Manufacturers have long argued that De Beers’ and other producers’ aggressive pricing policies would hurt the industry in the long term. But now we have seen they have boomeranged in the short term as well.
We should not romanticize the old De Beers, but it was a family business, and the Oppenheimers, like most diamantaires, had a long-term commitment to the industry. That doesn’t seem to be the case for the current team in charge of De Beers—which, for all its diminished stature, is still considered the industry price setter.
For years, sightholders—and the larger industry—took the long view, hanging on through the bad years in order to enjoy the good ones. “People were happy to buy through the bad times,” says one sightholder. “They knew that they would get extra credit.”
But over the last year, sightholders came to the realization that the good times (meaning profits) would not be coming back anytime soon. Last year should have been a decent one for the industry. Instead, it was an unprofitable year for many sightholders and a great one for De Beers. There was no way that could continue.
It hasn’t. Now we’re in 2015, which looks like a bad year for everyone. De Beers at the start of the year said that the market was simply experiencing “indigestion,” which should clear up around March. It is looking more like a raging peptic ulcer, a perfect storm of bad news. Rough remains out of sync with polished, and many key players have taken substantial losses. The Antwerp Diamond Bank has left the business, stranding some companies without financing. At the same time, many companies are highly leveraged, some through questionable activities such as round-tripping.
Demand in China and Hong Kong has dropped, and there is continued weakness in Europe and the Indian domestic markets. The United States is the industry’s shining star, but American retail reports vary wildly. While the market seems steady, it also appears stagnant; demand is highly selective, contributing to the buildup of polished goods.
Perhaps if producers had given buyers a little more oxygen last year, they would have continued to buy during this down period. But if a company doesn’t treat its customers right, at some point they will turn on it, no matter how big it is. That’s what’s happening here. One unhappy sightholder (there is no other kind) recently said to me that he’d manufacture moissanite or synthetic diamonds in a heartbeat. Others are rethinking their traditional aversion to tenders, noting that, while they make planning difficult and also yield high prices, they at least reflect the market and don’t lock clients in to buying unwanted goods.
De Beers’ bluff was called at its July sight: An estimated 60–70 percent of the boxes were refused in some way. Executives used to tell complaining sightholders there were three other companies that would take its place. De Beers’ sales fell 21 percent in the first half, so those three other companies never materialized.
De Beers is now letting sightholders defer as much as 75 percent of their allocations in the upcoming sight without consequences, bowing to the inevitable. There are also rumors it will lower prices, which has its own perils, as it could hurt polished prices. The situation is so serious that some feel the most sensible policy would be for De Beers to cancel the August allocation altogether, as Russian producer Alrosa is said to be considering. (Alrosa did not return requests for comment.)
Of course, even if De Beers wanted to take drastic action to help the industry—and that is not clear—it, too, has limited options. Parent company Anglo American is having a crisis of its own; it just cut 50,000 jobs. De Beers has been one of its better-performing divisions. Executives likely feel enormous pressure to keep driving sales and profits. Some also believe clients have a history of crying wolf regarding profits, complaining that they weren’t making money while they bought private jets. For its new sales period, De Beers is requiring that clients submit audited statements. It says this is to attract bankers. But it may also have the added benefit of letting executives peer inside clients’ books to see how profitable they really are—or aren’t.
Regardless, recent events clearly show that sightholders are not bluffing now, this is a real crisis. The scariest scenario is that the defaults in India continue, leading to a domino effect that infects more players. The current situation is as unsettling as the crisis of 2008 and 2009. However, that was a world financial collapse the industry had no control over. The trade has gotten itself into this mess and now must figure a way out.
“When someone is saying they are losing confidence in the business, it’s not because there isn’t demand,” says Guy Harari, president of BlueDax, an online rough broker. “It’s because they don’t think that they will ever make money. Let’s say there is more demand for the goods. The manufacturers will then have to pay more for the rough. They are squeezed on one side by the producers and on the other side by the retailers and the consumers. It is a catch-22. It is not sustainable.
“To paraphrase Einstein, you can’t solve a problem with the same mindset that caused the problem. The industry has to think differently. The current way is not working.”
