The summer of 2011 will be remembered for a few things. None of them are very encouraging, I’m afraid, says Isi Morsel, Director at Dali Diamond and a Board Member of AWDC, in his article posted at www.polishedprices.com. The weather was bad, the stock markets volatile, Standard & Poors reduced the US’s credit rating and Italy joined the club of EU countries in financial trouble. Champagne, anybody?
However, most diamantaires were blissfully unaware that amidst these events another one was planned that would have a far more direct impact on their business once they returned from holidays.
On the 15th of August - a month best known by diamond bankers for its low liquidity levels - one diamond miner decided to go ahead with its tender. The timing couldn’t be worse.
The results were predictably disastrous, showing downward trends for most lots of -20% to -35%, with four out of 16 lots remaining unsold. Immediately, alarm bells went off in all diamond centres and the scene seemed to be set for a sequel of the equally disastrous tender of 2008 which jump-started the strongest decline in diamond prices of the last decade.
What followed were two very nervous weeks, with prices falling to year-low levels and near-panic ripping through the markets. Carefully built up market positions were destroyed in the blink of an eye, future obligations all of a sudden became difficult to meet, and overall confidence in the business hit an absolute low. In short, one specific market and pricing test - which really is all that a tender is - has had far reaching consequences for an entire business sector.
Is this another diatribe against tenders? It isn’t.
Ultimately, each diamond supplier has to define its own objectives and implement the strategies best suited to achieve them. Companies with limited diamond potential may want to maximize their return in the short term, whereas companies who have bigger potentials will want to reap long term sustainable benefits. Both approaches are valid and should be respected.
However, the question that needs most answering is a simple one: Do tenders reflect the actual market situation at any given time? Are price reductions (or increases, for that matter) of 30% registered on one given day reflecting the market? Patently, this specific tender’s results seem to have overlooked the double-digit growth of most jewellery retailers in the US, which is, until further notice, the dominant jewellery market. They certainly did not take into account the similar growth in diamond sales recorded in the Chinese and Indian markets. They even do not reflect the global diamond supply situation, which does not show signs of increased product offering.
But maybe this tender reflected the future situation of the diamond market, much as the notation on the stock exchange takes into account the future performance of a specific stock? This is very hard to believe when it comes to the diamond business.
As Jean-Noël Käpferer, professor at HEC Paris and a renowned expert on brand and marketing strategy recently stated: “The mere mechanism of offer and demand is no longer the most important element in price determination. We have entered a new era with an entirely different logic: “Tomorrow, there will not be enough anymore for everybody”. A compelling thought, which certainly applies to the prospects of the diamond business.
Nowhere has the destructive nature of tenders become more apparent than in another luxury product market, the Pearls of Tahiti.
Imagine a tiny island group in the middle of the Pacific, which creates its own ultimate luxury item: perfect, lagoon grown pearls fetching up to 1.500$ per piece in the plush boutiques at Place Vendôme.
The business went from zero in the 1970’s to a multi million sector in 2000, making pearls the single most important economic driver of the islands.
However, the indiscriminate and systematic use of tenders has utterly destroyed the Black Pearls of Tahiti as a luxury product category, leaving the ground to the Gold Pearls from the Philippines and Australia.
Fortunately for the diamond industry, other players – and stronger players, come to that - have acted and reacted responsibly to this situation. Both Alrosa and De Beers, not surprisingly the main actors in the recovery of the diamond business post 2008, have kept a cool head and proposed pricing and quantities in line with market realities and fundamentals.
Although the market as a whole is still reeling from the ‘tender punch’, they took the adequate steps to prevent a knock out. They showed, once again, that a captain of industry is a different breed than a leader of the industry: Captains do stay on board the ship when the going gets rough.
It brings me to the basic issue of this article: As an industry that has an important downstream impact, engaging the livelihood of thousands of people on different continents, should it not also be our common responsibility to offer price stability? That responsibility does not extend to diamond suppliers only, but also to diamond traders, manufacturers and any other actor, including industry observers.
If anyone still doubts why, here is the main reason for acting responsibly: at the end of the day, none of us has anything to gain with an end consumer being - or becoming - aware of price fluctuations as disruptive as 30% in a luxury product category as diamonds. We all have enough challenges as it is already.
