October 21st, 2005
By Daniel Horowitz.
According to an article published on PolishedPrices, (A deeper look at the SA Diamond Amendment Bill, 19/10/2005), Bain & Co and McKinsey advised De Beers and BHP Billiton to "get rid of the middleman".
As a rough dealer and consultant in the diamond business for over 30 years, I believe that nor consultants nor producers can decide the fate of middlemen.
The ability to determine the shape and form of the diamond pipeline should be left to the market which by natural inclination seeks efficiency.
It is therefore the market place that generates or eliminates middlemen, driven by fundamentals only. Players trying to artificially bypass markets will only lead to the creation of even more middlemen.
It is striking that plenty of unopened rough boxes originating from producers are now available on the secondary market.
Why has this happened? Why are goods that were originally allocated to vertically integrated concerns now on offer at will?
The answer is that many sightholders are not achieving their downstream objectives due to liquidity problems and lack of retail expertise.
These sightholders accumulate profits thanks to strong spot market premiums rather than through vertical integration initiatives.
The net effect is that the very sightholders that were supposed to cut out middlemen have become middlemen themselves.
We now have a layer of sightholders silently unloading their allocation as quickly as possible and disrupting the market equilibrium where rough dealers use efficient, flexible and competitive distribution channels to sell rough.
Forcibly linking diamond manufacturing to the retail trade appears to be inefficient. Most cases show no inbuilt advantage whatsoever.
It is anyone’s right to characterize rough diamond dealers as middlemen, they nonetheless have a critical role to play out in the diamond pipeline.
As long as they fill a gap between producers and manufacturers – large and small - rough dealing remains an inescapable stage of global diamond distribution. It leads to fair, open and competitive pricing that ultimately will benefit the consumer.
Daniel Horowitz is one of the principals of IDH Diamonds NV (http://idhdiamonds.com), a rough dealing and consulting firm in Antwerp, Belgium. IDH has acted as a consultant to BHP Billiton, Rio Tinto, SDM, Chitotolo, Miba, and other mining companies.
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