In a 1998 interview, Nicky Oppenheimer told JCK: "In good times, people often say, ‘We don’t need De Beers,’ and it’s true; in good times, you don’t. It’s in bad times that people recognize the benefit of the CSO [Central Selling Organisation]."
The past year fits anyone’s definition of "bad times." It saw the steepest drop in diamond demand in more than 50 years. It saw banks refusing to lend, business come to a standstill, and a jaw-dropping string of retailer and manufacturer bankruptcies.
And the CSO is just a memory.
De Beers, of course, is still around. But it’s a remade company that is forbidden from cartel-like activities-such as stockpiling diamond production or buying up "distressed" goods-by agreement with the European Union. And the fact is, even if it tried to manage the diamond market, it likely wouldn’t be able to. Today, De Beers controls 40 percent of the market, a far cry from the 80 percent to 90 percent it did when Oppenheimer made the statement above. It now competes with other players in the rough market, which use a variety of sales mechanisms including BHP’s tenders and systems that resemble sights.
How did the diamond industry manage through the economic crisis? Not always well; the market is still reeling and will feel the pinch of this downturn for a long time. But at press time, there are tentative signs that the U.S. economy is in recovery mode, and a tinge of optimism is in the air. De Beers’ sights are up-recent ones were triple those at the beginning of the year-and rough prices are increasing.
Here are the main lessons from this downturn:
Cutting production arguably has the same effect as stockpiling. As previously mentioned, De Beers can no longer stockpile goods. So it made what might be a better business move: It stopped producing diamonds.
De Beers broker Mark Boston, chairman of H Goldie, in London, notes that stopping production is a "similar mechanism" to stockpiling "but perhaps more effective, and more transparent. When they tried to manipulate the market in the past it was actually not very easy. It was pretty frustrating for them."
De Beers Group director of external and corporate affairs Stephen Lussier says the production halt was a matter of simple economics. "When there was very little appetite for new rough diamonds, we didn’t want to produce more than our clients needed, because then you would be deflating the price," he explains.
The company’s mines in Botswana, Canada, and Namibia all went on "extended production holidays." There was a precedent for this: During the Great Depression, De Beers closed two of its mines for two years. In all, the company’s output fell a staggering 90 percent in the first quarter of this year, allowing second-place miner Alrosa, which produced and stockpiled diamonds through the crisis, to claim (temporarily) the mantle of "world’s largest diamond producer."
At press time, the mines are back in production. Even so, De Beers likely will produce only 40 percent of its standard output this year.
De Beers was not alone. Many mines, including the main ones in Canada, either halted or cut production in response to the crisis. Other parts of the pipeline also tried to put on the brakes. India’s Gem and Jewellery Promotion Council instituted a voluntary one-month halt on imports. But producers objected and it wasn’t extended.
Price volatility is now a fact of life in the diamond industry. Once the magnitude of the financial crisis became apparent, miner BHP spooked the market when prices at its tender were a reported 30 percent to 40 percent less than those charged by De Beers. Charles Wyndham noted on his Web site that prices at the Lesotho tender, which his company administers, were down a similar amount. Polished prices were down a third to a half for certain items, although it was difficult to get accurate price information since there was so little activity in the market.
All of which left De Beers in a quandary. It couldn’t sell its diamonds for 30 percent more than competitors, because no one would buy them. But it didn’t want to shake the market or hurt consumer perception of diamond value at the same time it was launching an ad campaign trumpeting the "value" concept.
In the end, De Beers did lower prices, but to a limited extent. "DTC prices have come down from their peaks," says Lussier. "But we did not want to see deep discounts. And the reality is that diamond prices didn’t decline that much. It was a very short-term thing."
Lussier stresses that, with demand growing in emerging markets like China and India, and with few new mines coming on stream, the long-range outlook is for diamond prices to rise. Still, what this crisis drives home is that diamond prices now fluctuate, like the prices of any other commodity. The tenders, in particular, are widely watched and have an impact on rough prices.
The "old" De Beers is dead and gone. Although many diamond companies have suffered during this recession, few thought De Beers would be one of them. But as one veteran De Beers watcher put it, the company is now "in the business of self-preservation, like everyone else." For the first time, the company seemed financially stressed. Its first sight of 2009 came in at around $100 million, a stunning $500 million drop from the year before. Other sights had similar numbers.
The company reacted to this downturn like so many others-by drastically slashing expenses. It laid off 25 percent of its staff in London, and new ventures, like its Washington corporate affairs office, were scuttled. Even so, De Beers had to borrow $800 million (interest free) from its trio of owners to pay off its debt, and it recently renegotiated its loan covenants.
De Beers also made unprecedented moves to boost sales. It talked openly of selling diamonds to non-sightholders and investment funds, but in the end those plans went nowhere. There were no "significant" sales to investors, Lussier admits, and the plan to sell to non-sightholders raised such a fuss it was quickly dropped. But De Beers did institute one new mechanism that was more successful: "Second-week sights," which allowed clients to get a crack at goods other companies had rejected.
"We wanted to make sure we maximized every available sales opportunity," Lussier explains. "We didn’t want to create demand where it didn’t exist, but we didn’t want to feel we had lost sales. And we did find instances where we created opportunities."
Despite all the talk of the company’s change in stature, it remains an important player in the industry, as evidenced by how much of this article is devoted it.
"De Beers lost the dominant position in the way they once had it, but regardless, people still look to them as a leader," says Boston. "They really can’t escape their history-and perhaps it’s their destiny-of leading the market."
The diamond industry needs a generic marketing mechanism. Problems were compounded by the fact that, for most of 2008 and 2009, virtually no one was doing any significant generic diamond advertising. De Beers, sensing bad times were coming, slashed its marketing budget at the beginning of 2008. It later reversed itself, starting the "Enduring Value" campaign in the fourth quarter of last year and planning a new "big idea" for Christmas 2009.
And yet De Beers has long maintained it can’t shoulder the marketing burden for the entire industry, especially now that it no longer has an endless pile of cash to draw from. At a meeting on the crisis last year, the major players agreed to start an industrywide entity to handle generic marketing. That entity is now called the International Diamond Board (or IDB) and is searching for a chief executive officer. Its budget has been estimated at $70 million to $100 million, a far cry from the $200 million a year De Beers used to spend. But if it works, the IDB may be one of the few positive results to emerge from this recession.