De Beers Holds the Line

In a somewhat surprising development, despite the BHP auction and a drop in prices in last week’s Rapaport list, the DTC held the line on prices at the last sight. Not only were prices not reduced, there were not even major changes to the composition of its sight boxes, early reports say. Instead, the allocations were smaller, the result of less production on the mine end. In this way, the DTC is avoiding the spectre of  “stockpiling” – which in the old days, involved producing diamonds, and then storing them away. Now, it’s simply not producing them. 
 

All this was received positively by the people I spoke to, who viewed as a confidence booster. (It should be noted, also, that DTC’s prices are generally considered lower than other producers’.)

 

The other news to come out of the sight (and a further confidence booster) is that the DTC intends to double its fourth quarter marketing budget here in the U.S. – including, as we have talked about previously, a campaign based around the idea of “enduring value.” (Many think that, if De Beers did reduce prices significantly, that could be seen as contradicting that message.) We should have more on that in the next few days.

 

Along these lines, Dilip Mehta, CEO of Rosy Blue, sent around a thoughtful email last week about the BHP auction and related issues. We have a revised version of it here, which we are reprinting with his kind permission …

 

The results from the BHP auction are a welcome move for a market that could use some oxygen. 

 

BHP looks at the diamond business as a commodity. And so, they make the most in the good times, but suffer the most in times like this. Luckily for the market, they are not the benchmark. I want to remind everyone that when they sold at 15 -20 % above market, that did not set the benchmark. This recent auction has to seen as one trade. The weighted average is way above their level. I am aware that critics will argue that the BHP rough in the secondary market was sold for a small margin. However it should be noted that financial markets were extremely nervous and volatile. It is difficult to sell in thin market with almost no liquidity.

 

For many years all the producers – with perhaps the exception of De Beers – and the entire cutting industry got carried away with price speculation. Some of that speculation did translate into higher retail prices. But mostly, it just added to debt.

Now, with the financial crisis and growing pressure by the banks, rough markets have come to their senses. BHP’s recent sales prices reflects the reality of today.

 

In our humble opinion, rough prices on average were about 10% too expensive above the polished prices over last four years. Therefore the industry did not build meaningful reserves to deal with the challenging times, and bank borrowings remain at a very high level. The recent financial crisis has added fuel to all these fires. 

 

But while these price drops may restore equilibrium, the issue is what media attention they get. News of a drop in diamond prices can only hamper consumer confidence (what is left of it!) Interestingly, the DTC ad campaign for this holiday is built around the idea that diamonds have “lasting value.” Will be spending less if they are negatively impacted with this news? 

 

Ten days ago, analyst Des Kilalea of Royal Bank of Canada predicted rough prices will go down by 20%. He may be right. However, this sent signals to the media that diamond prices fell by 20%. This was picked up by the Chinese news media, among other places. I have requested him to be more specific, and to note that 20% price drop is in the rough, not in the polished. In fact, rough prices are now at a level where they are a sustainable business for the manufacturer. 

 

It will be important that we manage the news carefully. We must put aside our personal differences and work to preserve our future.

 

We cannot allow a disturbance in consumer confidence to result in a meltdown of our assets. Our product did not appreciate like the others and at the same time should not go other way round.

 

Anyone’s loss is everyone’s loss.

 

JCK News Director