De Beers Big Game Safari on Botswana II
About a year ago, in December 2013, I wrote an article about how although it was not yet known, De Beers was beginning its way back to Africa and starting down a road to self destruction. The company was known in the past as a master of brand building techniques and PR tricks, like their ‘Diamonds are Forever’ campaign, or the concept of the ‘Kimberley certificate’, making De Beers' diamonds appear as the most kosher ones in the market. They were then looking for a really attractive idea to promote the move from London’s West End to Gaborone, Botswana. This move back to Africa was the first shot in their leg.
I am not a sage who possesses the skills to look deep into my mug of coffee and from the grains remaining read the future. Rather, I pay attention to the news and read all the information I can about the diamond industry. Just two weeks ago Alrosa together with president Putin, signed a two billion dollar deal in direct sales of rough diamonds with the Indian diamond industry. The first effect we saw of that business transaction was the second shot in De Beers leg. A substantial number of sight holders refused goods at a De Beers sight in Gaborone. As it was a $600 million dollar sight and most of the goods go to India, I figure the refusal was at least a third of the entire allocation. The lofty days when De Beers fetched each sight holder in a chauffeured Rolls Royce from Heathrow, followed by a take-it or leave-it presentation of your allocation are long forgotten. Once refused, you were history. De Beers weren't granting second chance back then. The only thing reminiscent of De Beers arrogance back then was them treating the sight holders like some people treat their servants.
Polished diamond prices have suffered all year long. As a supplementary action, De Beers raised the prices of their rough on an average of 7% this year. Their decision put all sight holders at a loss before even looking at the goods. De Beers falsely assumed that higher rough prices would result in higher polished prices, but on the contrary, what we saw was exactly the opposite. When big companies begin losing money, they lower their prices just to survive and maintain liquidity.
De Beers loudly declared that they believe the fundamentals of the diamond business are solid and the trend is moving upward, not that we needed to hear it from them just to see what is happening in the market. Many believed that the miners and retailers would have not been affected by these price fluctuations. Rather, it would've have been the diamond polishers, stuck in the middle, who feel the squeeze. Only, US retail sales have been declining. That doesn't mean to say that consumption is down, but it definitely was changed dramatically. 85% of our Internet sales today are finished jewelry pieces as opposed to loose diamonds. Amazingly, the number of sales are up 50% compared to where we were a year ago, only the sizes of the sales tickets are substantially smaller. Brokers and diamond dealers are rapidly losing their platform. It won't be too long before both these professional positions are wiped out entirely. Diamond dealers and brokers are dealing with goods that are already listed online on diamond lists like Rapnet.
The short summary of my view: If you destroy client business, you are essentially chopping down the tree you sit on. One of my friends, a major De Beers sight holder, said to me that "no one else is able to give an assortment of goods so consistently like De Beers." The irony of the consistency, however, is the price. When a stone starts to roll down the hill one doesn't know ahead of time if it will trigger an avalanche like when the Russians entered the Indian rough diamond market with a 2.1 billion starting sale. Botswana, Namibia, Angola and Zimbabwe will follow them. Together, they will then give an afternoon in the colonial tea room of the Taj Mahal Hotel and the De Beers white man will serve tea tea with cucumber sandwiches.
Leibish Polnauer, President and Founder of Leibish & Co. Fancy Color Diamonds