There are many in the industry who were relieved to bid farewell to 2015. I understand their sentiments. It was year highlighted by shrinking growth in China, a moribund Indian economy, full-blown recession in Russia, uncertainty in the Arabian Gulf, and only moderate growth in the “still recovering” US market. The US dollar climbed dramatically against most other currencies, financing was near to impossible to obtain, liquidity was low and stocks piled up in the pipeline. It was not a pretty picture.
What can we expect from 2016? More importantly, what can we do to ensure that this year is an improvement on the one just past?
It is important to note that there are numerous elements in the current situation that are the result of factors for which we are not responsible and although we may be able to better defend ourselves against their effects, there is little that we in the jewellery and gemstone industries can to alter the course of events.
But there are other elements that we are able to influence, although in the past we have not always chosen to do. This must change. “Carpe diem,” the Romans used to say — “seize the day” or take control over your destiny.
It may well come to pass that, when we look back at 2015, we will describe it in considerably more positive terms than we do today. This is because we will regard it as a turning point, or a juncture at which we finally understood that certain premises of the past are no longer acceptable, or even valid. Sometimes one needs to hit rock bottom in order to appreciate that change is imperative.
The distribution of profit in industry is a case in point, and particularly when it comes to diamonds in the midstream of the pipeline. For despite bold statements about our industry being transformed from a supply-driven to a demand-driven business, the mining companies never relinquished their ability to demand and receive price changes, almost at will. With their margins in the healthy double digits, they considered it perfectly acceptable, when opportunity arose, to squeeze their clients’ margins, which were in the low single digits at best.
And why should they have not? For despite sometimes grumbling, their clients in the midstream generally accepted their lot. The fear of being cut off from supply outweighed concerns about profitability.
What happened in 2015? Chronic low-to-non-existent profitability had led to a sharp increase in indebtedness, and this in turn made the banks jittery. They tightened credit policies, and a liquidity crisis ensued. Then the markets went south, first in China, but elsewhere as well. The producers waited too long before cutting production, so, in addition to a cash shortage, the pipeline was backed up with excess merchandise.
With no other reasonable options available to them, companies in the midstream just said “no” to producers.
And then, also with no other reasonable options available, the producers reversed their policies. Not only did they cut rough diamond prices by about 18 per cent on average during 2015, which was considerably more than the corresponding fall in polished diamond prices, but they also relaxed their attitude to clients not taking up merchandise on offer.
Was it a point of no return? This will very much depend on the industry, and particularly on the industry’s leadership.
The logjam in the pipeline eventually will be released, and the slowdown in the markets will ease, for the long-term prospects for the industry remain exceedingly positive. When that happens, the industry needs to remain united it its determination not to return to industry dynamic that existed prior to 2015. If it is able to speak with a single voice and act accordingly, that need not happen.
But this should not be a war of wills. Producers are reliant on their customers, just as the midstream is reliant on its suppliers. There is a middle ground and it should be reached through dialogue. But whatever that middle ground is, it will have to include a more equitable distribution of profit.
The midstream’s relationship with the producers is not its only burning issue. It also needs to address its relationship with its own clients, and particularly their expectation that they continue to receive generous terms of payment. The disparity in profit margins between the midstream of the pipeline and the jewellery retail sector may not be as pronounced as it is between the midstream and the rough producers, but it also is significant.
Let us make 2016 a year that was as significant as 2015, and for all the right reasons. For that to happen, we need to seize the moment.