The superheated effervescence of the rough diamond market is coming to an end, according to Maurice Tempelsman, Chairman of Lazare Kaplan, a DTC Sightholder. In a recent conference call, Tempelsman said that rough diamond prices, particularly at the lower end, have declined. He also noted that rough diamond premiums are “pretty much gone.”

 

However, while the diamond market may have cooled for the short term, Tempelsman said that he expects a rough diamond shortfall over the coming years, especially related to new market demand coming from China, India, and other emerging consumer markets.

 

Further, Tempelsman implied that jewelers can expect to see increased price volatility related to rough and polished diamonds. He said that “the elimination of buffer stock has caused increased price volatility,” a trend that will continue for the foreseeable future.

 

Regarding the U.S. diamond market, Tempelsman sees it as “hesitant.” He noted that 2005 holiday sales volumes were up, but were driven solely by price; unit sales of diamonds were down by several percentage points, in his opinion.

 

On a positive note, Tempelsman noted that diamond prices have lagged price increases of gold, platinum and silver. He said that the drivers of gold and platinum prices were outside of the jewelry industry, mostly driven by the weakening U.S. dollar and investors.

 

For the nine-month period between July 1, 2005 and March 31, 2006, diamond and precious metals prices showed the following price increases, as illustrated on the graph below.

Source: Commodities Markets & IDEX Online

 

As the graph below of the IDEX Online Diamond Price Index illustrates, polished diamond prices rolled over after peaking in the fall of 2005. In recent days, polished diamond prices have spiked.

 

Source: IDEX Online

 

Lazare Kaplan Ramping Up Diamond Activities

Now that rough diamond demand and pricing has stabilized, Lazare Kaplan is back in the market buying rough diamonds. In particular, the company has stepped up its rough diamond buying activities in Angola. Lazare Kaplan has a technical assistance and cooperation agreement for the purchase and marketing of rough diamonds with Sociedade de Comercializacao de Diamantes de Angola SARL (“SODIAM”), the government entity responsible for developing and marketing diamonds produced in Angola. Rough diamond buying from this operation began during the summer of 2004. This past winter, the company’s Angolan operations included rough diamond buying in both the formal and informal mining sectors.

 

Lazare Kaplan has an agreement with Nozala Investments, a broad-based women’s empowerment group, for cooperation in South Africa’s diamond sector. The agreement contemplates diamond mining, cutting, polishing, and distribution. The joint venture is in line with the South African government’s recently announced program to promote new entrants and investment in the domestic diamond sector, and increase this sector’s contribution to economic growth in the region. Initial cutting and polishing activities, which commenced during the three months ended February 28, 2006, concentrate on local sources of rough diamond supply.

 

Lazare Kaplan has an agreement with NamGem Diamond Manufacturing Company for the cutting and polishing of diamonds in Namibia. NamGem is Namibia’s flagship venture in the international diamond polishing industry. Under the terms of the agreement, Lazare Kaplan provides marketing and technical manufacturing assistance to NamGem. Lazare Kaplan purchases rough diamonds and supervises the manufacturing operations on a fee-for-services basis. All rough and polished diamonds are bought and sold by the company for its own account. Lazare Kaplan recently notified NamGem that it would be willing to make an equity investment in the operation.

 

In Botswana, Lazare Kaplan has been granted a diamond cutting license. This was a long, drawn out process.

 

The following graph reflects Lazare Kaplan’s dramatically increased diamond business in Africa over the fiscal period beginning June 2005 and ending February 2006.

 

Source: Company Reports

 

Late last year, Lazare Kaplan amended the terms of its agreement with Diamond Innovations Inc. relating to the sourcing, manufacture, and marketing of Bellataire brand diamonds. Lazare Kaplan is seeking to increase sales and profitability of Bellataire diamonds. Bellataire diamonds have been enhanced with heat and pressure, using a technique originally developed by Lazare Kaplan and General Electric. A few years ago, GE sold its interest (and operations) related to this venture to a third party.

 

The company has two agreements with Alrosa, which is the largest producer of rough diamonds in Russia. Under the terms of these agreements, Lazare Kaplan sells polished diamonds that are cut in facilities jointly managed and supervised by the company and Alrosa personnel. The proceeds from the sale of these polished diamonds, after deduction of rough diamond cost, are generally shared equally with Alrosa.

 

Lazare Kaplan also sources some of its diamonds from the Diamond Trading Company. It has been a client of the DTC for about 60 years. Lazare Kaplan supplements its rough diamond needs by secondary market purchases and has entered into relationships with other primary source suppliers.

 

Lazare Kaplan’s Margins Appear to Have Stabilized

In recent quarters, Lazare Kaplan’s diamond margins – especially rough margins – have show significant volatility. Further, margins have been under some pressure, especially related to rough diamonds. In the quarter ended November, 2005, Lazare Kaplan lost money trading rough diamonds, as the graph below illustrates. However, the margin from rough diamond sales showed a modest recovery in the quarter ended February 2006.

 

Source: Company Reports

 

Lazare Kaplan management says it expects rough diamond margins to remain in the 2-3 percent range for the foreseeable future. Rough diamonds are a commodity, and margins are opportunistic. Lazare Kaplan’s goal is to sell (or use) exactly what it buys. Lazare Kaplan does not want to speculate in the diamond market for two key reasons: 1) significant price volatility and trading velocity; and 2) the lack of a way to lay off risk (no futures or hedging markets or other financial instruments are available to lay off risks).

 

Lazare Kaplan’s polished diamond margins have stabilized somewhat, though they remain volatile, as the graph below illustrates.

 

Source: Company Reports

 

The author owns less then 100 shares of LKI sock.