Professional Jeweler Archive: Israel's Lustrous Advance

October 2004


Israel's Lustrous Advance

As diamond demand grows, supply can't keep up. Here's how one diamond center is coping

A view of Tel Aviv from Ramat Gan, Israel. This modern, clean city boasts modern conveniences for diamond buyers who travel there. Photo by Robert Weldon.

In July, the Israel Diamond Institute held a Rough Diamond Seminar in Ramat Gan, the center of Israel’s diamond cutting and trading industry. The objective was to reach out to new sources of rough diamond supply. Senior Writer Robert Weldon attended. Part 2 of this story will appear in our November issue.

A poignant series of questions clatters up and down the diamond pipeline these days. Retailers ask how they will secure a steady and reliable source of diamonds for their stores in years to come. Wholesalers wonder how they’ll supply the retailers despite supply shortages. At the beginning of the pipeline, mining experts wonder whether they can keep pace with global demand, even with new discoveries in Canada and several African countries.

As new mines start producing in earnest five to 10 years from now, the theory is that rising consumer demand in China and India will suck up the additional production. This means prices – already on the rise – could remain on a relentless upward trend.

What follows is a story of how the Israel Diamond Institute is fighting to help its sector maintain market share in the diamond-cutting world – and perhaps expand in the years ahead. For U.S. retailers who shop in Ramat Gan – or whose suppliers do – Israeli success may well provide them with a broader range of goods and improved sustainability of product lines.

Swimming Upstream

The lives of miners and diamond manufacturers used to be relatively distant: the diamond crystal was mined by the former and polished by the latter – that was their only link. Neither really knew the challenges faced by the other. Today, vertical integration is pulling them closer together and helping them understand each other’s problems and needs.

The diamond industry underwent great change after De Beers’ Diamond Trading Co. instituted its Supplier of Choice program in 2001 and began to supply diamonds to companies that came up with the best marketing programs. The predictability of rough diamond supply became an open question as De Beers dismantled its historical custodianship of the diamond industry. De Beers said recently its control over the diamond market has shrunk to 45% from an estimated 80% a decade ago.

The goods DTC still controls increasingly head east, toward India and other ultra-competitive cutting markets. At the same time, the diamond community has seen change in the industry because of recently opened Canadian mines and diamond players such as Lev Leviev (see box below). Free from the ties that once bound diamond manufacturers to the DTC, many manufacturers now see investment opportunities in upstream ventures much closer to the mines.

The Kimberley Process – through which all legitimate rough diamonds are now channeled to stop those that fund conflict and terrorism – has also forced participating parties to better understand their upstream and downstream partners.

From the Israeli manufacturer’s perspective, the main goal is to secure new streams of rough diamonds. “There is a different climate now, and we can see strong independent diamond merchants such as Lev Leviev and Beny Steinmetz as Israeli powerbrokers,” says Efraim Raviv, managing director of IDI. In Israel and elsewhere, Leviev and Steinmetz are viewed as Israeli pioneers in the mastery of upstream sources because both now invest in the mining of diamonds. But the Israeli industry hungers for even more rough sources as global demand accelerates.

Thus was the genesis of the IDI Rough Diamond Seminar held in July in the Ramat Gan diamond district. The seminar brought together rough diamond producers and Israeli diamantaires. “We need the diamonds,” Eric Olmert candidly told attendees. Olmert is Israel’s deputy prime minister and minister of industry and trade. “We need to find new sources so we can expand our industry and give our industrialists what they need.”

Guest speakers included several junior and senior Canadian, Angolan and South American diamond miners. The miners’ objective was to seek potential Israeli investors (the second part of this story in November will focus on the world’s other diamond producers and what their presence means to the future of rough diamonds).

Flowers in the Desert

Israel, through sheer ingenuity and hard work, has continuously made its little strip of desert bloom and flourish. Through recycling and technical know-how, for example, Israelis have found unique ways to pipe and drip the exact amounts of water to a given plant so it can bloom and bear fruit.

IDI Chairman Simcha Lustig says similar ingenuity helps Israeli diamantaires flow more diamonds toward Israel. The country has no diamond mines, but it markets more than 50% of the world’s diamonds by value thanks to procurement efforts like the Rough Diamond Seminar. “Our goal is that other producers and marketing companies open offices here,” says Lustig.

“Our goal is that other producers and marketing companies open offices here.”

– Simcha Lustig, chairman of the Israel Diamond Institute

Photo by Robert Weldon.

Adds Moti Ganz, president of the Israel Diamond Manufacturers Association: “Israel’s vision is to produce high quality at low prices. We are doing it through technology and marketing. We will do it by forming new relationships upstream while understanding what consumers downstream need and want.”

