Dilip Mehta shares views on industry growth in the economic crisis

Dilip Mehta, Chief Executive Officer of Rosy Blue to Stakeholders speaks his mind in a formal letter to the world diamond industry:

In the present global financial crisis, each of us is naturally concerned about the effects it may have on our diamond niche. Although this is neither the first nor the most serious crisis our industry has faced, but what really differs about this one is the inexplicable speed of developments. At the DTC Sight during the last week of September, many of us still felt so positive about the market that some sight holders purchased large amounts of additional rough (ex-plan), which underscores the abruptness of the events.

As a stakeholder and partner in a diamond company, I have pondered what can be done to come through the current slowdown stronger and better. This necessitates "reading the map" and making some assumptions on supply and demand and, thus, on diamond prices. In this letter I would like to share some of these views with you.

1. Polished Prices

Whilst one may argue to what extent rough diamonds are a commodity. For polished iamonds, the answer is very clear. Diamonds and diamond jewelry are valuable consumer products competing with other high-value consumer products on the market. If we look at the last decade or so at the composition of sales in US jewelry stores – which account for half of the world diamond jewelry market – then we see that the share of diamonds and diamond jewellery sales in terms of overall shop sales remains fairly constant at about 70%. This unquestionably shows that the diamond jewelry market is solid and hardly eroded by fluctuations in the economic tide. Solid consumer demand in other regions such as India, the Middle East and China provide further evidence. If we expect a market or price decline in the months ahead, it will have nothing to do with our particular product.

Rather, the decline will be part of a general trend, as the American economy is driven by consumer spending and the government there will take all actions to restore it as quickly as possible. True, some economists expect that there will be deflationary pressures in the Western economies on many consumer products. It is up to us to utilize this unique opportunity to impart to the consumer the long-term value proposition inherent in our product. Lest we obsess excessively on the US market, we must also bear in mind that many regions in Asia already have a culturally and historically ingrained notion of diamonds being a store of value rather than just another consumer product.

The relative stability we see in polished wholesale price levels should be a source of both satisfaction and pride to all of us. Polished price stability is really a result of the structure of the market. It is the source of confidence in our product. As such, we have an enormous joint interest throughout the diamond pipeline to maintain this stability.

On every level – especially at the retail store level – there are inventories to protect. To a large extent, retailers, like the manufacturers, depend on bankers' and suppliers' credit, while their own equity is largely represented by their stock. Retailers will fight to preserve price levels not just because of their direct economic interest but also because they understand that any reduction in the price of diamonds harms their own long-term prospects in the market.

One might argue that just because we have enjoyed price stability so far it doesn't mean anything about the future. Here, I respectfully disagree. In the long term future, if anything, prices will go up. The supply-and-demand prospects show severe shortages of diamonds in the decades ahead. When the value of virtually all other products may decline, our customers can look to a product that will keep its value. The price stability will become an important product driver. With all the great, sophisticated, state-of-the-art diamond-exploration technologies available to diamond-mining and –exploration companies, in the past two decades, the mining sector has failed to discover any new world-class diamond mines. The International Monetary Fund (IMF) has already devoted multiple research papers toward what will happen in Botswana after 2029, when the country might literally run out of diamonds.

We need to highlight in our communications to the consumer the fact that overall polished prices have not fundamentally been impacted by the global economic crisis. We need to stress in our promotions the diamond's ability to maintain value and remain valuable in the eyes of the consumer. The inevitable shortages that we are going to face in the decades ahead will only enforce and validate consumer's confidence in diamonds as a store of value.

2. Rough Diamond Prices

When, in the past few weeks, the financial system came to a sudden halt and even banks were refusing to lend to each other, our business, needless to say, was severely affected. Some rough prices fell considerably, though I view this mostly as a technical correction that has cancelled some of the highly irrational and irresponsible increases in rough prices that we have witnessed in the past 12-18 months.

I am not joining the chorus of those who like to put the blame on the producers, though I am also the first one to say that I'm not overly excited by some of the experiments in rough marketing systems that we have seen. If there is a benchmark in rough prices it would be the DTC's continuous and consistent box supplies, which, for most of the time, allows a considerable premium as compared to the open market price of the rough. When other producers are capable of optimizing their revenue by securing sometimes substantially higher prices well above the benchmark and the fair market value, it is unfair to blame them. We should have the courage to blame ourselves for our eagerness to overpay for rough.

Needless to say, we must all continue to compete. However, the entire value chain, including the producers and banks as well as manufacturers, must strive to create not only sound individual businesses but a sustainable value chain. The market created a situation in which we are all too willing to make rough purchases at prices that will ultimately damage our own very best interests. Rough supply must be in line with polished demand, both in terms of volume and price. There must be a dialogue between the producers and the manufacturers on how to achieve a commercially sensible equilibrium in these turbulent times. They need us and we need them. We must make sure that we now find a win-win game. For the manufacturers, a good place to start is to buy responsibly – financially, ethically, and strategically.

3. Where Do We Go From Here?

So what should we do? The coming global recession, which seems to be inevitable, will impact our industry as it impacts any other industry. There are certain measures that we should all take such as becoming more efficient and reducing costs, including unnecessary luxuries, without worrying too much about our social standing. Mostly, though, what we must do is act rationally and do our corporate very best – both on the buying and selling sides.

What we should also do is seriously explore how to convey the proven and unquestionable lasting-value message to the consumer. I believe in this message not only because it's true but also because I believe in our business. Our conduct in our own business is an inherent part of the message. If, on our level, we fail to act rationally, indulge in all kinds of speculative activities, divert banking credits to non-diamond uses or do things that bring the industry into disrepute, even the most sophisticated and appealing consumer message will not hit home.

In the past, when the business faced difficult times, we were quite complacent – trusting that the demand-and-supply manipulations would ensure our corporate and industry's health. Those days are gone – for good. We are now "independent" – or to borrow a word used earlier, interdependent. Let's make the best of it. I have suggested to AWDC a format for a symposium on Sunday, November 16th, where we create a few groups to discuss and debate all important issues including the RAPPAPORT price list. A collective view on the challenges facing the industry and the solutions they require could then be presented to a larger group by a limited number of speakers.

All that I ask is that we raise the pertinent questions and seek out solutions collectively as an industry, as a value chain.

Passionate Diamantaire,

Dilip Mehta