Gemstone Supply Rough Times
Historically speaking, gemstone mining has always been hit or miss. When miners make a big strike, gemstones flood the market, prices fall, and smart dealers stock up, because inevitably the pocket will get mined out and prices will creep back up again. That rush of discovery, the thrill of seeing some new and amazing piece of nature coming onto the market, is one of the driving forces of the gemstone market. But lately, gemstone mines around the world have been missing more than they hit, according to gemstone cutters and wholesalers. For nearly two years, rough production worldwide has been soft, goods are harder to come by, and prices are rising in many gem categories.
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Changing demand has put gemstone supply in a crunch. The result: higher prices in the pipeline. Historically speaking, gemstone mining has always been hit or miss. When miners make a big strike, gemstones flood the market, prices fall, and smart dealers stock up, because inevitably the pocket will get mined out and prices will creep back up again.
That rush of discovery, the thrill of seeing some new and amazing piece of nature coming onto the market, is one of the driving forces of the gemstone market. But lately, gemstone mines around the world have been missing more than they hit, according to gemstone cutters and wholesalers. For nearly two years, rough production worldwide has been soft, goods are harder to come by, and prices are rising in many gem categories.
"The last time we had a drought like this, it was 20 months with nothing new coming out. The current drought is running nearly two years," says gem cutter Steve Avery. "And, like a weather drought, there's no way to predict when it's going to end."
Dealer Michael Nemeth, who often buys rough at the source, agrees: "This is the biggest lull in production in the past decade."
The cyclical nature of gem mining in the last half century has seen different countries rise to prominence — Brazil in the 1950s and '60s, Tanzania in the '70s, Afghanistan in the '80s, and Nigeria in the late '90s, notes cutter and rough gem wholesaler Mark Kaufman. "We're definitely due for something new. Most of the gems in the world are produced in poor countries, and when families aren't farming, they're searching for something that will mean hard cash. Nigeria was dead for years, and then someone was digging a hole and bam, an alluvial deposit was discovered that started a gem rush. It will happen again, but who knows when."
In the past, when gem production was slow in one area, another was up, but that's not the current situation, reports wholesaler Jerry Romanella of Commercial Mineral Co., Scottsdale, Arizona. "None of the typical gem-producing areas are hitting on all cylinders. People are still mining, but they're not producing excess quantities. There are no new pockets. My cutter in Bangkok says everything on the market is recycled. I haven't seen anything interesting for a while, just [picked-over] parcels for higher prices."
Production lulls are reported in many gems, including grossular mint green garnet, tsavorite, rhodolite, spinel, sapphire (particularly pink, but also yellow and blue), tanzanite, and even white topaz — with prices escalating.
Some of the factors influencing the lulls have to do with issues at the source: lack of capital for exploration programs, sophisticated mining equipment to go deeper into the earth, and real processing plants for better recovery; bad weather and difficult terrain; political unrest; and soft economies.
In some cases — for example, the emerald mines of Colombia, the ruby mines of Mogok, Myanmar (formerly Burma), and the tanzanite mines in Tanzania — it's simply a case of old deposits not producing as much as they once did.
Discovery of new deposits is random because the prospecting itself is done haphazardly, with individuals sometimes literally stumbling over new finds. The gem trade is just starting to see the use of better equipment, trained personnel, and new technology in mining. "Consortiums of venture capitalists are investing in small to intermediate operations," reports Gordon Austin, gemstone mining consultant and former director of the U.S. Bureau of Mines. "As long as gem mining is commercially viable with good returns, there will be capital available."
But the unpredictable nature of production makes it a hard sell for corporate investors. "I know of an iolite mine for sale, but it would cost about $100,000 to purchase and bring into operation," notes Austin. "This is far beyond the capabilities of local miners. [And in the world of publicly-owned mining companies,] who is willing to take the chance on mining material that runs from $400 to $20,000 per kilo, with the bulk in the $400 range?"
Political unrest can also hinder mining. Madagascar, which became one of the most important sapphire sources in the world with the discovery of a huge series of deposits in the mid-'90s, experienced a conflict two years ago that brought mining to a halt. "In 2002, big changes were happening in Madagascar," says Tom Cushman of Allerton Cushman Co., a dealer with many years' experience in Madagascar. "There was a civil war, and the country had two presidents for six months. The old dictator put an embargo on all things up and down the highway to the port. Fuel prices hit $26 a gallon. Air France, which backed the old dictator, banned all flights. Nothing was coming in or going out. There was no one at the mines, and no buyers in the country. But since the new president came in July 2002, things stabilized."
Market Pressures Aside from the logistics of mining, one of the biggest problems for gem miners is a shift in demand in the marketplace. Starting in the late 1990s and continuing into this decade, demand for high-quality gems has been increasing. The pressure on supply has only increased in the past two years as large gemstones have come into style.
"I don't attribute [the shortage in large sizes] to less larger rough [coming out of the mines], but rather greater demand for what has always been a rare product," says Eric Braunwart, president of Columbia Gem House, Vancouver, Washington. "Larger rough may be what the individual cutters are buying. If so, the shortage would be caused by greatly increased demand and not less actual material. We're constantly telling our manufacturers to be more realistic in the volumes they request. Large orders for bigger sizes are pushing prices up, not bringing them down because of volume."
