The new millennium may see a shake up in the diamond industry.
De Beers and the diamond industry worldwide have been synonymous. The conglomerate which controls 70 per cent of the market of roughs through the central selling organisation (CSO) rules the roost in the diamond industry.CSO sales are the barometer of the diamond industry and reflect the state of the industry. When the diamond industry was in dire straits during 1998, its worst crisis since 1982, CSO sales fell by 28 per cent to $3.3 billion. However, of late there are rumours that things are about to change in the world of diamonds. De Beers is said to have appointed an outside agency to look at operations, something unheard and unthought of in the past. The consultant appears to have already made some observations, the foremost being that the `single-channel-system’ of the CSO has run its course. So, will De Beers release the 60-odd years stranglehold on the diamond industry? Can the leopard change its spots?
Recent pronouncements made by top official at De Beers indicate that the conglomerate is indeed having a re-look at its affairs. Even though the final decision is yet to be known, recent statements provide some indication of the things being contemplated.
Earlier in the year, the CSO is said to have started to experiment with providing more flexible choices to customers. The experiment focuses on large sightholders, probably about ten worldwide. De Beers managing director, Gary Ralfe, has been recently quoted as, When I talk about coming close to our customers, instead of just selling diamonds to our clients, I am talking about the sightholder, particularly our larger sightholders. Instead of just saying, `Well that is it’, we are actually seeing how we will be able to help them in their programmes; how we can commit ourselves which we already do. I tell our clients to supply certain boxes of the same consistent mark-up at the same price for a defined period of time. We do it for five sights for a number of the major sightholders and we would like to take that further. It could also help in advertising, promotion of diamonds that they will be producing, and really seeing whether through that way, we can simulate demand, particularly in the difficult areasdown the pipeline.
The system Gary Ralfe refers to is the PPP, which stands for plant production proforma. Herein, sightholders who generally take about $4 million worth of goods a sight, were being offered at the beginning of the year an opportunity to receive supply commitments from the CSO on assortment and price for large volumes of those articles. This allows them the benefit of making commitments to the polished ware buyers.
Moreover, these sightholders were not required to stock goods at their warehouses as goods were readily available from the CSO. After initial hesitancy, the sightholders seem to have accepted this offer, for it also indicates that they are long-term partners with the conglomerate and thus belong to an exalted exclusive club.
More recently there was a rather startling statement made by CSO director, Gareth Penny, in Capetown. He is said to have stated that De Beers will focus on increasing global diamond demand rather than relying on short-term supply constraints to bring balance to the market. De Beers, through its London-based CSO marketing arm, controls 70 per cent market by buying back supplies from even rival producers and using stocks to stabilise price. The company according to Penny, has suffered “a decade of unacceptable under performance” marked by flat sales growth, year-on-year increases resulting in stockpile of $4.5 billion worth of goods and a share price that has underperformed the Dow over the past ten years.
With CSO sales estimated at $5.2 billion for 1999 as compared to the 11-year low of $3.3 billion during 1998, the diamond giant is not enjoying the benefits of leading the industry. Therein lies the urgent need for a strategic review of De Beers’ operation and corporate structure. However, the billion dollar question is: how to create incremental demand for diamonds. A start has been made by way of branding of diamonds and the millennium media blitzkrieg.
In spite of the obvious contradiction in the two schools of views, while one is looking at a more exclusive club and the other looking at the demand side of things, one thing is certain. There are winds of change blowing at 17, Charterhouse Street, London.
The background
But how did things come to such an impasse? What propelled a change in the CSO outlook?
Quite often in the past, there was this general grouse that De Beers did not allow equitable profitability to seep through to all concerned in the diamond industry in times of a crisis.
This had even caused the World Federation of Diamond Bourses to pass two resolutions in September 1997 that the trade was in a crisis and that the CSO had failed the industry.
The grouse of the producing centres as well as the manufacturing centres was the same. Probably, that was the reason why Argyle left the CSO fold during 1996. The trade also seemed to perceive that while De Beers seemed to make profits, it was at the cost of others. CSO appeared to be getting the brickbats but at the same time it managed to stay profitable and satisfy its shareholders.
However, since late 1997, CSO went for fewer sights and increased its stockpile. It even asked the producers, with whom it has contracts for roughs, to hold 26 per cent of the output at the producer’s end. This, to some extent, released the pressure on inventory stocks at the cutting and polishing centres.
