Mention of the word diamond elicits images of wealth, an excess of it, besides the obvious beauty of the item itself thus the diamond trade could be dismissed as out of the normal reach of human rights activists in our search for justice and equality but all those taking part in the diamond trade and not treated equally and despite the lucrative image of any involvement with diamonds therein lie the same inequalities that exist in any other trade as there are those at the top, ‘reaping it in’ and those elsewhere working under disgusting conditions and even dying on the job.
When a diamond dealer seeks better conditions in the trade, despite that what is highlighted as needing attention will benefit a wide swathe of workers, that gets little attention from the usual NGOs involved in human rights. This is the likely condition arising around Martin Rapaport’s * most recent foray into the exclusive diamond industry’s mode of operation from the top level position he holds.
His latest article is an appeal titled: “Rough diamond distribution system self-destructs” wherein he declares that the diamond industry is undergoing fundamental structural changes as the rough diamond distribution system self-destructs amid collapsing rough prices.
He sees this phenomenon as good news though because unprofitable, unsustainable and unfair rough prices have been the bane of the diamonds industry; for too many years artificially high rough prices have stolen profits from the trade, he says. The hard-working cutters, polished dealers, jewellery manufacturers, designers and retailers who have honestly added value to diamonds have not received their fair share of diamond profits.
The fault he insists is that the major mining companies and the banks have milked the trade dry by systematically supporting rough prices that were significantly higher than polished prices. This effectively moved profits from the trade to the big mining companies.
“The banks helped these miners squeeze profits out of the trade by showering money on firms that boosted rough prices to speculative unprofitable levels. The over-extension of credit created a situation similar to what happened in the Real Estate Bust of 2008. Too much credit created a price bubble that burst when it became clear that the value of the underlying assets was insufficient to repay loans.”
In the case of the diamond industry, the banks were complicit in the creation of the rough price bubble because they consistently lent money to buy unprofitable rough diamonds. As in the case of the real estate bust, the banks were more interested in their short-term profits than the ability of their clients to repay loans.
“Once it became clear that the clients did not have the assets to repay the loans, the bankers chose to continue the loans as long as the interest payments were made. They hoped that at some stage their clients would accumulate huge profits that would enable loan repayment. But the rough borrowers never got the big profits. De Beers and the other mining companies kept raising prices whenever polished prices increased so cutters remained unprofitable and instead of a polished boom, we now have a rough bust.”
It was the likes of De Beers, ALROSA and the other mining companies that became the beneficiaries of the banking ruse. They took short-term profits without caring about the long-term negative implications of their relentless price hikes.
“Essentially, money was moving from the banks to the mining companies in a Ponzi scheme environment involving overpriced rough diamonds supported by diamond cutters who took the money from the banks and gave it to the mining companies. Some cutters also took their cut by setting aside some of the money the banks so generously gave them. None of the players who benefited from this game were innocent. Nothing supported the high rough price levels other than even higher rough prices supported by unsustainable loans.”
Martin Rapaport seen that the real victim is are the legitimate diamond trade that could not make profits by adding value to diamonds because the rough Ponzi game left no room for profit. Companies that relied on real rather than Ponzi scheme profits could not buy rough and make a living from cutting it. They and their customers and their customer’s customers, were pushed out of the diamond business due to the unfair high rough prices created by the Ponzi-playing banks and mining companies.
The greatest threat to the diamond industry is that the mining companies will continue to ignore the needs of the trade. They will keep their rough prices higher than polished, starving the diamond trade of vital profits and liquidity. More and more cutters will stop cutting, diamond supply will plummet, more dealers and retailers will leave the industry, forever.
Is it worth sacrificing the diamond trade to maintain unsustainable artificial rough diamond prices he asks? In fact, the mining companies cannot survive without the trade. You can’t recreate a global diamond trade with hundreds of thousands of expert members all over the world. Without the trade, the mines are worthless.
Are the mining companies killing the trade? Are they unable to see the consequences of their actions? As Rapaport has it, “One wonders how long the Botswana government and Gokhran, the Russian treasury, want to play monopoly with their diamonds and our lives. Botswana makes a good case for beneficiation, the idea that the people of Africa should benefit fairly from their diamond resources. I support and agree with this. But Botswana must understand that others also have rights to benefit from diamonds. What about the hundreds of thousands in India who have lost and are losing their jobs and livelihood. Have there been suicides in Botswana like there have been in India?
What about simple economics? If the trade goes bankrupt, the mining companies will go bankrupt. De Beers is not only starving the trade of profits, they have begun to starve the people of Botswana of revenue by halting their rough purchases and payments.
“Frankly, De Beers CEO, Philippe Mellier’s brand of trade exploitation and cannibalization is no longer tolerable. It is time for Mellier to go. If De Beers wants to survive in the diamond distribution business they must urgently appoint a leader who is a diamantaire, someone who is knowledgeable and passionate about the diamond business and the future of the diamond trade,” he insists.
Essentially, rough prices have been manipulated to artificially high levels and that has impacted negatively on the profitability, liquidity thus viability of the diamond trade and a lot of skilled and unskilled workers are badly affected and that will worsen unless a change is made. He calls for 1) the resignation of Philippe Mellier, CEO of De Beers; 2) disclosure that we expect De Beers second half rough diamond sales to be down by at least 60%; 3) call for De Beers to drop rough prices by 30-50% to inject profits and liquidity into the trade.
Maartain Rapaport also adds: “Please note that we do not expect polished prices to decline due to a fall in rough diamond prices. Increased trade profits and liquidity will support polished diamond prices and expand demand as downstream distributors invest in marketing and sales.”
For the original article see: http://www.diamonds.net/Docs/Alerts/Rapaport_RoughBubbleBust_112415.pdf
*Martin Rapaport is chairman of the Rapaport Group and founder of the Rapaport Diamond Report. Rapaport has been called a “maverick” within the diamond industry. He is a member of the board of Jewelers for Children and an early proponent of the Kimberley Process.