American dealers are competing with dealers all over the world for the best gemstones — dealers who are often willing to pay a premium to get what they want. A prime example that American gem cutters cite are the German cutting and wholesaling firms of Idar-Oberstein, known internationally for dealing in the finest grades of gemstones.
Steve Ulatowski, president of New Era Gems, recalls that on his latest buying trip to Tanzania, both Thai and German dealers were bidding up the price of the most vibrant goods. "I made a deal on some spinel, and the next day I came back to complete the transaction, but the miners had sold the parcels to some German cutters for double the price. Four years ago, it was easy to buy rough, but the Germans are willing to pay prices the American cutters cannot afford."
Other dealers see the same trend with different gemstones. "The Germans are paying $40 a gram for pink tourmaline when it used to be one-sixth of that price," says Nemeth. "Two- to five-gram pieces are upwards of $200 a gram."
The problem with demand that's focused on top-quality gemstones is that the best gems are only a tiny percentage of what's mined, and sometimes a mine will go for long periods without producing any fine material at all. No matter what is coming out of the ground, the miner's expenses are the same. If nobody is using the medium- or commercial-quality stones, the miner faces a real financial quandary — and that's exactly what's happening, say dealers
Austin tells of a friend who mines amethyst in Brazil and is thinking of closing his mine because he cannot market all of his production. "He can sell the very top-end material, but not the commercial- and mid-grade material. Now this, he believes, is an indication of the economy. The average buyer is not purchasing the ÔWal-Mart' jewelry, so there is less demand for the low- to mid-grade material."
"The low-end market [for gemstones] has dried up, and there's a cascade effect," agrees Kaufman. "If the miners aren't selling enough of the bread and butter, then they aren't able to mine, and that small percentage of top quality is nothing."
So with demand for the best gemstones already at a fever pitch, some miners are stopping work because they can't pay the bills, adding to the supply crunch. The result is a steady increase in prices.
One of the biggest increases has been in pink sapphire, which dealers say is going for two to three times what it did just a couple of years ago. Another major price hike has been in tanzanite, where rough prices have been quoted at $700 to $800 a gram.
Kaufman says high-end tanzanite is scarce: "They're asking huge amounts for it or holding on to it. Instead of $300 a carat, it's $450 for the same goods. Either you come down on your margins, or your customers pay the difference."
To remain competitive, many cutters and dealers say they stock up. "I've always felt at the mercy of a hole in the ground," describes Avery. "So, I act like a squirrel and hoard all I can and live off my stock during difficult times. I've developed several credit lines to work with when I need it."
And when supply is down for one gem, cutters promote another. "If I'm short on pink, I push red or blue-green," says Kaufman.
But without increased supplies of rough hitting the market, it is only a matter of time before prices increase across the board.
"To survive, you must keep a good inventory, and unfortunately you must raise prices," says Ulatowski. "We've been spoiled by cheap facet rough. I don't think people realize how lucky they are to have rough, even in gems like blue topaz, amethyst, and citrine. People in the industry are going to have to start understanding and accepting that if they want facet-grade rough, they will have to pay extra for it. Once these higher prices are accepted on the market, mining activities will increase."
In addition to the ebb and flow of gems from the mines, wholesalers will have to contend with the changing nature of the market.
"The world is getting smaller," Austin observes. "Gem miners in the past sat at the mines and waited for runners or buyers to come to them or to the nearby villages. Today, many of these same miners or their heirs simply jump on an airplane and fly to the cutting centers and sell their production. They get a much better price having cut out one, two, or three middlemen."
Miners are becoming more educated and aware of global business practices rather than living hand-to-mouth, believes Austin. "The miners of tourmaline in Brazil have become much more refined and business oriented. [More and more] companies and individuals are not only mining rough, they're bringing it directly to the market — cutting the rough and selling finished stones, even making jewelry. The day of the Indiana Jones rough buyer/seller may be ending. It's becoming very difficult to take a handful of money to Africa or South America and double or triple it buying gem rough and selling it in the United States or the cutting centers. More operations are becoming integrated."
Braunwart believes the future of the trade lies in strategic alliances, especially with the people at the source. "If you build the right bridges with your suppliers, they will come to you first. Alliances between miners, suppliers, manufacturers, and retailers will be the norm."
To that end, alliances between the industry and government agencies are bringing about improvements in producing countries. The Tanzanian government recently established an Export Processing Zone in Arusha that it intends to develop into a large mining, cutting, jewelry manufacturing, and trading center. It also is looking to simplify and lower taxes on rough gem goods to entice buyers and investors. Madagascar is moving in a similar direction. As part of a major undertaking to professionalize its trade, a new gemological institute will be established to provide gemology and lapidary arts education, and a research laboratory for certification. The project also calls for the creation of an export exchange and tracking system.
"If we can raise the level of professionalism, the market will be in the producing countries, instead of all the good material being exported to Asia and then sold into the world market," says Cushman. "What that will do for the world as a whole remains to be seen. Probably the rising tide will float all boats and everybody will make more money."
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