In early February 2009, it was reported that the biggest producers of rough diamonds - De Beers, ALROSA, ВНР Billiton, Rio Tinto and Harry Winston Diamond Corp. - intended to go into a joint marketing project sloganned as “Generic Diamond Marketing.” So far no significant particularities of this initiative have been disclosed by its participants and it was announced only that a managing committee (SteerCom) has been set up and McKinsey & Company, a consulting agency, has been outsourced to develop a facility to finance the project.
Marketing is an elastic notion and SteerCom’s business may be boiled down to diamond advertising campaigns or it may underlie consultations of pace-setting diamond producers targeted at bringing the diamond market back to its “canonical form” – the monopolistic regulation of prices for rough diamonds. In this case the five largest diamond companies will play the role of a “collective De Beers” or, if you like, a “diamond OPEC.” This is a radical solution and all the other options by comparison look as more or less apposite stopgaps leading only to short-lived market galvanization and incapable of providing for its stable development in the course of several future decades.
Indeed, any diamond advertising campaign run by whatever countries and upheld by whatever expenses cannot exclude the idea of ever growing value of diamonds from its core. Any motivation for buying a diamond – as a symbol of national status, or as a gift of love or, the more so, as an investment instrument – simply excludes the possibility of its long-term and visible devaluation. The existence of an ever cheaper diamond market is probably possible within a very short period of time on condition there are very cost-consuming advertising efforts underway aimed to convince the consumer that diamond prices will soon be reversed. Such a practice appears highly dangerous since to deceive the expectations formed in this way would mean a slashing destruction of the diamond market followed by unpredictable consequences. However, the history of the “diamond pipeline” does not know any other tool of guaranteed diamond price growth, but the monopoly on rough diamonds. It would be incorrect to say that the abandonment of monopolistic regulation of the diamond market was the only reason of its now deplorable state, but at the same time it is evident that “Supplier of Choice” is not the kind of strategy which will permit to push off the current bottom in a secure way.
The financial state of each of the companies making up the “Big Diamond Five” is currently far from being ideal. De Beers resorts to massive layoffs and cuts down production; market capitalization of Rio Tinto and BHP Billiton during the last year slumped more than 50% and the expected merger between these mining giants did not occur; the companies announced a significant retrenchment of their personnel engaged in diamond mining and said their output of rough diamonds would be decreased. The construction of mines in the Diavik diamond field (jointly owned by Harry Winston Diamond Corp. and Rio Tinto) will be postponed for a long time and personnel there will be reduced. So far ALROSA may be considered a happy exception from this macabre list since Gohran, a state repository, is buying the company’s rough diamonds for money taken from the national budget. The Russian government’s paternalist policy allows this company to maintain its output avoiding sweeping layoffs and continue capital-intensive construction of underground mines. However, foreign currency reserves of Russia are not endless and they are being decreased at a high rate: according to expert estimates, by the end of 2009 they will be more than halved going down from $427.1 billion to $201.1 billion. There is a great probability that Russian diamond mining companies will be backed by the national budget in 2009, but any further outlook is very turbid.
Demand for diamonds has already weakened to a great extent and, alas, is still shrinking in the United States, Japan and the European Community. The reason is unbiased: the purchasing capacity of the population in the major diamond consuming countries has drastically declined due to the global economic crisis promising to take quite a long time – by the most optimistic estimates, the world’s economy will likely to rebound not earlier than 2011. On the whole, according to various estimates the market of rough and polished diamonds fell 20% to 30% compared with the last summer. The market is dwindling while the pressure on it is growing giving way to a rapid decline in prices. For instance, during the last three months Tiffany & Co. reduced prices for its products sold in Japan by 15%.
Is it possible to boost diamond demand against this background and if not to raise then at least stabilize prices by way of advertising campaigns? Undoubtedly, the diamond market is aware of precedents, when a successful advertising strategy was able to produce a powerful and long-term sales growth as it happened, for instance in Japan. But such achievements were possible only if there was a simultaneous economic upturn in the country where such a campaign was run. Is there now at least one such country on the world map? It is mostly a rhetorical question.
