Since 2001, Namibia became the natural choice of De Beers for the opening of one more DTC division - NDTC - and with time Namibia turned into one of the world’s diamond production centers. Having secured a solid position on the list of early sightholders of NDTC, Hardstone Processing established itself as a reliable and professional manufacturer of high quality diamonds in the course of five years. Burhan Seber, Managing Director of Hardstone Processing, agreed to take part in our analytic survey and here is what he said.
How do long-time DTC sightholders feel and how do they see the market now in the course of major changes taking place in the industry? We mean the exit of the Oppenheimer family from De Beers, a possible privatization of ALROSA and also the intent of Rio Tinto and BHP Billiton to leave the diamond industry.
Large mining companies, like BHP, looked to sell their diamond businesses (even though profitable before slowdown) citing diamonds as incompatible with their overall business model. These mining companies began trying to exit the industry at a time when diamond prices were booming and thus their assets were valued at considerable premium. Though still in the market to sell, would they accept current valuations? Are there serious buyers? Don’t believe their exit is of any alarming concern, just a business decision.
The Oppenheimer family exiting the industry is a shame – we have lost a great heritage. They were like British Royalty to the Commonwealth. More importantly, the human aspect is lost. A corporate management team who just works by a generic business model cannot replace a lifetime of dedication and experience in the diamond industry. On the upside, Anglo has obviously greater resource.
Do you feel any changes or problems in your work? How did you work before and how does it look like now?
There is no denying that the industry is sick today…and while the reasons are many, one overwhelming factor is the current economic environment. But diamond trading is always attractive when cash flow is healthy. And during a crisis, this can be even more profitable. Being cautious and using cash wisely is key today.
How much has the diamond industry changed in the past two years?
Everything! 2010 was booming with sales and profits. 2011 was out of control with speculation, first half profits wiped out by second half for traders. Manufacturers fared much worse. 2012 continues with heavy losses and very slow trading and slow consumer sales.
What is your personal view of current prices for rough diamonds?
Out of touch with polished.
Is it possible to forecast prices?
Down for the foreseeable future. Unless polished prices increase significantly, which they won’t and on the contrary may decrease (smile), then down is the only way forward.
What are the prospects for the sightholder community as a sales system?
For producer countries, fixed long-term supply contracts are the only system that can work. There are significant investments made by Sightholders in these countries, so they need a guarantee for their investment in the form of supply.
For traders, I cannot really say. Producers are gearing more towards auctions, including maybe even De Beers.
In any case, the current “Supplier of Choice” system will probably change somewhat to meet the new realities. It is actually already changing subtly.
What is your personal feeling about the DTC transfer to Botswana? Do you believe in success? What kind of risks and difficulties can be expected?
There is no reason why it cannot succeed. The will is there. The main challenges are the limitations of skilled workforce and infrastructure in Botswana. But the move is exactly to tackle those fundamental shortages in Botswana.
In the short-term, lack of skill will be managed by London based DTC employees moving with their families to Botswana. In the long run, there will be enough skilled Batswana to take their place.
Infrastructure develops very quickly where there is money, and Gaborone has already changed significantly since the announcement.
Sightholders will travel wherever necessary to get their goods. At worst, sights in Botswana will be a more costly inconvenience.
What impact on the market and business is produced by new diamond miners (Zimbabwe, etc.)?
Depends on the timing. Currently, the effect of more rough is just to depreciate rough value further. In the long run, the more producers we have, the healthier the market will be, as increased supply to comfortably meet demand will mean that rough will have to be priced at fair value to polished.
What kind of development trends do you see for the diamond industry and market nowadays?
Supply is critical. But the only healthy market is a demand driven market. The supply driven market is always short-term profitable. Producers have to face that reality.
How do you manage to have a successful business with the current high prices?
Buy what is viable only. But guess this question is not valid anymore as prices slowly decreasing, so we buy only what we need.
What was 2011 for you, and what do you expect in 2012?
2011 was a disaster for manufacturers. Traders made large profits the first half of 2011, and those who bought and sold quickly would have balanced off the losses of the second half with the gains of the first. Unless they speculated. Manufacturers did not fare as well. Any forecasted profit in the first half was wiped out by the crash in July, since manufacturers still owned the goods in the pipeline at the time. Currently manufacturing is quiet.
Do you think diamonds could be traded as a commodity at the exchange?
Doubt it. Even diamantaires cannot agree on the value of one certified stone, so how can market traders who know nothing about diamonds do a proper job? There are too many parameters even within a single category. Our business is not clear and transparent enough for outsiders.
Some analysts noted that the global diamond output will start shrinking by 2013. Did you think about this?
Shortage of supply is artificial currently and will be, if any, in the future.
Are there any prospects for the diamond market as a whole?
Diamond manufacturing is becoming less and less attractive. That should be a great concern to the industry; and producing countries in specific. Unless significant changes are made, manufacturing may shrink to dangerous levels.
Manufacturing cannot compete against rough trading on par level, especially in a speculative environment. And speculation is here to stay. Yes it hibernates during down periods, but it is quick to take the lead when recovery begins. The system must be adapted to protect manufacturing which requires significant investment, greater cash flow due to much longer turnover cycles, and are more susceptible to market volatility, production risks and polished price limitations. In contrast, rough trading is a straightforward, minimal investment and cash business.
The other concern is synthetics in the long run. Many arguments pro and con, yet when rough pricing becomes non-viable, when industry faces troubles like in Zimbabwe, when producers restrict supply artificially to control pricing, when consumers cannot afford the premium of our luxury product, it is difficult to ignore the synthetics argument.
In your opinion, what kind of challenges the diamond industry is facing lately?
Basic fundamentals…manufacturing rough is not yielding profitable polished. Once there is no reason to manufacture, trading (and speculation) also comes to a halt.
Producers have to make sure that manufacturing is a profitable business. The current model supports producers and traders in good times. Everyone loses in bad times (with exception of cash flow rich traders). Manufacturers lose (or best case make less than…) all the time. It’s the last thing you want to be, if you have a choice. No incentive. That is fundamentally wrong.
In your opinion, what kind of efforts should be taken by diamond industry players to keep the diamond market in good trim? If there was something you could change or influence in the industry, what would that be?
Pricing mechanism both for rough and polished.
For rough, pricing must be in harmony with polished. There has to be enough incentive for manufacturing. Speculation is fine in trading, not in manufacturing.
For polished, an independent pricing mechanism to Rapaport needs to be set up. Though we cannot criticize Rapaport since we have not created a better alternative as an industry.
Veronica Novoselova, Rough&Polished
