Hard Stone Processing PTY LTD (HSP), operating in Namibia, specializes in manufacturing 2.5-10 carat high quality rough diamonds into mostly brilliant cut diamonds. While it does export the majority of its finished product, HSP is deeply rooted in Namibia’s polished diamond trade.  It is a leading supplier of polished diamonds to jewelers in Namibia and has established key partnerships with the Namibian jewellery industry. Since 2007, HSP is also a proud NDTC Sightholder and a member of the Diamond Manufacturers’ Association of Namibia (DIAMAN). It was also recently the winner of the Namibia Shining Light Awards 2009 for its jewellery creation by Andre Canto, the Diamond Tattoo.

Burhan Seber, Managing Director of Hardstone Processing gave this interview to Veronica Novoselova, Rough&Polished correspondent in Windhoek, in which he described the current state of the diamond market.

What are your company’s financial and operational highlights for 2009?

There is a return of rough demand which put factories back into production. The pace of recovery in rough demand has surprised most people.

Are there any plans to increase your output and sales of rough diamonds in 2010?

Namdeb just stated that, compared to 2008, their output in 2009 would be half of that and for several years thereafter – if so, then unlikely. Sales should improve from 2009 though, as they did hit a rock bottom. Globally, it will depend on the sustainability of the current economic recovery and its positive effect on consumer appetite.

ALROSA has virtually regained its pre-crisis performance. Could you give your comments to this?

The fear in the industry is that rough demand is too hot, with increasing prices, but polished prices are not at par. When the demand and price of rough becomes more than that of polished, the industry has a problem… speculation! The current increase in rough sales could be partially due to restocking by manufacturers. If so, this would be a short term phenomenon – unless polished sales pick up. As a side note, ALROSA must be commended in the way it handled its stockpile through the crisis and even today, as the industry did fear its ability to flood the market with rough.

What do you think about, whether or not, any measures are going to be taken in order to support demand for rough diamonds and prevent speculative inflation, which may result in a price drop?

Measures have already been taken by producers to support rough prices by restricting rough availability in the market, through cutting production and/or sales. With less supply, the logic is rough demand will remain strong. Having said that, restricting supply could in itself lead to speculation.

Yet the greatest problem we face is in defending polished prices. Generic marketing is aimed to create greater consumer confidence. The new IDB would create a new fund for generic campaigning for the industry. But will this be enough to defend polished prices? And this is a long term strategy, because today, the issue is more about consumer appetite than consumer confidence. Anyhow, the IDB and this whole scheme of generic marketing are now temporarily shelved since Alrosa has not confirmed its initial financial commitments. In any case, if polished prices do not catch up soon, a drop in rough prices will be inevitable.

What is the reason behind a recently higher demand for rough diamonds despite the almost flat polished market?

The million dollar question! The drop in rough prices was exaggerated during the crisis, so re-adjustments were expected, but prices seem to be increasing too rapidly now. Again, another initial important cause may have been the restocking of depleted stocks by manufacturers who were not buying during the crisis; this especially in India. If so, without strong sales in polished soon, this could be short-lived. But the market today seems resilient, with rough demand still strong and prices relatively increasing. One could also argue the supply/demand factor, saying that there is too little rough in the market. Last, it could just be speculation! Let us hope it is not only the last, but a bit of each.

Do you consider this trend to be long-term?

Again, depends more on external factors. If global economic recovery is sustained and polished demand/prices increase, then yes. If not, no. But markets do have a mind of their own, and it does not always follow logic. Many put faith in Asia’s (specifically China’s) increasing demand to save our industry; unfortunately, given the scales of business, our industry is still very much dependent on US sales, and the prospects of these do not look bright. The mood is very-very cautious.

How do you evaluate the current prices for rough diamonds – are they fair?

As a factory owner, I should always say ‘of course not!’ Currently and in my opinion, let’s say ‘borderline’, BUT, polished prices are still lagging, and any further increases in rough prices would make it unsustainable.

Will it be correct to say that the crisis in the diamond industry is over?

No, not by any means! The world economy is a mess, and we will not be out of it until the economy is.

What is your estimation of the market in 2009? How was the market changing in that year?

Not sure I understand… Market has improved significantly, but that was not difficult seeing where it was coming from. We are still in a very much unknown territory, and the industry is extremely fragile.

What is the difference between the market in 2009 and in 2008?

The industry has changed completely! Much less liquidity at all levels (including consumers), high unemployment figures with further significant job insecurity, fragile economies, heavy financial losses, serious loss of consumer appetite and changing character of consumers resulting in dramatic reductions in discretionary spending. This translates to much less demand for diamonds and diamond jewellery.

Important are banks and their support. Bank exposures to the industry have been reduced significantly. Though they have supported the industry through the crisis, they have become more skeptical and stricter in their lending.

What do you think, were the measures taken by De Beers in the crisis situation correct?

If you mean by reducing production and increasing marketing, yes. But a prolonged artificial restriction of production globally by producers could push the industry back into speculation.

Was the sightholders scheme effective during the crisis?

No, but few schemes would be in a crisis situation. When all goes wrong, it’s just about ‘survival of the fittest.’ The NDTC was very supportive and proved very flexible during the crisis, recognizing the dramatic overnight changes in supply and demand dynamics.

What is your evaluation of performance displayed by the world’s major diamond mining companies and their competitiveness?

Diamonds are a rare commodity today. Whether new discoveries in the future will change that, it is anyone’s guess. Today, producers’ incentive for exploration is little. So the next few years of supply can be predicted, as it takes approximately 10 years to start production after a new source is identified. A RBC Capital Markets report predicts that rough diamond supply will be outstripped by demand by 2014. But this does not take into account the artificial control of production levels, so the situation could be much more drastic. Steady and sufficient supply is a must for a healthy industry.

Veronica Novoselova, Rough&Polished African Bureau Editor in Namibia