Market Forecasts '99
Diamonds: Millennium Buying Mania?

Reprinted From National Jeweler
By Frank S. Costanza
Appears in the January 1, 1999 issue of National Jeweler.

Engagements are expected to skyrocket. Wedding bells are set to ring in record numbers. And, if that weren't enough, De Beers plans to invest millions of dollars in assorted advertising campaigns for 1999.

But will all that warm love, combined with cold, hard cash, translate into tremendous diamond sales for U.S. jewelers in 1999? Although most are skeptical as to how much diamond business "millennium mania" will generate for jewelers, the majority of those interviewed by National Jeweler expect to cash in on the upcoming consumer buying frenzy.

Global economics, in addition to the approaching millennium, should also be credited for any increased diamond sales in 1999, according to retailers. The U.S. economy is still going strong despite a somewhat topsy-turvy 1998. Americans-already the world's most reliable consumers-are expected to buy even more diamond jewelry in 1999, especially since they've been spared the financial difficulties of the ongoing Asian economic crisis.

"I don't think people are going to buy a diamond just because we're approaching the year 2000," says Kenneth Gordon, owner of Kenneth Gordon Private Jeweler, Harrison, Tenn. "What I am seeing though, is more engagement rings moving out of my store."

Engagement rings, which normally comprise about 40% of a jeweler's total sales, are expected to top retailer wish lists in 1999, jewelers said. Diamond solitaire necklaces, along with jeweled wedding bands, also will be hot consumer items. Jewelers can expect to sell more better-clarity, good-color stones as well, thanks to steady demand for ideal-cut diamonds and quality stones. "People will buy diamond jewelry as long as they have the money to spend," Gordon says.

And spend now they must because diamond prices aren't expected to fall any time soon. A steady balance of supply and demand for both rough and polished diamonds will stabilize prices in 1999, according to De Beers and Argyle, the diamond trade's two biggest hitters. The stabilization of diamond prices, however, has taken its toll within the international diamond industry.

De Beers' 1998 first-half profits plunged 57% to $336 million as a result of reduced rough allocations through the Central Selling Organization's 10 annual sights. The drastic reduction of 1998 rough allocations, which have declined between 40% and 50% compared with 1997 figures, has all but crippled the world's cutting centers. And the reductions are likely to continue well into 1999 as De Beers seeks to strengthen the market's overall health. The company's recent extension of its rough diamond trade contract with Russia for three years should help stabilize prices and reduce those infamous Russian leaks.

Reduced rough supplies, combined with fewer polished diamond outlets, has stoked competition on the world's loose diamond wholesale market. And competition is good news for U.S. retailers who are still reaping the benefits of generous credit and memo deals.

"I've been getting better deals from my overseas suppliers," says Susan Eisen, owner of Susan Eisen Fine Jewelry in El Paso, Texas. "The fact that they want to open up accounts with independent jewelers like myself, and not just the huge jewelry chains, says a lot about the market. It takes a long time for economies to rejuvenate and that's making [independent jewelers] much more valuable in the eyes of our suppliers. And we love all the attention."

Good deals for retailers generally mean bad news for diamond dealers and manufacturers. Many diamantaires are starting to experiment with finished diamond jewelry while other dealers have infiltrated new markets searching for consumer outlets to peddle diamond goods. Those are the lucky diamantaires since many unfortunate dealers have either been forced out of business or absorbed by larger companies.

Israel, for example, was rocked over news in mid-1998 that Lorenzi Diamonds, the country's second largest polished diamond exporter by value ($177 million in 1997), owes at least $100 million in outstanding debts to its banks and trade creditors. The collapse of one of the trade's largest diamond cutters and exporters proved that no company, regardless of size, capital or inventory, is immune to the deadly Asian economic flu.

On a positive note, the Asian economic crisis is beginning to show signs of recovery, according to sources. Asian diamond inventories are finally beginning to dwindle down to the point where retailers need to replenish their once stagnant stocks. Asian diamond demand, traditionally lead by free-spending Japanese consumers, is still way down when compared to pre-crisis figures.

"There has been increasing signs of consumer activity in the Far East, according to several suppliers," says Diamond Manufacturers and Importers Association President Jeffrey Fischer. "That doesn't necessarily mean there's a great deal of activity, but any activity comes as a great surprise. It's a very positive sign that things may be slowly turning around."

As the Asian economic crisis simmers, De Beers' hotly debated and controversial plan to "brand" select polished diamonds is sure to make more big headlines throughout 1999. De Beers' Britain branding pilot test, combined with the company's millennium diamond initiatives, are sure to catch media attention and lots of consumer dollars. Expect De Beers to move beyond its pilot branding initiative in 1999 despite strong trade opposition as voiced during the last World Federation of Diamond Bourses conference.

The world's diamond mining companies, meanwhile, are heading into another strong year in 1999. De Beers continues to control approximately 60% of the world's diamond production. However, Argyle received great news about the company's AK1 open pit mine. After speculation that it would shift from open pit to underground mining-a move that would drastically reduce Australian rough production by as much as 75%-Argyle decided to continue open pit mining. Argyle, whose sales jumped 18% in the first half of 1998, should unearth approximately 36 million carats in 2000.

Meanwhile, production from Canada's newly opened Broken Hill Proprietary Ekati mine will hit full swing later this year. The mine is projected to account for 6% of the world's diamond production by value.

While production has increased across the globe, escalating hostilities in the diamond-rich nations of Angola and Congo continue to threaten rough production in those countries. As a result, Argyle forecasts that world rough production will increase between 2% and 3% in 1999, matching a 2.6% growth in demand.

U.S. consumer demand, by comparison, was expected to increase by as much as 10% before the end of 1998, according to De Beers officials. Better yet, approximately 60% of retailers recently surveyed by National Jeweler and Sovereign Marketing Research, New York, predict that diamond jewelry demand will increase again during the next 12 months. As for the goods, most consumers are craving ideal-cut stones and better quality diamonds, according to retailers.