Tuesday, April 5, 2011

Subdued 2011 awaits cutting and polishing firms

Experts believe 2011 will be yet another year of poor profitability for the country's 16 polishing and cutting firms as their margins remain stifled by the widening gap between rough diamond and polished prices.

The price imbalance, which was triggered by the recession in late 2008, means the firms pay more for rough diamonds than they are able to sell them for to jewellers after they cut and polish them.

Experts have explained that while the recession dropped both rough and polished prices, the former had recovered faster and to higher levels than the latter, eroding margins and pushing firms into the red.

Yesterday, renowned diamond guru Chaim Even-Zohar said 2011 was likely to present a further squeeze on margins for cutting and polishing firms, which are collectively known as diamond manufacturers.

Even-Zohar's research suggests local manufacturers recorded losses in 2008, which mildly improved in 2009 due to lower rough prices. Research indicates the firms barely broke even last year.

"The margins will narrow this year, but in the long-term, demand will increase faster than supply, giving us good hope that polished prices will firm and the gap with rough will improve," Even-Zohar said at the inaugural Diamond Beneficiation Pitso in Gaborone yesterday.

"We have seen that globally, rough prices are increasing at a greater pace than polished and by necessity, this trend reduces the profit margins of every diamond manufacturer.

"However, the manufacturers here were handpicked by De Beers and the government and are among the best in the world. If anyone has a chance to meet the challenge, it's the companies here.

"Even if on paper there's no profit, I don't foresee any likelihood that any of them will close doors. In addition, these firms are part of integrated international organisations which provide them with support."

Estimates provided by diamond consultancy, Tacy Ltd, underline the position diamond manufacturers find themselves in worldwide. According to Tacy, demand for rough diamonds could rise by 20 percent in 2011, compared to a 9.9 percent rise in demand for polished.

The Israeli-based consultancy estimates that demand for rough rose by 66 percent last year, compared to an increase of 38 percent for polished stones. Even-Zohar said the dramatic recovery in rough could be attributed to pipeline replenishment which, however, will be less of a factor in 2011.

While the price imbalance is global, the local 16 cutting and polishing firms' margins are particularly affected due to factors such as the higher cost of production and industry-wide dependence on credit.

"Looking at the industry here, 'break even' is a nice phrase, but the industry is not at break even. There's a great challenge of how to improve the bottom line and make the business sustainable," said Even-Zohar.

The President of Botswana Diamond Manufacturers Association (BDMA), Mervin Lifshitz, concurred: "We have very little flexibility," he said. "We live in a tight space between rough prices which are influenced by market demand and polished prices over which we have no control.

"We have competition from New York, Belgium, and Asia and the challenge that faces us is to remain competitive.For this industry to continue, large sums of money needs to be continuously invested in methodology, technology and training.

"The 16 firms here have invested heavily in these areas and their failure to continue to do so will lead to Botswana falling in competitiveness."

The pitso provided a platform for the first audit of the cutting and polishing industry five years after the government licensed 13 factories and after the initial three that were operational prior to 2004.According to the pitso, the fledgling industry's biggest challenges are sustainability and growth.


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