H. Goldie & Company is one of the oldest De Beers accredited diamond brokers and has a strong focus on working with Indian sightholders. Mike Aggett joined the company as managing director in 2009 after a career at De Beers. He recently spoke with Rapaport News about factors affecting the rough market:

What is your background and how did you come to H. Goldie & Co.?

MA: I spent 32 years working for De Beers in roles that included rough buying in Africa, and sales through what was then Diamdel in India and Antwerp. I returned to London and worked in sightholder sales, which culminated in coordinating De Beers London sales operations as head of client management. During that time I worked closely with the sightholder community and with the accredited broking house, including H. Goldie, which I joined in 2009.

What is the role of a De Beers accredited broker and how has that changed in recent years?

MA: Primarily, our role is to represent all of the business interests of the sightholder client, with a particular focus on its relationship with De Beers.

The role started to change when De Beers introduced the supplier of choice initiative around 2000. Initially, the focus was on being a sort of lobbyist on behalf of the client at De Beers. However, today we have to customize our offerings to sightholders to add value on an individual basis. This can focus on any part of the sightholder’s business, from rough procurement to financial consultancy to retail marketing and branding assistance.

The old one-size-fits-all offering is very much a thing of the past and H. Goldie is certainly looking to broaden its business avenues.

How has the move to Botswana affected the brokerage business?

MA: There was a lot of concern surrounding how the transition to Botswana would work in reality, but it was an almost seamless transition. The sightholders clearly miss London as a venue but Gaborone has welcomed them wholeheartedly and there is almost full attendance of the sightholder community at each sight.

I don't believe the move has greatly affected the relationship between the brokers and sightholders. We are still able to offer full logistical support to our customers both in their dealings with De Beers and other producers in southern Africa.

The fact that Okavango Diamond Company and other tenders and sale opportunities have all aligned with De Beers sight week in Gaborone has provided momentum for clients to feel that it’s worthwhile to attend.

How do you envision the next De Beers sightholder contract being different from the current one?

MA: The aims and principles of De Beers remain the same in that placing their product in the strongest hands is always going to be the driving factor to maximizing profits and returns to its shareholders.

The changes that De Beers has made in terms of opening up rough supply to non-sightholders, or so-called accredited buyers, provides the company with a vehicle to achieve its goals by giving it potential access to a broader range of buyers.

Importantly, by incorporating stricter financial regulations, transparency and improved corporate governance, De Beers is going to improve the quality of its customers. Hopefully, this is going to lift the entire industry, and consequently attract more funding and inspire confidence.

How do you assess the rough market in 2014?

MA: We saw strong rough pricing during the first half of the year. All the producers raised their prices and achieved fairly significant sales volume. By mid-year, prices began to level off before declining during the third quarter.

In many areas the first quarter price appreciation has probably been eroded as the year progressed. The current feeling is that rough prices may continue to soften as this year comes to a close.

Similarly in terms of demand, there was strong demand during the first quarter and things began to slow around April-May. By mid-year, the mining companies found they were unable to sell the high volume of rough that they had in previous months. This was primarily because of weaker polished sales, softening polished prices, growing rough and polished inventory and limited liquidity.

Liquidity has been a growing issue since the beginning of the year and it has been a significant contributing factor to both buying patterns and pricing on the secondary market. The recent withdrawal by Antwerp Diamond Bank (ADB) from the industry and the more stringent approach to lending by other financial institutions will put continued pressure on the pipeline.

Has that correction in rough prices during the third quarter been reflected at the sights?

MA: Not to a large extent. De Beers has adopted this sort of dynamic pricing policy where they look very carefully at a number of factors and tweak and adjust boxes on an almost month-by-month basis. Prices have had to reflect the market to a degree, but I think the market has reacted more strongly than De Beers pricing.

How do sightholders navigate such an environment, if De Beers is not adjusting their list according to what we are seeing on the secondary market?

MA: Manufacturers consistently complain about profit margins. The tight margins in manufacturing have kept premiums at minimal levels. Demand has pretty much been factory driven to reflect individual manufacturers’ particular polished requirements during the year.

