Dec. 18, 2014 (TSR-Bloomberg) – Jewelers who fill up Christmas stockings with diamonds are increasingly doing so by investing in or securing supply deals directly from individual mines, avoiding the industry’s middlemen.
With most of the diamonds near the Earth’s surface having already been dug up, and few new mines sprouting, Tiffany & Co. and Chow Tai Fook Jewellery Group Ltd. are sharing an ever smaller pie. That’s driving them to be more creative in reaching out to mine operators that range from the Canadian Arctic to the Kalahari Desert.
In the past, big retailers were largely forced to depend on Anglo American Plc’s De Beers unit, which at one point held a virtual monopoly on the diamond trade and still handles 37 percent of all rough stones. Now, Hong Kong-based Chow Tai Fook, the world’s largest listed jeweler, is following an early lead by New York-based Tiffany in exploring investments in individual mines in Canada and elsewhere.
The trend allows big retailers “to get diamonds at a better price” and “be secure” they’ll continue to be able to access the stone further into the future, said Des Kilalea, an analyst at RBC Capital Markets in London.
Tiffany was a leader in the movement, investing in a Sierra Leone mine in 2011 and lining up agreements to buy future output at projects from South Africa to Canada. Earlier this month, Adrian Cheng, the executive director for Chow Tai Fook, said his company is also examining Canadian projects with the idea of buying stakes.
Stuart Brown, chief executive officer for London-based Firestone Diamonds Ltd., which is building the Liqhobong Mine in Lesotho, said he fielded multiple supply deals with retailers when he sought financing to build a mine last year.
“We had to beat them off with a stick,” Brown said.
The industry is suffering from a dearth of new projects; it’s been decades since the last big find. Output for diamonds peaked in 2006 with 176 million carats mined, and then fell to about 146 million carats last year. That tight supply has driven prices up more than 50 percent over the past five years.
There are other motivations leading jewelers to seek closer ties to the source of their supplies, as well. The industry’s reputation has been hurt by so-called blood diamonds, the gems that bankrolled regional conflicts in Africa that killed thousands of people in the 1990s.
Advocacy groups have asserted that the ruling Zimbabwe African National Union-Patriotic Front looted about $2 billion of stones to fund the nation’s military; the party denies the claims. According to a United Nations report, diamonds worth more than $24 million have been smuggled out of the Central African Republic since it was suspended from an industry watchdog initiative, the the Kimberley Process, in 2013.
“Gaining supply itself may not be an issue,” said Anish Aggarwal, a partner at the Antwerp-based industry consulting company Gemdax. “Retailers want to be able to tell more of a story of the nature of diamonds they purchase. Buying direct from source allows them to do that.”
By exploring mines worldwide, retailers can veer away from politically messy situations that crop up in any single area. While Chow Tai Fook is continuing to examining Canadian projects, the company was put off by political risks in southern Africa, according to Cheng.
“There are a lot of opportunities, but it is not very easy because it is always in a foreign country, somewhere in Africa or Botswana, or anywhere around the world,” Cheng said in an interview last month in Shanghai. “We need to measure the political risks, economic risks, deployment of staff — it’s not an easy decision.”
Tiffany, the world’s second-largest luxury jewelry retailer, gets about 60 percent of its diamonds directly from mines, according to its annual report. Francesca Madeo, a spokeswoman for the New York-based company, declined to discuss its sourcing strategies in an e-mailed message.
©2014 Bloomberg News