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Diamond Industry Recovering From Recession

July 27, 1986|From Reuters

TEL AVIV — The world diamond business has regained its sparkle after suffering the worst recession in its history in the last five years.

The 23rd World Diamond Congress, held here earlier this month, found dealers, manufacturers and producers in a buoyant mood, with prices rising again and jewelry sales setting records.

It was perhaps fitting that the convention should be held in Israel, which now cuts half of the world's diamonds and has led the recovery.

Industry leaders blame the great diamond crash of the early 1980s on a burst bubble of speculation. De Beers' sales of rough gems and industrial diamonds slumped to $1.47 billion in 1981 from a record $2.72 billion in 1980.

"A lot of people lost a lot of money in diamonds around the world in the last few years. It was the worst ever. It is no exaggeration to say that people lost billions of dollars," says Moshe Shnitzer, president of the Israel Diamond Exchange.

Julian Thomson, chairman of De Beers Consolidated Mines Ltd., which has a virtual monopoly on world rough diamond sales, said investors put their money into diamonds in the late 1970s, when inflation was at record levels and interest rates were low.

Boom-Bust Cycle

"What happened was a classic example of speculation feeding on itself, followed by overreaction at the top of the cycle. We must all try to ensure that no such thing happens again," he told the congress.

From 1981, real interest rates went through the roof, the dollar soared and inflation tumbled. The bubble burst and overextended speculators scrambled to sell their diamonds.

De Beers, owner of the Central Selling Organization (CSO), which controls the supply of rough diamonds, withheld vast stocks of diamonds from sale to try to stop the fall in prices.

Industry sources said the CSO is still holding stocks equivalent to more than an entire year's world diamond sales.

Some dealers say the crisis was made worse by the dumping on world markets of a large quantity of Soviet rough diamonds in 1984.

Shnitzer said the Soviet officials responsible for the move have since been fired for acting against their national interest.

De Beers laid off a quarter of its 20,000-strong work force to reduce production and cut its dividend by 50%.

In a reference to the collapse of other commodities prices, such as the recent tin crisis, Thomson said the CSO "succeeded where other commodity stabilization schemes have failed."

Willing to Wait

"You should be in no doubt that our stockpile has been soundly and satisfactorily financed and that we are entirely willing in the interests of the whole industry to carry large stocks for as long as may be necessary. That is an essential part of our function," he told the congress.

Diamonds have gradually regained their luster for several reasons--lower interest rates, a cheaper dollar, falling oil prices and a consumer spending boom in the United States and Western Europe which has benefited the jewelry trade.

Diamond exchanges are opening in more countries. The retail trade is expanding into new markets such as men's jewelry and new areas of the world, including Eastern Europe.

De Beers has raised its prices by an average 7.5% this year and managed to reduce its stocks. Shnitzer says the price of high-grade stones has increased by up to 20%. The trade is dominated by Orthodox Jews, partly because diamonds have always been a portable asset which those fleeing persecution could carry with them.

Outside Israel the world's biggest diamond centers are Antwerp, Amsterdam, Bombay and New York.

India has possibly the fastest growing industry but Bombay is still excluded from the World Federation of Diamond Bourses because India does not allow free entry to traders from Israel.

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