By the second quarter, there was a particular slowdown of smalls below 3 grainer rough and the goods producing VS and better clarities. Obviously this was all a result of polished demand trends. Demand driven by good value in the rough has basically been eradicated this year and there are no boxes where low prices have driven demand.

I also think the rough tender system has maximized rough prices because it is very much geared to pick out areas of specific demand and maximize those prices.

Manufacturers need to gain better margins through differentiation, design and branding.

Consumers are increasingly price conscious, and only by presenting a differentiated product offering can price really become secondary in their buying decisions.

Won't higher rough costs eventually be passed onto the consumer?

MA: Ultimately, higher material costs will have to translate into retail prices in order for the business to be sustainable.

With the emergence of new consumer markets for diamond jewelry and the positioning of diamonds as a cultural imperative as a vehicle for the storage of wealth or gift-giving, demand for diamonds is going to grow.

However, I think the concern is the speed with which the buying culture of future generations is likely to change.

While the appeal of natural diamonds as a gift of love is absolutely engrained in the DNA of today's consumer, there is always the possibility of synthetic diamonds. With a lower price and less environmental impact, synthetics may appeal more to the modern consumer over time.

I believe that there will always be a consumer group that will only purchase natural diamonds, particularly in the engagement and wedding context. But on the cheaper, fashion jewelry side, alternatives may have a greater appeal.

How do you expect decreasing supply will affect rough trading on the secondary market?

MA: Trading on the secondary market has already changed and it will continue to adapt to the realities of the industry. The traditional dealing businesses perhaps have less of an influence than they used to.

Dealers have found it increasingly difficult to operate with sufficient margins. They’re also affected by the growing necessity of the major manufacturers to secure rough supply from the primary sources, or through the larger tender systems. A combination of all these elements will shape the future of trading on the secondary market.

If we look at the manufacturing sector, there has already been consolidation. A number of smaller operations have certainly disappeared in recent years. Consolidation will be slow but ongoing and less sustainable businesses will likely disappear.

What is the state of bank credit and liquidity in India, where many of your clients are based?

MA: The announcement of ADB’s withdrawal sent shock waves across the industry globally, including in Mumbai. Add to that, the Indian press reported that Standard Chartered Bank was also considering reducing its exposure to the diamond industry.

So the focus shifts to the Indian banks and they have been hesitant to add new diamond clients. In fact, in the past six months they have not approved any additional finance to existing customers.

Local payments have also been delayed by over a month and companies who sold polished on credit terms have been trying to receive their payments in time for Diwali. The cost of finance in India has also been very high and there doesn't appear to be any chance that interest rates will go down in the next few weeks as the Reserve Bank of India attempts to keep inflation under control. So the Indian banks are cautious and haven’t jumped in to fill the gap that ADB and the other banks have created.

What are your biggest concerns for the industry?

MA: I think the threat of non-disclosed synthetics and the affect it might have on consumer confidence if they filter into the natural diamond pipeline is the biggest underlying threat for the industry. It has been well recognized and the industry has taken the necessary steps to tackle this danger – introducing systems and screening facilities to identify non-natural diamonds.

In terms of the day-to-day business, the biggest challenge relates to liquidity and access to finance, coupled with a need to create a reasonable profit margin.

What are the long-term prospects for the market, sightholders and H. Goldie in the next decade?

MA: Demand is set to outstrip supply for diamonds and as economic development creates new consumers for the product, the fundamental big picture for diamonds is positive.

In my view, sightholders already represent the A-list of global diamond companies. The new requirements by De Beers to elevate the sightholder brand to one that represents a higher level of financial transparency and exemplary corporate governance and ethical standards should instill greater confidence from financial institutions and investors, and also from the retail and consumer markets, to select sightholders as their business partners.

At H. Goldie, we’re going to continue to develop close working relationships with each of our sightholders, while recognizing the changing landscape in which the industry is operating. We’ll continue to adapt and develop a diverse set of added-value services personally tailored to fit each individual company, and help them navigate the prevailing challenges in the rough market.