Antwerp Facets Special Report

In the present global financial crisis, we are all concerned about the effects it may have on our value chain. Although this is neither the first, nor the most serious, crisis our industry has faced, what makes this crisis different is the inexplicable speed of developments.

If there is a positive outcome from the global financial crisis in the context of the diamond industry, it would be the industry’s restructuring and consolidation. There have been, and will be, company failures but people like to stick around and not face reality. The current crisis could well be the final nail in the coffin that would lead to a consolidated, sustainable diamond industry, where there are fewer, but more sustainable players, and profitability is restored. We need people on the wholesale level who understand and work together with retailers. That’s the key to a win-win situation for both wholesalers and retailers.

Another outcome of the crisis will be a smaller retail market, with the global retail market shrinking by 10 to 12 percent, once the crisis that started in 2008, which was already about 7 percent down, ends. Data from De Beers reveals a similar trend: retail in the United States will be down by 22 percent while global retail will be down 15 percent. Companies will be cautious about opening new stores over the next few years, and will focus on managing their inventories. I believe that the industry should put in more efforts in promoting itself, investing in marketing and advertising, and building up consumer confidence.

We have fine-tuned both our buying and selling activities so that each transaction and derivative process adds value. This means that we have tightened our inventory position, improved our manufacturing efficiency and concentrated our efforts in servicing our best clients so that we may deliver more value to them. We have actually been preparing for well over a year by focusing more on profitability and less on gaining market share by being very selective about buying as well as selling opportunities. This being said, we admit not having anticipated the tide turning quite so abruptly in the third quarter. However, because of our drive to instill operational discipline, we were much better prepared to face market turbulence.

As a group we had very few redundancies both in manufacturing and in our offices. We have limited operations in [the Indian manufacturing centre of] Surat which was struck hard by the fall in demand. As mentioned above, we have limited cutbacks globally. However, in the last year, we have shut both our South Africa and Moscow factories.

The wholesale diamond industry suffered a bigger impact than the retail sector (the bull-whip effect). As the stocks of retailers are now being depleted due to destocking, the reversal of demand has come more vigorously. That said, the industry will see retailer demand come into line with supply by the end of 2009. Rosy Blue is not an exception to this rule.

Jewellery sales move fairly consistently with GDP. However, when GDP growth accelerates over, say 5 percent, then jewellery sales grow at almost twice the rate or more, such as in China, India, the Middle East and Russia. In times of mild recession, the impact on retail jewellery sales remains limited. However, in a deep recession, retail sales suffer a comparatively bigger drop. This time, as the crisis hit hard and fast, all product categories were affected. The luxury sector suffered a similar impact of high growth and deep recession.

The United States was the first market to be hit. In 2009, the luxury retail sector felt a bigger impact than the mid market, which felt the effect immediately in the fourth quarter of 2008. We believe that retail confidence in the United States is now improving, and in the last few weeks we have been seeing stable polished prices. We saw that polished prices fell sharply, but have now recovered and are trading at about 15 percent below the peak levels of last year, while rough prices are at about 25 percent below peak.

The most important measures for the diamond industry to adopt are to exercise self discipline and conduct business responsibly. This means that the industry should buy rough diamonds based on real needs, pay fair market price instead of making speculative purchases at unsustainable prices, and make sensible decisions when selling. Avoiding loss starts with buying responsibly and intelligently. We should have the courage to blame ourselves for the eagerness to overpay for rough. We all have to manage our risk. Luckily our client base is made up of good companies and therefore we did not need to cut back sales so much.

Diamonds are a store of value. As rough production diminishes due to an insufficient number of new mines being discovered and existing ones becoming depleted, diamonds are sure to remain an excellent store of value. However, we must promote consumer confidence in diamonds by buying and selling responsibly and rationally, without creating unnecessary and irrational market volatility

We have to build up a new prosperity. The new prosperity is shared prosperity. The global economy of the 21st century is creating new economic opportunities. But succeeding in these complex times will take more than improved technology and a higher turnover – it will demand new kinds of engagement of a company. Indeed, one of the major challenges for companies today, lies in providing responsible leadership in times of significant change.

Finally, I would like to comment on the issue of Corporate Social Responsibility (CSR), an issue in which we believe strongly. On May 4, 2009, we published our first CSR report for the Rosy Blue Group. CSR is a long-term process which requires ongoing adaptation in the way a company conducts its business, not only for the purpose of making a financial profit, but in response to the increasing demands for transparency and accountability placed on the company by its stakeholders and society as a whole. Our enduring commitment to CSR provides an added value to our suppliers, our customers, our people and the communities in which we work and live.

We are among the founding member of the Responsible Jewellery Council, and we have been implementing De Beers' Best Practice Principles since 2003. In June 2008, the Rosy Blue Group signed the UN Global Compact. We will promote the Global Compact’s 10 principles and report our progress towards implementing them.