Shmuel Schnitzer, president of the Israel Diamond Exchange, says the Israeli industry’s technology has always been cutting-edge. “By the end of 2004, new technology will help us compete globally with the smaller goods that have traditionally gone to countries where low labor costs dominate,” he says. “For buyers, this means Israel will be like going to the supermarket. They can find anything they want, together with services such as banking, customs facilities and shipping.” Israel currently outsources diamonds it cannot cut competitively.

Israel also faces growing competition from diamond-producing countries that seek to cut their own diamonds. Israelis say cutting at the source is often not a sustainable venture. “In South Africa and Canada, where laws now promote local empowerment through cutting, the costs are actually higher than in India or Israel,” says one dealer.

“New technology will help us compete globally with the smaller goods that have traditionally gone to countries where low labor costs dominate.”

– Shmuel Schnitzer, president of the Israel Diamond Exchange

Photo by Robert Weldon.

Conquering the Challenges

For Israel’s diamond future, imponderable factors loom. For an outsider looking in, the war in Iraq, a shaky global economy and possible meltdowns in the West Bank may seem like big challenges. But Israeli resilience cannot be underestimated. Despite rough diamond shortages and shifting DTC supplies, Israel says its rough diamond imports are running 40% ahead of last year. Net polished diamond exports have risen 22% so far this year. In fact, Israelis optimistically point to growth in the global economy, with the U.S. gobbling up three-quarters of Israeli diamond exports. In addition, major players such as Lev Leviev have pledged to help Israel and already import many of their diamonds into the small country, with many more to come.

“A young Israeli generation feels optimistic about diamonds and is eagerly entering the business,” says Schnitzer. “The educated youth will invigorate the diamond business and accelerate the use of cost-saving technology and business savvy.”

– by Robert Weldon, G.G.

Lev Leviev Mines Diamonds & Cuts Them Too

The Israeli diamantaire announces plans for an Angolan sales office in Ramat Gan

Lev Leviev, chairman of LLD Diamonds, stood up to make some remarks at the Israel Diamond Institute’s Rough Diamond Seminar and a respectful hush filled the auditorium.

The Leviev story is near legend in Israel. It’s the tale of a maverick Israeli who dared to challenge De Beers a few decades ago. By later going directly to the source, he established himself as a miner and the sole legitimate conduit for diamonds from Angola at a time when no one else would touch them due to the conflict diamond crisis.

Conservative estimates say Leviev, on his own, churns out an annual $2.5 billion in diamond sales (rough and cut). And that’s only a portion of his diversified empire, which also includes oil production, construction, real estate and clothing holdings (“The Discreet Tycoon,” January 2002, p. 20, and “Lev Leviev’s Connection,” February 2002, p. 19).

Lev Leviev (left) of LLD Diamonds and Israeli Finance Minister Benjamin Netanyahu discuss the opening of a new sales office in Israel for Angolan diamonds. Photo by Robert Weldon.

At IDI’s diamond seminar, the respectful silence was broken during the question-answer period. A diamond dealer angrily demanded to know what Leviev is doing for Israel. “We haven’t seen a single carat of what you bring to Israel,” he charged. Leviev pummeled him with answers: “Perhaps you are not running your business efficiently. Maybe you don’t buy diamonds well. Or maybe you are not professional enough. Perhaps you ask for too many discounts.”

In reality, Leviev does bring diamonds to Israel, reportedly even more than De Beers. In 2003, he reportedly imported nearly $1 billion in rough to the country (compared with about $850 million from De Beers), with three-quarters of the stones sold to customers there. Leviev’s intimation is that Israelis need to restructure their operations, think differently about their businesses and get closer to their sources.

But Leviev is becoming known also for opening cutting factories in countries where diamonds are mined. “I have heard it said Africa is a bad place to invest,” he says. “I can tell you I have never lost a cent in Africa. There is no reason diamonds should not be cut in their countries of origin as well.”

Leviev and the Angolan government’s diamond marketing arm, SODIAM, announced at the seminar they would open a sales office in Ramat Gan called SODIAM International Ltd. A considerable portion of Angola’s production will be sold through these offices, making Israel a further destination point for anyone wanting Angolan goods. Angola also is establishing its own cutting factory, together with Leviev, and a percentage of goods will be polished there. The country is eager to repair its tarnished image following a three- decades-long civil war that produced human atrocities that triggered the conflict diamond crisis and roiled the diamond industry for years. Angola, a major source of diamonds, yearns for renewed respect in the market. Leviev is trying to lead the way with a win-win solution: more diamonds for Israel, more cutters for Angolan diamonds.

– R.W.

Copyright © 2004 by Bond Communications