Diamond Cutting Centers Face Profitability Issues
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Diamond Cutting Centers Ran Into Price Fluctuations in India

1990: Diamond Cutting Centers and Economic Problems

January 1998

1997 wasn't the best of years for the diamond industry—but it sure wasn't boring.

The most dramatic development occurred in August, when the two major diamond associations—the World Federation of Diamond Bourses and the International Diamond Manufacturers Association—staged a mini-mutiny. Citing a profitability "crisis," the organizations issued resolutions criticizing an institution they had always supported—De Beers' "single channel" system. In recent years, De Beers has learned the hard way that it could no longer take diamond producers' loyalty for granted. Now the company was facing trade balking as well.

De Beers has since pledged to try and help the profit problem, and the organizations appear to be softening their stand. Yet, if nothing else, 1997 will be remembered for this unprecedented, and stinging, rebuke. Even De Beers' harshest critics acknowledge that the industry's profitability problems were caused in part by the bloodless world economy—particularly in

Japan and the Far East, which had a number of bankruptcies this year.

In fact, the only market showing any sign of life in 1997 was the United States, which is still a substantial consumer of both large and smaller stones. There were also indications that De Beers' diamond solitaire necklace campaign was catching fire. Yet in spite of a generally healthy economic scene, there were a number of big retail bankruptcies this year—including Barry's and Montgomery Ward—demonstrating that even in these prosperous times, consumers are still picky about where they buy.

The drop in demand and continued profitability problems caused hardships in most of the major cutting centers—particularly Israel, which went through a traumatic summer of layoffs and plant closings. India was not doing much better—as the prices of "Indian goods" continued to fluctuate in the aftermath of Argyle's June 1996 decision to leave De Beers. Antwerp not only had economic problems, but unexpected political ones. In the beginning of the year, the city's Max Fischer Bank, a leading lender to the diamond community, collapsed, and Belgian police began combing through its books. What they found led to the arrests of several diamond dealers.

When the arrests continued, Antwerp dealers began to worry that the police were not just targeting specific individuals, but the industry itself, and its sometimes idiosyncratic bookkeeping practices. The industry eventually hired a well-connected lawyer as part of an aggressive PR counterattack, but nerves remain tense as the government shows no sign of backing down. Many diamantaires now say they may eventually have to leave the city they have long called home. De Beers was also busy this year. "Nicky" Oppenheimer, long-time deputy chairman, finally received the nod for the top spot, assuming control of the company largely built by his father and grandfather. Julian Ogilvie Thompson, company chairman since 1984, agreed to serve as Oppenheimer's deputy.

But there was ongoing trouble at the company's marketing arm, the Central Selling Organization, as it became increasingly difficult to tell who was in the cartel, and who was out.

In January, the CSO unilaterally canceled its diamond distribution contract with Russia, complaining that the country's repeated violations of the contract made the arrangement unworkable.

Yet the big news regarding Russia is what didn't happen. While many expected a catastrophe if Russia left De Beers, the large stone market in 1997 remained firm. Russian authorities, who had dithered in signing a contract with De Beers, were also unable to set export quotas. And so only a small amount of "open market" Russian diamonds appeared on the market, which was quickly snatched up by rough-starved manufacturers. The Russians, meanwhile, kept promising to sign a new contract, but the process dragged on through October, when a new deal finally signed. But this turned out to be another anti-climax. Rather than promising the long-term stability the industry hoped for, the new deal only lasts 13 months, with an option to renew. It also stipulates that nearly half the country's production will go to its domestic cutting industry.

Some analysts thought the deal disappointing, and the mixed feelings towards the final result is sometimes cited in the continuing woes of De Beers' stock price. De Beers also had problems on other fronts: One of the company's long-time partners, Zaire ruler Mobuto Sese Soko, was toppled from power in June. One of the first acts of the country's new finance commissioner was to cancel the country's contract with De Beers and declare that all stones from the country's MIBA mine would be put up for auction. The company also had problems with another cartel member—Angola—as an ongoing civil war prevented diamond mining and led to periodic outbreaks of smuggling.

Yet, in spite of all this, De Beers still controls an overwhelming chunk of the world diamond market, and is expected to finish 1997 with yet another healthy balance sheet. Many diamantaires were likewise hoping that, despite this rocky year, at the end of the day they too would come out all right.



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