As for promoting diamonds as an investment vehicle, an appropriate mechanism of liquidity will be the least thing required for the purpose, besides advertising; which mechanism, lets us be honest, does not exist in a civilized form. Someone should take up an obligation to buy out investment diamonds the very moment an investor will wish to part with this asset and desirably at a price not only offsetting inflation rates, but also providing for agreeable profit. To solve this task and the more so at a scale capable to stabilize the diamond market as a whole will require such recources and organizational efforts which will hardly inspire the companies of the Big Diamond Five, taking into account their current state of affairs.
The agreement between the biggest rough diamond producers to reduce supply adequately to demand, which is going down beyond control, is the only reliable way to stabilize prices and preserve consumer confidence towards polished diamonds (including their role as an investment asset). Any other proposals will not be able to eliminate the threat of a price landslide and, consequently, turning the market of rough and polished diamonds into unstructured chaos. The problem is that demand is currently running too low and any adequate output cutback or working for stock may cause unacceptable damage to diamond mining companies. Of course, there are many ideological and political factors impeding an efficient cartel strategy, but all of them appear insignificant compared to the major factor – absence of funds. This is why we do not know whether the Generic Diamond Marketing Project will be transformed into a cartel agreement between diamond mining companies accounting for about 90% of the world’s diamond output – an agreement, which will permit to maintain and raise prices by way of steering supply to the market and servicing diamond stocks necessary for this kind of regulation. Nevertheless, we shall try to forecast a situation, which will arise if such an agreement will NOT be reached.
So then – let us assume that no cartel has been achieved and every producer of rough diamonds is pursiung its own sales policy looking after its own interests and viewing others as immediate competitors only. Nowever, there are diamond stocks which have already been accumulated and which are twice as large as the annual output. Social tension is growing in the diamond-dependent countries and this is why it is difficult to decrease diamond output unilaterally. Sales are needed as a breath of air, but demand continues to go flat due to the crisis and no advertising campaigns are able to cancel this reason. A price collapse will be the logical result making the whole market attractively cheap. This is the time for a global buyer to come in. It will be the future monopolistic master of the house.
Actually, such a master has already emerged. On February 12, 2009, Rio Tinto and Chinese Chinalco announced their strategic partnership. Chinalco plans to invest $19.5 billion into Rio Tinto, which is going to be the largest Chinese inverstment into a foreign asset. As a result, Chinalco will gain control over 18% of Rio Tinto’s stock. The diamond sector of Rio Tinto has so far been left unattended by the Chinese whose priorities are copper, aluminum and iron. However, the scale of this deal and the eagerness of the Chinese to buy cheaper mining assets are undoubtedly impressive.
China’s export is coming down with a run – the crisis is literally devouring sales markets trading Chinese products in the developed countries. Only in January 2009 Chinese export decreased 17.5% which is a record-breaking result. But import is shrinking even more rapidly – in January it fell 43.1%. Unemployment is growing at a dashing pace – over 20 million people have already lost their jobs during the crisis. The correlation of these figures is a convincing proof that China does not intend to stimulate domestic demand and increase the purchasing capacity of its population backing up export-oriented enterprises by way of pumping in funds from the national budget accumulated during the economic boom. These enormous resources are obviously earmarked for other purposes. There are no fears here about eruption of people’s outcry – there is no political opposition in China and the Tiananmen memory is still fresh enough.
Today, the Chinese sovereign foundations, similar to China Investment Corporation and СITIC Securities Co., are operating hundreds of billions of dollars and there is not so much guess-work to be done about their destination. “The current instability on world markets gives us yet unseen opportunities for investments,” – these words uttered by CIC’ chairman should not be skipped by diamond marketers, especially taking into account that the world’s annual diamond output does not reach even 5% of the funds wielded by this one only Chinese foundation. Let us risk an assumption that the diamond market appears a back-burner task for Chinese investors exactly due to its insignificance. Now there is fighting going on for strategic metals and oil, while the diamond market may be left to “get ripe” for some more months – until it hits the very bottom. The rest is not difficult to guess, particularly in view of the ever growing Chinese influence on the administration of African diamond-mining countries. Afterwards the diamond market will return to its natural condition where it lived a happy life during the last century. Except that the Board of Directors of “New De Beers” will mostly speak Chinese and the role of Antwerp and London will be successfully performed by Shanghai.
Sergey Goryainov, Rough&Polished expert