As 1998 turned out to be a nightmare for the industry, the CSO action got some accolades from friends and foes alike. Cutting centres like India benefited hugely from this, and even Argyle was able to reap the rewards.
Whatever may be the merits and demerits of stocking roughs, the impact of CSO policies on De Beers’ bottomline was clearly visible in the its annual report for 1998.
The 28 per cent cut in CSO sales was reflected in a 40 per cent reduction in the company’s own earnings from $619 million in 1997 to $374 million and a 50 per cent drop in dollar terms in combined total net earnings, which includes retained earnings of associates. De Beers’ diamond stocks increased by $377 million to $4,816 million.De Beers had to reduce its dividend by 22 per cent from US cents 102.8 to 80.2 per linked unit.Moreover, even as CSO sales improved by 43 per cent to $2,447 million in the first half of 1999, as compared to the same period during 1998, profits have declined by 17 per cent for the first six months ended June 30 to $208 million. This was mainly on account of the dispute with the South African Government over export of diamonds, resolved only last month. This forced De Beers to sell from mines in Botswana and other countries, earning less profit on each diamond.
Coming to the branding of diamonds, it seems to have hit a stumbling block. It is now feared that selling branded diamonds may run foul of the European competition law. Nick Oppenheimer has reportedly said that the European Commission may thwart De Beers’ plans to sell diamonds laser-branded with its name and an ID number. This could seriously jeopardise De Beers’ plans to sell its gems at a premium to other suppliers.
Positives
However, it was not all bad news for De Beers. In the second half of 1998, the CSO signed a new three year contract with the Russians. More importantly, this time around the Russians appeared willing to stick to it. The last year or so did not see much of the infamous leakage of Russian stuff into Antwerp.
And even though BHP came in on stream with Canada’s Ekati mines, the CSO managed to bag the marketing arrangement with BHP, albeit only for 35 per cent of the roughs produced. This was better than having the entire production directly hitting the markets.
Then there was also news that though Argyle had done very well for itself during 1998, its output would fall by at least 19 per cent during 1999 when Argyle would take to expanding its open pit and even exploring the possibility of an underground pit. Once again it would mean less concern about price wars at the lower end of cheap diamonds.
In the middle of the year was the unexpected breather for De Beers when the three member commission of enquiry set up in South Africa was wound up. It was generally expected that the enquiry commission’s report would have been detrimental to De Beers.
US the sole hope
On the demand side, the crisis and contraction in demand from the Far East and South East Asia made 1998 a forgettable year to say the least. However, a buoyant US accounted for 46 per cent of the world demand for diamonds. Thereby registering a 9 per cent increase in retail sales from the US. With Europe contributing a 4 per cent growth, it partially offset the decline in Japan and South East Asia. In comparison, 1999 has been much better.
Game plan
Having proved to the diamond world the virtues of the single channel system of marketing, De Beers is all set to unleash its plan for the remainder of 1999 and its march to the next millennium. In his speech to shareholders, Nicky Oppenheimer said, ... But, ooking into the future, we will continue to be guided by the core principles and interests which have made De Beers the name that has stood for diamonds throughout the 20th century.
Realising the need for newer markets, De Beers has now targeted both China and India as markets which can consume diamonds. De Beers expects the Indian market to be a more receptive market. Probably, De Beers also realises that if Argyle is not on the scene, the studded jewellery market may shrink. Hence, the attempt to tap emerging markets.
Fresh challenges
Beset with fresh challenges, like a website offering 20,000 carats of rough diamonds at a discount, De Beers moves ahead secure in the knowledge that it controls 70 per cent of the roughs marketed in global diamond markets. Moreover, even as it grapples with banning of Angolan roughs due to pressures from the UN, the conglomerate has good news from Botswana (within the CSO fold), which is now the largest producer of diamonds in value terms. It is likely to outstrip Australia and Russia together in value terms. It has different strategies for different situations, which includes speaking diversely on the same topic to different audiences. Thus, even though De Beers toys with the idea of disbanding the CSO or enter into the demand side of the diamond equation, it will continue to remain the most influential player in the diamond industry. In a way, even without the CSO, De Beers will continue to dominate.