The polished-diamond sector may be heading for a substantial “shakeout,” Lazare Kaplan chairman Maurice Tempelsman told attendees at the recent American Gem Society Conclave in Atlanta.

“The correction that looms ahead may be smooth and long in coming, or it may be soon and sudden,” he said. “Either way, the impact will be felt at the retail level, as [suppliers] fail, and those that survive, being far fewer in number, become more important.”

He said that the “fault lines are already evident, though still papered over by low interest rates and other benign economic conditions.” Those fault lines include the unprecedented $9 billion trade debt that is 50% higher than just two years ago; unsustainable credit terms that polished wholesalers offer retailers; the pruning of client lists by De Beers and others; and the growing disconnect between quick-rising rough prices and slow-moving polished prices.

One cause of these problems, he noted, was that the industry could no longer rely on De Beers to maintain price stability. “Prices [in the future] will go up as well as down, just as prices for any other commodity or product do,” he said. “We got a taste of this in the wake of Sept. 11, when prices dropped shortly, only to regain much of that ground over the past 18 months.” He said this has made the decision to hold inventory riskier.

“Everyone in this room knows the challenges and issues associated with carrying inventory,” he said. “Those issues are compounded many times when one faces the prospect of such inventory fluctuating in value—prices going down as well as up. Yes, your supplier may carry a portion of that risk for you—but you may then soon find you have a supplier problem to cope with as well, because few in the polished diamond trade are geared to manage price risk, particularly if they are over- leveraged. And if, indeed, you have a supplier problem, then in an increasingly competitive market where timely and reliable deliveries are increasingly essential, I fear that you may have a basic business problem.”

Tempelsman closed with suggestions for retailers:

• Deal only with suppliers you trust. He noted that many in the polished trade, under increasing pressure, may be tempted to shortcut the Kimberley Process and the legal requirements for disclosure. “Suffice it to say the old saying ‘caveat emptor’ may never hold more force than where pressured sellers are concerned.”

• Establish long-term relationships with your suppliers. Retailers might be tempted, he said, when “suitors come calling … offering their wares on easy terms … [Don’t] pursue immediate gratification at the potential expense of a more immediate, stable relationship.”

• Don’t settle for a “generic buyer-seller” marriage. “Price and terms will always be important, but I believe that the touchstone of future relationships in our industry will be reciprocity,” Tempelsman said. “Reciprocity starts with listening—listening to and understanding each others’ challenges and working within the realm of what is realistically achievable.”

Tempelsman also remembered his son-in-law, Lazare Kaplan vice president Bob Speisman, who was active in AGS and was killed in the terrorist attack of Sept. 11, 2001. Tempelsman reiterated his “family’s thanks once again for the friendship and support so many of you gave.”