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Enough to Go Around

MARKET WATCH - PREMIUM REPORT

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A man was walking by a house on his way to work, watching a couple on their front porch. The gentleman was sitting in his rocking chair reading his paper; the woman, also rocking, was sipping lemonade. Their dog was lying on the floor uttering an agonizing moan and he thought, "What's wrong with that dog?"

He walked past that house the next day on his way to work and the next day after that, and saw the gentleman and the woman in their positions, and the dog laying on the floor making the agonizing moan.

He promised himself that if he passed the house the following morning and heard the dog moaning again, he'd ask the woman about it.

Sure enough, the next day, he passed by the house and observed the exact same scenario. He did as he promised himself and asked the woman politely, "Excuse me, why is your dog moaning?"

And the woman responded, "Well, honey, he's laying on a nail and it hurts."

"So why doesn’t he move, then?" asked the man.

And she said, "Oh, it hurts just enough for him to moan about it; not enough to move."

_____

Since January 2014, I have interviewed sight holders, manufacturers, and dealers, hearing their agonizing concern about the market including not only weakening profitability but also losses in production. Is this agonizing moan just enough to complain, or is the market ready to do something about it?

December sight was, according to my respondents, a disaster. Many sight holders deferred most boxes, some say even from the January sight of 2015. The evaluation of the respondents was that more than $250 million worth of goods were left on the table. Those who have big sights realized that taking the boxes at any price would provide an incorrect interpretation that the prices were still bearable, when in reality, the market showed a grim map that resembled the economic crises of 2008.

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None of the boxes were sold with high premiums. Even those in the strongest demand failed to sell with high premiums and ultimately earned just enough to cover costs.

Some sight holders say that in the last two sights, the losses stood at approximately 10% in rough, even before manufacturing. This means that if a little profit was earned during the former portion of the year, it was deleted during the latter portion.

Since the polished market is gridlocked, the Surat factories are running at only 60% - 70% capacity in order to maintain steady cash flow.

There are mixed opinions on how to move forward from here.

Some say that the healing process should begin with a gradual price decrease of rough, coupled with improved assortments. The concern here, however, is that it may cause some to live under an umbrella of uncertainty. A gradual price reduction (2% per sight) may make buyers suspicious and cause them to wait 2-3 sights to make purchases, in hopes of further reductions.

An alternate option instead of gradual reductions is a large decrease at once (10% or some similarly significant abatement.) This potential solution is compelling enough to indicate immediate change and motivate buyers promptly. Either of these potential solutions may enable the manufacturers to return to healthy activity.

So, how do we summarize 2014 as it comes to a close?

In 2013, De Beers’ underlying operating profit jumped from $474 million (2012) to $1.003 billion. Their share of the parent group’s underlying operating profit nearly doubled in that same timeframe, from 8% to 15% (source: Anglo American.) These statistics themselves are proof that there is indeed profit to be made; the remaining question is how to ensure that all facets of the industry are enjoying the rewards.

Is the whole industry winning when a supplier increases its profits while the customer reduces his profit, even to the point of loss?

In every market today, trading has become transparent, and as a result, power passes to consumers. Since the number of manufacturers is small compared to the number of potential buyers, as soon as trading becomes transparent, the number of consumers will increase and along with it, their ability to affect price. Lets take an example from the media world. Google began giving the masses the power to affect prices by exposing the trade to the public and enabling them to effect the prices. This revolutionary concept has been successful in many other markets; why not diamonds?

We are on the cusp of a new year. Let’s usher in new ideas together, healing the market so that we can all benefit in 2015.

Yes, it hurts enough to moan. But does it hurt enough yet to do something about it?


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