diamonds at wholesale level by 2012, or even earlier,” Shimansky says. These days, established diamond companies down the chain get a regular supply from mines, whereby the mine sets aside consistent parcels of goods. This suggests that like other commodities there is a formation of working relationships that mirror a contract like market.
Shimansky says the existence of large stockpiles is a myth. “De Beers did hold stockpiles of smaller diamonds while the market for these was undeveloped and until sales of these increased.” De Beers also kept a six month rough supply to protect the market from any glitches in mine supply, and such measures were good for the industry.
Those in the middle of the chain, at the bottom of the U, the cutters, polishers and wholesalers effectively earn commission for their labour, as the difficulty of gaining specialist expertise required has diminished as a competitive advantage. Those in the middle of the diamond chain find themselves taking loans or credit from suppliers to pay for their stock. This typically includes one or more layer of interest charges, and exerts pressure to achieve turnover of stock. Small jewellery retailers also find themselves struggling. To buy ten stones of 1 ct+ costs about US$60,000 and to keep stock one needs at least US$300,000. To be in the industry one needs resources.
Yair Shimansky says that at best it takes six months for an average diamond of half a carat to move through the system, though rare diamonds may move faster, and the Shimansky group, through owning its stock, is in the fortunate position where it sees this stock accreting in value as the price of diamonds increase.
Reports of big value increases through the handling of diamonds in places like Dubai are deceptive as these are simply used as tax shelters. Overall, the traditional routes in the diamond chain remain intact, with some 50% of the world’s diamonds by value polished in Israel and up to 80% of rough routed via Antwerp. Asian centres such as China, India and Viet Nam continue to dominate in the polishing of small goods, those diamonds ranging from one to 20 points.
Overall, diamonds have shown a large increase in value over the past two years, with Shimansky citing a three carat diamond that increased in value over that time by 200%. “However, no two diamonds are the same.” The biggest value remains in the large high quality diamonds, nothing smaller than one and two carat stones with high colour and high clarity, their value attributed to their rarity. “There is a market for diamonds as an investment for security where people have an amount they wish to invest and obtain the highest quality diamond they can get for that. The cut remains very important, and the colour, with pinks, blues, greens and rare yellows the most sought after. But where else can one condense several million dollars to something one can wear around one’s neck?”
Yair Shimansky has a strong preference for mined diamonds as opposed to lab grown diamonds. “Natural diamonds offers a better reflection of what people are trying to distil into a small package. However, with the shortage of diamonds there is a place for lab grown diamonds in the jewellery market, this being a natural gap that will be fulfilled by the big players.
“As for South Africa, it has missed the boat completely and continues to do so,” Shimansky says. One of the reasons, is that it no secret that South Africa has made a mess in its attempts to regulate the diamond sector to encourage beneficiation. In fact the effect of the introduction of the State Diamond Trader and regulations around it has been a dramatic decrease in supply to the local market. Shimansky illustrates this by saying that his company on its own last year did some purchases of US$9 to US$12 million worth in South African diamond supply transactions through De Beers sales unit Diamdel and the open market, and this year the total trade across the board through the state diamond trader has been less than that.
“It is simply not working,” Shimansky says. “We have had to import more rough for our cutting operations than we can buy locally. The state diamond trader has no capacity, no decision making capacity, and no power to deal.” De Beers has been the only supplier to this system, without which there would have been no supply at all. “The result of the implementation of the state diamond trader is that small cutters and polishers are closing their doors."
Shimansky raises the question as to the role of state owned diamond mine Alexcor, which sells its production on open tender as opposed to providing its production to the state diamond trader. The argument is that it can’t sell its production through the state diamond trader and make the same profit, but that raises the question as to whether the government should be looking to make a profit if its claim is to target job increases and benefit the industry.
“The government is trying to control the diamond trading sector, and it is important that the industry work to keep channels open else it will be the end of the free market. It is important to keep the open tender system in place as it forms the basis for market related trades and it will bring forex into the country.” In addition if the market is forced underground it will lead to less transparency and honesty in the process, and more illicit activity.
The internet as a trading forum for retail diamonds, while substantial in the US, has not achieved any significant breakthrough in SA. However, in general Shimansky does not see it as a threat, and supports anything that increases consumer awareness. “We prefer educated customers who want and are able to and prepared to appreciate our offering,” he says.