Pipeline Congested, De Beers Says

The diamond industry is suffering from “indigestion” from too many goods in the pipeline, De Beers managing director Gareth Penny noted in a conference call with analysts.

Penny’s remarks came as De Beers announced disappointing sales results. Its first-half sales were $3.25 billion, a marginal increase from last year’s $3.22 billion. The second half will also likely be soft, it said.

The company said the disappointing results were due to “higher interest rates, higher gold and platinum prices, reduced margins across the distribution pipeline, and the increasing need to manage polished inventory levels.”

One of the most interesting things about these sales results is how they’ve been affected by the Diamond Trading Company’s shift in policy. Under European Commission–approved contracts with the DTC, sightholders have the right to decline their allocations (unlike the old system, which was, for all intents and purposes, “take it or leave it”). Market sources say that, for the last couple of sights, many clients have left their allocations “on the table,” negatively affecting the DTC’s sales results.

De Beers called retail demand robust, noting that worldwide sales of diamond jewelry are growing 3 to 4 percent in the first half, with strong demand expected in the second half.

Other highlights of the analyst call:

  • De Beers said rough prices went up an average of 3.3 percent in the first half, but there will not likely be price increases in the second half. It also said that from now on, it will announce price changes on a six-month basis. De Beers’ policy on price announcements has been a constantly shifting one; for a while, officials said they weren’t going to announce them at all, but sightholders apparently preferred the announcements because it helped them pass increases on to their customers. Now it seems they will be made twice-yearly.

  • When asked about the movie Blood Diamond, De Beers chairman Nicky Oppenheimer sounded surprisingly sanguine, especially considering that his company is spending $15 million to counter its effects. “It will be an adventure movie,” he said. “We don’t see it as a threat and will be interested in seeing what the movie looks like when it comes out.”

  • Penny said the company is now “pleased with the performance” of its retail division, De Beers LV, and that its results “are going in the right direction.” He said it should have 20 stores by the end of the year. One of the places in which it hopes to open a store is Las Vegas.

  • Oppenheimer dismissed rumors that Botswana was going to sell its stake in De Beers, quoting officials there as saying there were no plans to do so. “The returns we have had as shareholders have been extraordinarily good,” he said.

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