The entire diamond pipeline - from rough to retail - ultimately constitutes one single supply chain. Any chain is only as strong as its weakest link.

 

During a recent breakfast with a prominent industry leader, we both mused about a diamond grading scandal. His views about it are etched into my memory. "If we cannot upgrade our diamonds, there is no profit left in the parcel," he said. He then continued: "Compulsory, mandatory, government-controlled grading standards? We'll go through the motions, but it will never happen. It's in nobody's interest. ..." 

 

As further evidenced by this anecdote, the diamond market in 2014 was characterized by an erosion of morality, (isolated) illegal excesses, and a general breakdown of trust, all of which, perhaps, were consequences of the protracted, multi-year absence of real profitability in the midstream levels of the diamond value chain (i.e., manufacturers and traders).

 

2014: A Year of Confidence Lost

From a business perspective, the year can be easily summarized in one sentence: The industry's performance in 2014 was not dissimilar to that of the previous year. During the last year, we saw the pace of growth of the diamond-jewelry retail market slow further, though slightly so. We also saw that the diamond content in jewelry continued to slide downwards, and that polished prices remained unstable edging downwards.

 

Meanwhile, rough prices edged upwards. Otherwise, not much changed in 2014 - except for one aspect: More players lost confidence in their own businesses, in the industry's future, and in other stakeholders. Above all, many players lost confidence in some of their rough suppliers. A De Beers broker, commenting on a recent sight, observed that "it is clear that some Sightholders, whose blind loyalty over the years was unquestioned, and ensured they bought from De Beers 'at all costs,' have now reached the point where months of negative or flat margins in manufacturing has resulted in them simply returning goods and being unconcerned if their actions result in a reduced supply allocation going into the new contract."

 

The indifference toward the midstream's plight by some of the oligopolistic rough suppliers - and the latter's respective changes in business models - was bound to be reciprocated at some point. That point seems to have arrived.

 

Continued Negativity

In the time-honored trust-based industry, 2014 was a watershed year. Most players reluctantly realized that the traditional fabric of mutual trust has become an illusion. Whether between suppliers and customers, clients and bankers, bankers and regulators, or industry and governments, it is clear that something quite irreversible happened.

 

The negative business mood that started in earnest toward the end of 2014 is continuing well into 2015. The negative mood is further exacerbated, to quote the De Beers broker, by "the cumulative disappointments resulting from the US holiday sales season, Chinese New Year, Valentine's Day, the Hong Kong trade show and more recently the BaselWorld show, coupled with a further recent drop in polished prices [that] continue to take their toll and have created a feeling of despondency amongst manufacturers."

 

"Upgrading" the State of the Industry

The diamond industry isn't really doing as well as the trade statistics, press releases, conference presentations, and highly impressive research reports claim. The difference between industry reality and its image is akin to the upgraded diamond-grading report. It's like certifying a company's responsible business practices when there are more reasons to call in the police, or when best practice principles are merely viewed as a promotional slogan without enforceable substance.

 

It's all talk. Take for example the idle talk among industry leaders about taking action against defrauding colleagues engaged in the selling of undisclosed synthetic diamonds. The industry players are "playing a role" in a massive joint effort to sustain the delusion and pretend that things are better than they are. That's how we are collectively upholding the diamond dream.

 

So, you ask, why is this a diamond-pipeline issue? When value-chain integrity is eroding and a few unscrupulous operators are impacting the terms of trade, competitive distortions are created. In such an environment, merchants will not be competing on a level playing field...

 

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