De Beers ushers in supply quotas

World diamond giant DB Investments (DBI), formerly De Beers, said on Thursday it had ushered in supply quotas in the face of a sharp downturn in global gem demand, Reuters reported.

The announcement came after DBI reported a 15% drop in first-half headline earnings of $744 million on the back of falling jewelry sales in the key U.S. retail market.

The introduction of quotas meant an about-face for the biggest force in the diamond market, which had originally hoped its new “supplier of choice” initiative would take the diamond market by storm this year.

“The quotas will be retroactively applied from January 1, 2001, but the exact figure or impact will only be known at the end of this year,” DBI spokeswoman Tracey Peterson told Reuters. “Each operation will then decide how to best apply the quota, which may be reviewed according to developments in the market.”

The quotas were being applied to its own mines, which are predominantly in Southern Africa, and to others supplying it with gems such as Russian and Canadian producers.

DBI Managing Director Gary Ralfe told a results presentation that the quotas would be “modest” and “nothing like ten percent” of current supply, Reuters reported.

Supplier of choice was intended to end decades of simply stockpiling gems in an attempt to support diamond prices by teaming up with its major customers to fan demand for its gems rather than restrict supply.

The economic downturn-which has resulted in a major overhang of diamonds in the market-coupled with objections from the European Commission that supplier of choice potentially fell foul of European competition law effectively put that initiative on ice.

Ralfe said that a marked slowdown in economic conditions meant the firm would be unable to meet its original sales target of $4.8 billion worth of diamonds in 2001 though it was still on course to sell over $4 billion.

Sales in the first six months of the year by DBI’s Diamond Trading Company totaled $2.619 billion, down 25.5% from 2000 because of a slowdown in the U.S. retail market, which accounts for more than half of all jewelry sales.

Peter Dupont, mining analyst at Commerzbank in London, said that DBI had produced more profit than the market had been expecting in the first half and that the outlook, though weak, was not any great surprise, Reuters reported.

Anglo American, which owns 45% of DBI, said it expected DBI to contribute profits of around $140 million for the six months ended June 30 but said the outlook remained uncertain, Reuters reported.

DBI said global diamond sales in the first-half of 2001 were 7% from 2000 in dollar terms and that there was a “serious erosion of confidence” in cutting centers, Reuters reported.

A consortium led by Anglo and South Africa’s Oppenheimer family bought out De Beers last May, after shareholders approved the group’s $19 billion bid.

Anglo said DBI had reduced its stake in the world’s biggest gold producer, AngloGold, to less than 1%.

DBI’s disposal of most of its roughly 3% stake in AngloGold follows on from similar selling of its stakes in BHP Billiton and FirstRand in order to focus on its diamond operations. DBI said the disposals had brought in 2.3 billion rand ($284 million).

The need to maximize the firm’s short-term cash flows meant it would delay its mine expansion projects at Snap Lake in Canada and the Premier mine in South Africa, Reuters reported.