St. Petersburg: A Revolution in The Making

A wild card represents "an unknown or unpredictable factor" in any number of domains – a factor that can make an enormous difference. Alrosa’s president, Sergei Vybornov, whom we already identified as one of the industry’s main shakers, has demonstrated this week that Alrosa has the guts and vision to assume a worldwide leadership role in the diamond industry.

The St. Petersburg conclave has delivered an unprecedented unity and resolve by all the world’s major producers and the principal downstream players. The feedback from some of the 17 participants to this round-table conclave sounds virtually identical, irrespective of whom you ask. “It was the most successful, constructive and productive meeting of this kind that I ever attended,” is the recurring refrain. “The best conference ever to take place.” The St. Petersburg Group has set industry priorities, has provided the needed money, has commenced working – and will have a second conclave later this year.

Alrosa’s Vybornov gambled and brought in Ralph Tavakolian (Tav) Morgan, a like-minded miner from the metal section, to convince the participants that what can be done in platinum can be done in diamonds. Morgan, deputy general director of Norilsk Nickel, acted as moderator of the conclave, which convened from nine to six and seriously addressed industry issues. He was a brilliant choice. This hardly 40-year-old executive has his feet solidly in both American and Russian soil. It is expected that Morgan will continue to play a major role developing industry strategies aimed at growing diamond demand. As such, we might as well get to know him.

Morgan graduated from Yale University with a BA in political science and international relations and received a master's degree in economics and law from Oxford University. He then advised the Kazakhstan Committee of State Property and worked in Kyrgyzstan. Morgan participated in the establishment of the Russian office of McKinsey, where he worked from 1995 to 2004 eventually becoming a partner. Since 2005, Morgan has been a member of the Board of Directors of Norilsk.

Morgan was the only “non-diamond” person around the table, but his company’s presence in, and familiarity with, South Africa and Botswana should have been helpful. His relevancy to the St. Petersburg meeting also comes from the fact that he represents a company that holds leading global positions in a number of metals, is viewed as a consistent and responsible supplier to the market, and has an outstanding record of returns to shareholders. Norilsk Nickel also enjoys one of the highest international credit ratings of any Russian company and is commended for its good governance and transparency.

Norilsk Nickel’s attributes are music to the ears of diamond producers, which are struggling to produce sufficient shareholder value and which seem to have difficulties defining where the industry, as a whole, is going. The major players in other metals work together on sustainable development and in promotional areas, and this conclave was eager to learn from the platinum experiences. For instance, organizations such as the Platinum Guild, which are very much driven by all the principal producers, were given as examples of the way to go forward from an organizational perspective.

The gathering had no formal agenda. At the opening, both Vybornov and De Beers’ managing director, Gareth Penny, made it clear that the issues of pricing and trading currency were off the table and would not be discussed. The European Competition authorities will find no fault with St. Petersburg. Not all of the invited parties (which we had previously listed) showed up, but absent miners have already communicated their desire to join.

The conclave followed a round-table format. Morgan asked the participants to identify the main issues facing the diamond industry. It came down to two broad areas: (1) the need to get ready to fill the promotion vacuum that will be created when De Beers ceases generic advertising; and (2) the need to address the present and future industry reputational issues and sustainable development standards that are facing the industry or may arise in the future.

The challenge in diamonds, which the conclave embraced, went beyond promotion – it focused on the “positioning” of diamonds in the minds of global consumers; it also focused on how to move the industry from a supply-controlled commodity to a truly demand-driven industry. One participant stressed the importance of moving from advertising to public relations. For instance, diamonds must constantly be everywhere in the news all of the time and in the most positive manner. 

Participants also discussed that the industry and product message to the consumer, hitherto driven by love and value motivations, may have to be adapted and aligned to messages that appeal to culturally diverse consumer markets in India, China, Russia, Brazil and other vastly emerging markets. For instance, the love association in the Western world doesn’t apply in some other parts of the world. Take India for example, where the size of the diamond is related to status and has nothing to do with the depth of the giver’s love.

In line with the conclave’s dialogue on diamond positioning, the participants were acutely aware of something expressed by Penny the following day in Antwerp. The positioning of diamonds in the market is no longer just about the quality of the product.

Consumers will increasingly measure the product against where it comes from, who manufactured it, and how. What does the product do for the economies where it is mined? This goes far beyond ethical practices – we are getting into areas of business morality, or, more precisely, the morality of our business.

Regarding industry reputational issues, participants noted that there are currently dozens of diamond and jewelry industry organizations that have their own code of ethics and best practice standards alongside the corporate standards of the major players themselves. Some of these organizations are pretty good; none of them are really convincingly effective. But there is no coordinated industry-wide standard to which all major players are absolutely committed.

Operational Decisions

The meeting also focused on ways of how to grow the total business. Questions were asked. If there were going to be supply shortages, would it make sense to invest fortunes in growing the market above the anticipated four percent annual real growth (on top of GDP growth). Growth must deliver greater income to the greater margins needed to finance future exploration, research and development, marketing, etc. It wasn’t lost on this audience that since the early 1990s, no great new world-class deposits have been discovered. And all of this, of course, was discussed while judiciously avoiding talking about prices.

The participants at the conclave decided to immediately commission an industry study that will come up with concrete recommendations very soon. A second meeting will take place later this year, maybe as early as September or October. Will this mean the establishment, again, of a new organization or organizations? Here I got different answers from various participants. Some existing bodies might need to be re-engineered. However, as far as I could find out, there was unanimity on the need for decisive, authoritative and effective action. There was a clear willingness from those present to put their money where their mouths are. And there was open-mindedness on how to proceed.

Those who talked to me off the record stressed that it is too early to crystallize the various individual positions and individual agendas some people may have had. They stressed that one should be positive about the beginning of a process – a process that fundamentally aims to change the way things are being done in the diamond industry today. It was also said that the “by invitation only” nature of the meeting should not make me jump to the conclusion that the forum will remain exclusive.

Vybornov sought to bring together CEOs or CEO-level players that can make binding, financial and other commitments. This was, apparently, one of the thoughts behind the invitations. St. Petersburg certainly represented a milestone. Let’s hope that the momentum created there will be maintained going forward. Let’s keep an open mind and see what happens next.

Have a nice weekend.