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Diamond consumer market still reasonably healthy: Stephen Lussier, Forevermark

Stephen Lussier, CEO of Forevermark, a De Beers brand, has been with the group since 1981. He tells ET how the business has changed since then, why Surat will continue to be a diamond hub despite Chinese competition and, even, how he finds the consumer market still healthy. Edited excerpts:

What are your plans for the Indian market?

The Forevermark programme commenced in 2011 in India. We started with Bangalore, followed by Mumbai and New Delhi and then Kolkata, Chennai and Hyderabad in the fourth quarter. By October 2011, we were in 6 cities. The total number of doors we had last year was 46. We intend to be in six additional markets and a total number of operational doors of 100-105. As on date, we have finalised our presence in 10 cities with over 75 retail doors in India.

How do you view the Chinese market? Industry observers indicate that it is giving tough competition to diamond merchants in Surat?

I think the Surat manufacturers will remain competitive worldwide. They are the most efficient in turning rough diamonds into polished in the world. And they remain so even today. There is no doubt there is competition from China, and I think it comes largely because the Chinese domestic market is growing strong.

But what we see increasingly with Forevermark is we have seen international companies also with a base here in India are now expanding and building presence in China as well. The brand Eurostar is a very good example. They are a strong distributor in China and are benefiting from the growth in the China market. So there is more competition but if you're committed to China the fact that you're manufacturing goods in India is not a handicap. If you do need to go you can't just sit in India and think it's going to come to you. You have to go out and start offices and build relationships with jewellers on the ground and you can succeed. It takes lot of time.

The number of mines worldwide is dwindling and the existing ones are exhausted. Are you feeling any jitters?

This is a long term trend - as mines get older they produce less. The deeper you go, you tend to find less. The world's big diamond mines are now 30-40 years old. The Kimberly mine in South Africa, which was originally the main source, is now almost depleted. We are not mining there anymore. In the next few years, our major South African mine Venetia has to go underground - and when you go underground you produce less. The world's biggest diamond mine Jwaneng will also go underground sometime in the next decade. The Canadian mines which are not owned by us but by others are also going to close in a decade. They are also exhausted supply.

So what do you plan to do?

We are looking for new mines and we are also opening new mines. We expect to open a new mine in Canada in the next three or four years. And that will help. We have made a huge investment into the Jwaneng mine to extend its life pit, which will help. But if you look at the next ten years it does not seems that the world will produce more diamonds when compared to the previous ten years. What's interesting is the world is not making anymore diamonds. You know the youngest diamond is about 800 million years old and the oldest one is about 3.5 billion.

For a new mine, what's the average investment and time required?

So (from the time) you identify there is diamonds (in a particular place), it takes an average ten years to get your first diamond out. And the average diamond mine would cost you billions of dollars to build. You have start investing four to five years before you see your first dollar back in revenue. You need patience and commitment because you ought to wait for a long time. After production, it takes about ten years to become profitable. So the first ten years you're just paying off what you spend. No one has found a big mine in the last 30 years.

Your parent firm De Beers recently said earnings have halved and 2012 will be tough and challenging. What are the challenges?

Yes, it's quite true. The first half of last year was our best six months ever. So we had an extraordinary six months. And the reason for that was there was a rapid increase in prices last year. The diamonds that we had we were able to sell at prices 30-40% higher. That happens only during a time when you have terrific period of price growth. That stock game is unrepeatable. But now it does seem a difficult market.

The good news is that the consumer markets are still reasonably healthy. Despite the things happening in the world, right from the problems in Europe, US to the slowdown in China. But actually demand is okay at the consumer level. It's growing in America, China and other key markets. Still we are going to sell more.

So where is the problem?

The problem is in the middle. It's between the rough diamonds and the consumer. That is a great challenge. During the recovery from 2009, people bought lot of rough diamonds than they required and so there are more diamonds in the pipeline than that relates to the end-consumer demand. When prices were going up, people thought buy everything they can. As a result, there were too much carats of diamonds in the pipeline in the middle. That's all creating a lot of turmoil in the middle together with the issue of liquidity. In the old days, people would still buy more diamonds even if they did not need them because they thought it's a good thing to have. But if you don't have the bank finance it's very difficult to do that. Consumers will keep buying and in the middle of the pipeline people would want to reduce the inventory.

How much revenue does the India market contribute?

See that's a complicated questioned because it depends on what hat I put on my head before I answer. If you look at the diamond business as a whole, in terms of consumers, it's about 10% of the world. This is based on the sales to Indian consumers. If you look at the sales of the De Beers group, rough diamonds, I don't know the latest figure but India is well over 50%. And nearly nine out of 10 diamonds are cut polished here in India. So India is extraordinarily important to the De Beers group and Forevermark India is one of our five priority markets. We certainly expect India to be number two or number three going forward for Forevermark. Probably number three, just behind US and China.

How big is the industrial segment for you?

It's a pretty small segment. But there is this extraordinary and exciting future around technology. One of the reasons why diamonds become precious in the first place was actually, if you go to the days of the Maharajas, it was because of their physical property. They were the hardest natural substance. Maharajas used to wear them as talisman in the battle to protect themselves. So their natural properties have always been amazing and that's what the industrial segment focuses on. So they look at how we can use the natural properties of diamond to create new uses.

So they have been used in cutting tools, that's the main use. The other property that diamonds have is they are conductors of electricity and they are a super performing material for conducting. The challenge now is for most uses you don't need a super material. You can make do with a cheaper good material. Like, in computers, people use silicon chips but as the calculations that they ask these machines to do gets more and more intense they start searching for super materials and it becomes worthwhile to pay for them. And diamonds are the ultimate super material for all sorts of advanced electronic applications. We think if we just keep working on the technology and wait until they are required there will really be a very good market in the future and who knows some day it might become bigger than the gem business.

You have been with the group since 1981. What trend changes have you seen over from then to now?

First the geographies changed. When I started, there were only two markets - US and Japan. Then China and India changed the whole dynamics.

The second change is the role of women particularly in marketing terms. Because the way we used to market was very much the hero man giving this token to the woman he liked. Nowadays people say gosh that's old fashioned and we have to find newer ways to communicate the affection, commitment and love. But do it in a way that reflects the quality of the receiver and the giver. And nowadays women are comfortable buying diamonds for themselves and it's always not a gift market. The self purchase market is growing.

Another thing that has changed in India is people buying diamonds are now asking for certificates. This culture already existed in other countries but it is slowly growing in India. Ten years ago if anyone gave a diamond you would just purchase it. You would go by words. But now fundamentally it has changed the way in which diamond business operates. It's a lot of money and consumers are entitled to know such things. Even if they trust the jeweller they are now looking for that extra assurance.

 

 
Source: The Economic Times - Sangeetha Kandavel, ET Bureau Jul 25, 2012, 01.23PM IST
http://articles.economictimes.indiatimes.com/2012-07-25/news/32848730_1_biggest-diamond-mine-jwaneng-stephen-lussier