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Gold and the Jewellery Supply Chain A Context Philip Olden: 18th May 2010 © Philip Olden 2010 The revitalisation of gold jewellery demand Gold Jewellery Demand (US$m) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2000 2001 Others 2002 India 2003 USA 2004 2005 Middle East 2006 2007 Turkey 2008 2009 Gtr China Source: GFMS, WGC © Philip Olden 2010 Market profiles, gold and diamond jewellery 8% 2% 22% RoW India 18% USA 2% 4% 12% 18% 7% 11% M East Japan 1% Gtr China 23% 8% 40% Turkey Italy 16% 9% Gold Demand 2008: $60 billion at av. gold price Diamond Demand 2008: $14 billion at rough prices Source: GFMS, WGC, IDEX, Tacy © Philip Olden 2010 Gold supply chain is not linear 41% of supply “Scrap” Supply Consumer Retail Import/ Wholesale Manufacture Alloying Bullion bank Refining Mine Supply 59% of supply “Scrap” supply is a major component and makes the supply chain cyclical. “Scrap” gold: “recycled”, “pre-owned”, “laundered”? © Philip Olden 2010 Gold supply chain is not linear 41% of supply “Scrap” Supply Gold can be owned and supplied by multiple participants in the supply chain. This also makes the supply chain non-linear. “Unallocated” bullion can be sold, leased, loaned, swapped etc. © Philip Olden 2010 Consumer Retail Import/ Wholesale Manufacture Alloying Bullion bank Refining Mine Supply 59% of supply “Unallocated” and “allocated” gold Unallocated gold: - gold as money not individually identified and owned can be leased, loaned, swapped by bullion bank stored and insured by bullion bank the simplest and cheapest way of owning gold not traceable (yet?) Allocated gold: - gold as a product - individually identified and owned (bar serial numbers) - bullion bank cannot “deal” in the gold - separately stored and insured at cost to owner - used where integrity of inventory is essential (e.g. ETFs) - traceable © Philip Olden 2010 All gold jewellery is bought by weight 1 oz, branded “fixed price” gold jewellery (c. ⅓ of total) Refiner Duties/ margin freight Cost of Production Mine margin $600 – $700 Making charge Bullion bank buy/sell spread W/S margin $1,000 $1,200 Spot price Retailer margin $1,400 $1,800- $2,000 + 1 oz, unbranded “commoditised” gold jewellery (c. ⅔ of total) Refiner margin Cost of Production Mine margin $600 – $700 © Philip Olden 2010 Duties/ freight Bullion bank buy/sell spread Making charge/ retailer margin $1,000 $1,200 -$1,400 Spot price Perceived obstacles to gold chain of custody • Gold as money • Tight margins • Large “above ground stock” and “scrap” supply • Non-linear supply chain • Over-capacity in refining • Lack of will • Existing gold chains of custody are insignificant © Philip Olden 2010 Opportunities to create a gold chain of custody • Mine supply is traceable • Establish dedicated/allocated refining • Integration of mining and refining • Use of allocated gold accounts • Involve bullion banks in RJC process • Collaboration of RJC and ICMM membership • Impact of “Freetrade/Fairmined” gold • Focus on “branded” fixed price market in US/EU • Create reputational and financial value © Philip Olden 2010 Reputational risk of “dirty” gold • It’s about mining practices • Gold is a consumer product • NGOs influence public opinion and media in US/EU • Gold sector is fragmented and lacks leadership • “No Dirty Gold” Golden Rules unenforceable? © Philip Olden 2010 The jewellery industry’s reputation • Damaged by blood/conflict diamonds, dirty gold - High profile with NGOs and media - But little impact on sales • Strong alignment by industry leaders to address reputational issues, despite fragmentation • Industry remains very defensive • Fine jewellery losing market share • Losing relevance and desirability with younger consumers © Philip Olden 2010 Trust: the new opportunity? • Consumers have lost trust in businesses/companies - 2009 in US was all-time low of 38% • 91% bought products from companies they trust • 77% refused to buy from distrusted companies • 55% paid a premium price from a trusted company Source: Edelman Trust Barometer 2009, 2010 © Philip Olden 2010 Trust will change jewellery marketing 2006 2010 Quality products & services 53% Attentive to customer needs 47% Financial performance 42% 83% Company I can trust 83% High quality products & services Fair pricing 38% Communicates frequently Well known brand 37% Treats employees well Employee relations 35% Socially responsible 33% 79% 75% 72% Good corporate citizen 64% Prices fairly 58% Visible CEO 23% Innovator 48% Dialogue with stakeholders 23% Top leadership 47% Employee/CEO communication 12% Q: What shapes your trust in a company? © Philip Olden 2010 Transparent and honest practices Financial returns 45% Q: How important are these factors to corporate reputation? Source: Edelman Trust Barometer 2010 Trust: the new opportunity? • Trust is now; - a major market differentiator - a source of reputational value - a source of financial value and price premium © Philip Olden 2010 We can create competitive advantage • The best responsible sourcing guidelines in the premium/luxury market • Leading players in industry driving change • Be more positive, less defensive • Create reputational and financial value • Improve market share and consumer demand • Chain of custody is important to enable this • Must connect with consumers at retail level © Philip Olden 2010 We need a chain of custody in gold • Gold is largest and broadest category • Consumers will demand it, esp. in US and Europe • It is possible, esp. in high margin US/EU markets • Requires the will to change • Needs to be significant to be credible • Enables a more positive competitive position • Will drive reputational and financial value © Philip Olden 2010 Gold and the Jewellery Supply Chain A Context Philip Olden: 18th May 2010