Israeli Diamond Portal Reports:An Exclusive Interview with Chaim Even-Zohar

Jan. 13, 2009 - PRLog -- Here follows a “Guide for the Perplexed” for both diamantaires and laymen, which explains how the crisis is affecting the diamond industry and provides practical tips on how to behave while in the throes of crisis.



First off, Chaim Even-Zohar explains the difference between a business crisis and a financial crisis. The world has faced several financial crises since World War II. These kinds of crisis generally lead to the deep and prolonged collapse of assets and huge government debts worldwide. The resumption of normalcy takes a relatively long time.



Chaim Even-Zohar believes that the cup is actually half full even if many people are unaware of the fact. If we look at the declining assets, the diamond industry has actually shown remarkable resiliency. “Everything is relative,” says Even-Zohar, “but if you keep in mind declines in commodity or housing prices, for example, we have never witnessed such radical declines in diamond values.”



Even-Zohar points out that at the end of 2008, in most categories polished diamonds went back to the prices at the beginning of the year. All in all, he says, prices have performed remarkably well.  



“The latest estimates for worldwide retail demand of diamonds set in diamond jewelry are a 12-15% decline. This refers to the wholesale polished price of diamond content in retail sales of diamond jewelry. This is an important distinction because while the diamond jewelry market in the US claims 50% of the world market, in terms of diamond content it claims only 43%.”

 

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Spaghetti Chart



Even-Zohar states that one of the major problems facing the world diamond industry is the inefficient and convoluted pipeline, which De Beers calls “the Spaghetti Chart.”



The total amount of diamonds in the hands of retailers, traders and others – valued at $45-50 billion - will suffice for a two and a half year period. The data refer to rough and polished diamonds measured in polished wholesale prices.



It is clear that at every point of the pipeline – whether we are referring to retailers, jewelers, and even manufacturers – all of the parties have embarked on decreasing inventory. “This practice is normal. When sales decline, the working stock must be reduced accordingly. The demand for rough diamonds will drop during the next year by at least 50%. It is sad to say but in a crisis the pain is not always divided equally.”



Even-Zohar warns: “The cutting centers will take the greatest hit, but they will also experience the fastest growth in an upturn. If mining production and sales from inventory totaled $14.5 billion in 2008, they will be around $7.5 billion in 2009. Some mines will close down while others will reduce production.”



When it comes to the industry’s rehabilitation, we must distinguish between two phases, explains Even-Zohar. The first stage is that of stabilization, during which inventory levels at every point of the pipeline will be brought in line with demand. Stabilization should occur without further major shocks to diamond values because any write down in inventories means a drop in the company’s equity, which in turn would result in greater difficulty to secure financing. Even-Zohar estimates that the stabilization stage should take somewhere around 12 months, depending on the conduct of diamond producers and the banks. Banking debt can be expected to drop significantly during this period.



The second phase is that of recovery, although an interim period may occur beforehand during which demand will have stabilized but fall below previous levels.



Even-Zohar points out: “If world jewelry retail declines by 15% in 2009, that sales level may persevere for several years because the recovery rate could well differ in various countries.”



While the worldwide debt of the diamond industry is currently about $15-17 billion, Even-Zohar believes that by the end of the year it will probably shrink to $10-12 billion.



What can we expect in the coming years? Even-Zohar quotes Harvard Professor Kenneth Rogoff as assessing that it may take four years for GDP per capita to rise in the US. GDP per capita growth is traditionally considered an accurate benchmark for measuring diamond jewelry retail consumption growth.  



While certain elements can be predicted, Even-Zohar notes that much depends on the producers’ supply level. If they produce more than is needed, rough diamond prices will drop. Even today, rough diamond prices are 20-25% above the level of the price of the resultant polished diamonds.



He warns: “Rough diamond prices must go down. The industry needs a controlled environment.  Otherwise we risk a freefall of prices, which must be avoided at all cost.”



Referring to the Israeli Diamond Industry, Even-Zohar gives a word of comfort combined with a strict warning on how to behave during these turbulent times: “Israeli diamantaires have a very good chance of emerging from the crisis, but their recovery depends on their conduct. We now have a ‘buyers’ market.’ No diamantaire should overpay for rough diamonds. In doing so, he will jeopardize his own business. Diamantaires who need polished diamonds for clients can easily find them on the market.”



Regrettably, if a business’ turnover declines by 30-50%, costs must be reduced by the same level. It is admittedly a painful process and each diamantaire will be forced to pay the price, depending on his position in the pecking order. “Some will need to sell their private plane while others will have to send home a third of their workforce. There is no choice but to economize.”



Perhaps the hardest part is to get clients to pay up. When in doubt, advises Even-Zohar, walk away. “When you miss a sale, your only loss is the potential profit from the sale. But if you don’t get paid, you lost 100% of the diamonds’ value. Practice due diligence - do your homework before closing deals.”



In these difficult times one dreams of taking a year’s vacation far away from the turbulent market, but the average diamantaire naturally prefers to keep his finger on the pulse around the clock. “And sometimes,” concludes Even-Zohar, “even that isn’t enough.”

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Behind the Israeli Diamond Industry are a group of vital and dynamic institutions. Each one is responsible for a different aspect of the industry’s activities.