from Mine to Mistress - by Chaim Even-Zohar
Corporate Strategies and Government Policies in the International Diamond Industry
from Mine to Mistress - Corporate Strategies and Government Policies in the International Diamond Industry - by Chaim Even-Zohar

From Mine to Mistress

By Jackie Steinitz
01 Sep 2007 at 12:52 AM GMT-04:00

LONDON (ResourceInvestor.com) -- "From Mine to Mistress" is the title of a book by Chaim Even-Zohar which covers the entire diamond pipeline, examining each stage of a diamond’s progress from a rough stone at the mine to the polished gem set in jewellery on the finger of the consumer. As Even-Zohar explains, sales for mistresses offer the ultimate revenue optimisation in the diamond pipeline; the gentlemen tend to be less choosy, they pay a lot and wish to minimise their stay on the retailer’s premise! (Also, perhaps, if you buy for a mistress you must buy a bigger one for the wife!).

Continuing on the marriage theme the book is indeed beautiful "to have and to hold." It is a pleasure to read as well - though such is the weight of information that it contains in its 943 pages (2.4kg worth!) that you need to consider not just what to read but where to read it; forget trying to read this book while standing on a crowded commuter train!

"From Mine to Mistress" has been described by Gary Ralfe, the former CEO of De Beers, as the "bible of the industry." It is certainly important reading on the sector, containing a wealth of facts, figures and insights into a unique and complex industry which is currently undergoing great change.

The author, Even-Zohar, has been a memorable figure on the diamond scene for more than 30 years, working variously as a consultant, analyst, publisher, journalist and general guru. Known by many, he has extensive networks, a mammoth bank of knowledge about the industry, and is tenacious in his quest to unearth information about the diamond pipeline.

The book is targeted at many audiences; producers, retailers, jewellery manufacturers, governments, bankers who lend to the industry, NGOs, investors - indeed at anyone who is a stakeholder or considering becoming one. It is structured both by country, with a chapter on each of the major producing countries and diamond cutting centres, and by issues.

Although the book does not explicitly include a list of key issues for resource investors here are a dozen snippets - though note that these are by no means representative of all the figures and arguments presented in the book:

  • Diamonds have a number of characteristics which have been important in shaping the nature of the industry. Examples: each diamond is unique, it is easily transportable, there are no clear price benchmarks in the industry; a diamond can cost anything from a few dollars to $50,000+ a carat (with the result that rough diamonds larger than 2 carats represent 7% of total diamond production by weight but 44% of the value). The lack of a price benchmark has been one of the factors contributing to the aura of opaqueness and mystique in the industry.
  • Returns on capital can be huge in the diamond business. Two examples are cited: the Jwaneng mine in Botswana, which is the largest and most profitable mine in the world, has a profit to revenue ratio of 94%, (so it costs just 6 cents to produce a dollar!), while the Marsfontein mine in South Africa produced such wonderful stones that it recouped its exploration and mine-development costs within five days of production. But as Even-Zohar cautions, not all mines are like that, and mines are hard to find!
  • Diamond production is geographically concentrated. Although diamonds have been found in more than 35 countries 94% of supply is mined in just eight of them. Three quarters of world production by value comes from just 50 kimberlite pipes. Only 0.5% of all kimberlite discoveries in the past 135 years will be exploited economically.
  • Just five companies (De Beers, Alrosa, Rio, BHP and Aber) account for 77% of production. However there is growing phenomenon for downstream players such as retailers and dealers to invest in diamond exploration companies to ensure future supplies. These industry stakeholders tend to take a long-term view and so provide stability to the shareholding base.
  • Marketing is crucial in the industry. Diamonds have achieved almost universal product recognition aided by "a diamond is forever", which Even-Zohar describes as one of the best marketing slogans ever developed. Paramount concerns in the future besides driving demand, will be the preservation of consumer confidence in the face of issues such as conflict diamonds, synthetics, diamond treatments, discounting, and successfully developing new marketing methods to meet the needs of the twenty-first century consumer.
  • Diamonds are subject to particularly large demand swings at the upstream end of the pipeline. As with all commodities upstream demand depends not only on final consumer demand but also on movements in pipeline stocks. This effect - sometimes called the ripple effect - is particularly acute for diamonds as large inventories are required to accommodate the many different types of diamonds and diamond jewellery. The effects of the ripple can be further exacerbated by the high degree of reverse flows in the diamond pipeline whereby unsold diamonds/diamond jewellery are returned to the dealers and manufacturers.
  • The industry is currently undergoing a huge transformation. Although driven in part by many technological, societal, environmental and ethical factors the ‘big bang’ was the recent change in the business model of De Beers and its strategy to compete more effectively in the luxury goods market by driving the industry from one that was supply-controlled to demand-led. Even-Zohar expects the resultant shake-out and transition period to last a further 5 years.
  • Although diamonds were one of the early global industries the trend is reversing as governments seek domestic beneficiation. Since diamonds are easily transported they could move to the lowest labour cost regions for processing and to the most attractive trading environments for selling. Thus diamonds mined in Australia have been sold in Belgium for cutting in India to serve the final consumer, who is most likely to be found in the U.S., which accounts for 50% of demand. However a dramatic shift is taking place in the producer-government relationships whereby governments in some of the diamond producing countries are demanding beneficiation and a share of the value-added, forcing the industry to "deny economic laws and move manufacturing of polished diamonds to higher labour cost environments". The shift is partly a reflection of the zeitgeist - governments are no longer interested just in revenue generation they are seeking for wider societal benefits - and partly as diamond resources in some countries are set to decline, so governments are looking for diversification. Africa has been the biggest source of diamonds since the 1870s; the "emerging-Africa factor" will have a profound impact on the future value chain for diamonds.
  • World supply has peaked. Supply has grown quite rapidly over the last 25 years quadrupling over the period (equivalent to an average growth rate of 5.7% per annum). But supplies at existing mines have peaked and lead times to build new mines are long (8-10 years) and so it is possible to make reasonable assumptions about supply to 2015. These forecasts, according to Even-Zohar, suggest that supply will remain below 2005 levels at least until 2015.
  • Demand for diamonds will grow in tandem with income growth. Demand has been growing at a single digit rate in recent years, and Even-Zohar expects demand to grow in line with disposable income growth, particularly in India, China and other fast developing markets. (Note that global diamond demand is not uniform. Different markets have different preferences for the colour and clarity of diamonds, so differing relative growth rates in the various markets will impact on the price structure for diamonds.)
  • The bottom line is that worldwide demand will significantly exceed supply in the final years up to 2015. This supply-demand gap will differ by type of diamond and is likely to be more pronounced for larger and better quality diamonds.
  • The long-term trend in the price is thus likely to be upwards reflecting the realities of the supply-demand balance but price volatility will increase. In the past when De Beers acted as custodian of the industry and held a buffer stock diamonds enjoyed a degree of price stability that was better than any other commodity. In the future with a demand-driven industry price volatility will be much higher.

And so on. There are many more points, and I would not be the first to call the book a veritable "mine of information." The worst news for potential investors in the market is probably the suggestion which lurks in a box on page 174.

Even Zohar, no stranger to controversy, contends that in the very long term synthetic diamonds, which are already used as industrial diamonds, could become accepted in the jewellery market. This could transform the economics of the industry; the market size would be dictated by consumer demand not by availability and exploration would become less important. He notes however that his view runs contrary to the mainstream view in the business.

Meanwhile the best news for the resource investor with an exploration / development / production focus is on page 175; the greatest challenge the industry will face in the medium to long term is shortages and where to secure the rough diamonds.