Rapaport Sees Opportunity for Dealers Amid Turmoil

RAPAPORT... In 2100,the diamond industry will look vastly different from its current makeup, MartinRapaport assured diamantaires at the recent Antwerp Rough Diamond Days event. Mostnotably, it will be less influenced by the mining companies as demand dynamicsincreasingly impact the market, the chairman of the Rapaport Group noted.

"Marketpower is shifting from supply to demand," Rapaport explained at the November 21event, which coincided with the Antwerpsche Diamantkring bourse's 90thanniversary. "In the next 90 years, diamond-mining companies will not havemarket power. They probably won't even exist, as diamond mining will be verylimited."Whenrough supplies are reduced, and eventually eliminated from the open market,recycled diamonds, gems and jewelry will emerge as the primary source ofsupply, with elderly consumers selling and young ones buying. That will resultin a more profitable diamond and jewelry trade, as "unconstrained free-marketsupply becomes available from motivated sellers," Rapaport continued.Giftof commitmentMeanwhile,on the demand side, growth will be driven by demographics as the globalpopulation is projected to rise by 40% to 10.9 billion people by 2100, andmiddle-income earnings will rise by 24% to $7.08 trillion, according to UnitedNations forecasts Rapaport cited.Withthose predictions in mind, the challenge for the diamond industry is to ensurethat diamonds remain a symbolic gift of commitment. "The gift of a diamondengagement ring is a social contract and the idea of a social contract at atime of commitment is a cultural requirement that transcends generations," heexplained. "It will be as relevant in 2100 as it is today."Ensuringthe continuation of diamond demand into the next century requires maintainingan honest and liquid diamond market that provides fair value to buyers andsellers.Richesin the nichesThelong-term viability of the diamond trade, particularly for dealers, was anissue he emphasized in a presentation at the New York Diamond Dealers Club theprevious week. Rapaport recognized the turmoil the diamond industry currentlyfaces, as profits and liquidity are disappearing. Midstreamprofit margins are being squeezed by the mining sector, which can only improveits profit by raising rough prices, while manufacturers keep buying the roughso they can keep getting credit, he noted.At thesame time, consumer demand has narrowed, in part due to a shift toward brandingand a lack of generic marketing over the past decade or two. Instead of tryingto sell diamonds to everybody, companies have decided to sell diamonds in areaswhere you can make the most money, which is by having a brand.Asdealers are in the generic business, they need to create a niche thatdifferentiates them - whether in a certain cut ofdiamonds, or goods with strong blue fluorescence, for example. "The riches arein the niches," he stressed. Findinga niche is not so easy considering the midstream is being further squeezed by"disintermediation" - the phenomenon in which supplierscut out the middleman by selling directly to the consumer. It's worse than that,since everybody's supplier's supplier is trying to sell the customer's customer,Rapaport continued. "De Beers is opening up jewelry shops and Tiffany iscutting diamonds," he noted.A criticalmassDespitethis trend, Rapaport stressed that dealers still added value to thedistribution chain. "Brands are selective, but they still need goods," he emphasizedin New York. "There's no way a retailer can keep an inventory of all the itemsthat are necessary and so dealers become the retailer's lifeblood."As such,Rapaport outlined an opportunity for the New York trade to make money: Becominga very efficient source of memo goods for the US market. The key role ofdiamond dealers is to move the entire range of diamond types and quality downthe pipeline: "That's how dealers make money. They find the right diamond, forthe right person, at the right location, at the right time, and at the rightprice," he added.Similarly,diamond manufacturers need dealers as a source of liquidity, because if dealersdon't buy their polished, cutters might lose their credit lines, and thereforetheir ability - or contract - to buy rough."Don'tunderestimate the power of the dealers, or our power as a group of committedpeople working together in an industry," Rapaport concluded at his New Yorkpresentation. "We have a critical mass. There is added value coming from the simplefact that we're all together." Maintainingthat vibrant trade will be crucial for the future of the diamond market overthe next 90 years, he added in Antwerp. "The ability of diamonds to retainvalue is in the hands of the diamond trade," Rapaport stressed. "It is the responsibilityof the diamond trade to ensure liquid, fair markets for natural diamonds."Image: Martin Rapaport, chairman of the Rapaport Group, delivers a presentation on the future of the diamond industry in Antwerp last week. (Rapaport News)