Hit the Reset Button

When Steve Ballmer of Microsoft talks about “reset” in the software business, a term used by others in TV interviews, we know that business managers are seeing far more than a short-term recession. They expect the level of business to be distinctly lower than it has been for years and plan to scale back proportionately. That thinking is evident in the layoffs, plant closings, store closings, and abandonment of expansion plans that we see all around us.

The jewelry industry, tiny in comparison to autos or high tech, is right there with the rest. We’re a very entrepreneurial industry that doesn’t react the same way as corporate entities. Where there are public companies or large corporate organizations—mostly on the retail side—we see comparable actions. People are laid off and every expense is scrutinized. Fair enough. There has never been a recession, mild or not, in which companies have not adapted to a softer market.

One case that’s notably different is in the diamond business. De Beers has offered exit packages to its employees to reduce the head count in London by 25 percent. Besides the severity of the cut, it suggests more than just a concerted effort to “reset” costs to reflect declining revenue (we have just seen sights in the $100 million range). There are bound to be some significant losses among the most senior and experienced personnel, especially those who were instrumental in developing the Supplier of Choice and Forevermark programs. By its own statements, De Beers will review all plans and budgets in the course of this downsizing.

Two other De Beers announcements illustrate the company’s concern about the depth of the problems. They proposed, and then withdrew, a plan to offer rough in the open market once the needs of sightholders were met. I am sure they realized that if their own clients were not buying, either for lack of sales or bank credit (recent sights consummated by BHP and Rio Tinto have also been a small fraction of normal), then there is little prospect of significant sales anyway.

More important were the implications of the move. It suggests the undoing of the decades-old principal of price support. Ernest Oppenheimer understood that in building the De Beers monopoly over 80 years ago, the supply of diamonds must be kept in balance with demand. In the 1930s, that policy very nearly bankrupted the cartel, which was saved only by the highly profitable expansion into industrial diamonds, which became essential to the mechanization of the world’s industries.

This time, De Beers cannot control the levers. Diamond sourcing is now a multipolar world, and De Beers fully controls less than 40 percent of it. Producing countries seek maximum returns and have not readily played a role in De Beers’ efforts at image marketing. And bank credit is not available to continue stockpiling. Banks have pulled back as they see key players under great pressure because of plummeting sales, and, more significantly, they recognize that the old price protection is absent.

We then hear that David Lamb, who led the development of the Forevermark concept, is departing, just as the program opens in Asia. At the same time, De Beers is seeking to organize all the producers to cooperate on a diamond marketing program. That may have a chance, at a time when all of them are suffering serious sales declines.

Thus, we can reasonably assume that De Beers is rethinking everything, trying, like everyone else, to find its way.

Price volatility was assured years ago when De Beers either backed off from buying up worldwide production (the case with the Argyle mine) or was forced to do so (the EU required all purchases from Russia to end this year—what timing!). For a number of years it did not matter much, as the world roared ahead with its binge buying.

Now the tune has changed. Is it all bad? Not necessarily. For one thing, the diamond price increases seen over the last few years were fed by misplaced belief that they can only go up. For another, as mining aligns with demand, prices will stabilize and, I believe, inevitably rise as supply, even at full throttle, falls behind demand in years to come.

While that does not give us solace now, we do see that the public does not fret over all these upstream factors. People continue to buy, even as we hit that reset button.

benjanow@gmail.com