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Next Marilyn Sought to Sell Emeralds Over Diamonds: Commodities

November 01, 2012

Next Marilyn Sought to Sell Emeralds Over Diamonds

Rarer than diamonds yet cheaper, emeralds are gaining among consumers. Photographer: Alejandra Parra/Bloomberg News

Ian Harebottle is searching for a global celebrity to do for emeralds what Marilyn Monroe and Audrey Hepburn did for diamonds.

The chief executive officer of Gemfields Plc (GEM), the biggest producer of the green stones, said he wants “to bring in an A- lister to be the face of emeralds,” mirroring what the actresses did in past decades that helped then-monopoly producer De Beers sell diamonds as symbols of lasting love. Clear gems still dominate today’s $21 billion precious stone industry.

Rarer than diamonds yet cheaper, emeralds are gaining among consumers. At current growth rates they may take more than 20 percent of their competitor’s market share within two decades, according to the trade group the International Diamond Manufacturers Association. Gemfields’ share price has gained 78 percent this year.

“Sometimes rarity is not an asset,” Harebottle said in an interview. “You need the volumes of supply, which is what we’re doing.”

Harebottle’s strategy, from buying African ruby and emerald mines to leveraging iconic names, is supported by Brian Gilbertson, ex-CEO of the world’s largest miner, BHP Billiton Ltd. (BHP) Gilbertson heads an investment fund that licensed the Faberge brand name to London-based Gemfields and bought a controlling stake in 2007. His son, Sean, is on the board.

High-quality emerald prices increased more than 10-fold in the past three years, out pacing a 21 percent gain in diamonds, according to calculations based on Gemfields and WWW International Diamond Consultants Ltd. data. Still the red, green and blue stones comprise just 10 percent of global gem sales and lack standardized pricing.

Rare White

A 0.9 carat round diamond that’s internally flawless and of rare white color would cost about $7,000, according to online retailer Blue Nile. A round emerald with “excellent clarity” of the same size would cost about $3,500, according to Africa Gems, an online retailer of the stones.

Gemfields’ market value increased to about 140 million pounds ($225 million) this year as prices increased for its Zambian output. That’s where it owns 75 percent of the Kagem emerald mine, the world’s largest. It also has 75 percent of the Montepuez ruby field in Mozambique. The biggest investor is the Rox unit of Pallinghurst Resources Ltd., a Guernsey, U.K.-based fund that invests in natural resources whose chairman is Gilbertson. Rox owns 63 percent of Gemfields.

The company lacks the heft of the 20th century De Beers model, in which a single firm mined, marketed and largely controlled wholesale prices. Colored stones are a fragmented industry that’s largely supplied by individual miners -- sometimes parents and children -- across about 10 countries.

Halle Berry

At the same time it has benefited from singer and clothing purveyor Jessica Simpson, actress Halle Berry and the Duchess of Cambridge receiving engagement rings containing colored stones.

Global imports of rough emeralds, rubies and sapphires totaled about $2.2 billion in 2011, according to the United Nation’s Comtrade data. Rough diamond sales totaled about $18.9 billion, according to BMO Capital Markets research.

“During the past three years, these other gemstone categories have taken away yet another half percent from our market share, of our display space, of our sales in the jewelry retail shops,” Moti Ganz, president of the diamond manufacturers group, said in a speech at the World Diamond Congress on Oct. 15.

De Beers dropped so-called generic marketing of the stones when its monopoly was ended after losing a 10-year legal battle with the U.S. over price-fixing in 2004.

Got Milk

Polished diamond prices have declined for five straight quarters as Asian purchases slowed and the euro region debt crisis eroded demand, according to PolishedPrices.com data. Rough, or uncut, prices have fallen for the past two quarters and are heading for the first annual decline since 2008 after rising by more than 20 percent in each of the past three years.

The colored gem market was about equal in size with the diamond industry in the 1940s. Generic marketing is where participants buy advertising that benefits them all -- such as the “Got Milk” campaign in the U.S. for the dairy industry.

De Beers, the world’s biggest producer, created the industry and developed the “Diamonds are Forever” tagline that was voted as the best slogan of the 20th century by Advertising Age. Monroe’s recording of “Diamonds are a Girl’s Best Friend” and Hepburn’s “Breakfast at Tiffany’s” film helped cement an allure in consumers’ minds, spurring a boom in demand and prices that were underpinned by cartel.

Diamond Champion

“For a long time De Beers was the champion, they would say ‘a diamond is forever’ and the whole market could copy that,” Harebottle said. “At some point in time De Beers got a bit blinkered and they said ‘A De Beers diamond is a De Beers diamond.’ It created confusion in the diamond place and I don’t think it was good for diamonds.”

The diamond industry attempted to re-launch generic marketing through the St Petersburg Initiative and the International Diamond Board, though efforts were stymied as disparate companies failed to come to an accord on who will bear the cost.

“Not all people were willing to do their part,” said Stephen Lussier, executive director at De Beers in London. “For those things to work everybody has to be on board and if there are any free riders then people lose confidence.”

“Having been down that road a couple of times we would take some persuading,” Lussier said. We’re more focused on doing it in a way that has more direct benefits for us.’’

Advertising Spending

Gemfields, which says it currently pays for about 70 percent of global emerald advertising, has less concern about taking the brunt. “If I spend $1 and it makes me $2 I’m going to do it. The fact that people free carry, I don’t mind, so long as it benefits us,” said Harebottle. His company plans to boost its marketing budget to as much as $4 million next year from about $1.5 million this year and $150,000 in 2009.

De Beers, which spends about half what it used to on marketing will spend in the “hundreds of millions,” said Lussier.

“There is the opportunity for other gemstones to undertake category marketing, but I think that the difference is that the industry, including the supply side, is more fragmented,” said Anish Aggarwal, a partner at industry consulting firm Gemdax. “If there is clear industry leadership, they will have a chance.”

Harebottle sees emerald prices, which have avoided the 18 percent slump in diamond prices in the past six months, increasing at about 10 percent to 15 percent a year over the next decade. Gemfields produces about 20 percent of the world’s emeralds and plans to expand that to about 30 percent, while boosting more valuable ruby output to a similar share.

Powerful Force

“Clearly the historic De Beers marketing was an extremely powerful force in building markets from scratch into what they are today,” said Lussier, who is also chief executive officer of Forevermark, De Beers’ diamond brand. “De Beers can do its part, but it alone is not enough. It’s important that the overall marketing expenditure by the industry maintains the sort of level when De Beers was doing it all for them.”

While the growing popularity of colored gems is reflected in the shop windows on London’s Bond Street, diamonds are still the first choice of consumers who are better educated about the stones.

“Colored stones are mainly bought by more experienced customers who already have diamond pieces,” said Richard Campbell, whose family runs the jeweler Lucie Campbell on New Bond Street. “It’s incumbent on the buyer to have confidence in the jeweler or their own knowledge.”

Lucie Campbell’s display is dotted with emerald, ruby and sapphire jewelry, including the shop’s most expensive piece, a pair of 22.45 carat and 21.66 carat emerald earrings set in platinum and surrounded by diamonds. The display carries no prices.

To contact the reporter on this story: Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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