De Beers is the oldest and most authoritative diamond company of the world. For 120 years of existence its management has proved their ability to make correct and duly decisions during the two world wars, cold war, collapse of the British Empire, people's liberation revolutions in Africa, and breakdown of the world socialist camp. The overwhelming number of diamantaires had enough guts to follow the strategy pursued by De Beers. In any case, NO ONE was able to disregard the essential role played by De Beers on the world diamond market.
And today De Beers may well be a model to follow during the current crisis. The Rough&Polished Agency believes this is due to the reasons below.
Production
The distinctive feature of De Beers in diamond mining is their pragmatic purposefulness in maximizing profits. As soon as some project turns money-losing the company is fast to drop it.
Thus, in February 2007 De Beers announced it was to sell its two oldest diamond mines in the Republic of South Africa - Kimberley and Cullinan. According to Gareth Penny, Managing Director for the De Beers Group, the company has entered a new era – it will not strive to have the maximal share in the global rough trade as before, but will concentrate on greater production efficiency and return on investments.
In April, 2009 De Beers stopped all the operations in the diamond sector of Congo. Such a decision had been caused by a slump in world diamond prices. Clearly, though Congo remains a very perspective country for diamond mining, De Beers cannot ignore the current world economic crisis.
De Beers is cautious about defining an optimum scale of diamond output, sales and operating expenses. Relying on its long-term experience De Beers is carefully estimating the balance between supply and demand. The company’s representatives were repeatedly heard saying, “In the long term the position of the diamond industry looks strong. For more than 10 years there have not been discovered any significant diamond fields in the world, while the world diamond reserves appear to be the lowest for the whole of their history, and diamonds, accordingly, will be turning more and more rare and dear goods.”
Diamond output reached 14.48 million carats during the three quarters of this year. The 3Q output was 39.9% lower compared with the previous year. The nine-months output was down 61.2% versus one year ago. The 3Q output was up 43% against the 2Q due to renewed operation in the Orapa and Jwaneng mines in Botswana and other mines in South Africa. The Canadian mines of De Beers (Snap Lake and Victor) stopped in August, which also affected the 3Q results.
To reach the planned indicator of 24 million carats in 2009 (which is one half of the 2008 output), the company should extract 10 million carats of rough in the fourth quarter. Taking into account the growing mining and geological problems in the company’s major mines it will not be an easy task.
Marketing
Starting from 2000, De Beers officially announced its new marketing policy of Supplier of Choice, or SoC, focused on the end user. De Beers withdrew from regulating rough diamond supply to the world market and instead turned to stimulating demand making this its corner-stone goal. The majority of experts viewed the company’s new strategy with understanding. De Beers took care to perform a detailed study of purchasing capacity generated by major commodity markets (the United States, European Union, and Japan) and organized consumer mood monitoring, all at its own expense. Unfortunately, the company missed the signs of enormously excessive lending in the American market and a deep financial illness of Japanese consumers.
However, closely watching the latest market trends De Beers managed to take its bearings just in a matter of weeks after the open phase of the crisis and came to an important decision curtailing rough supplies to the market and avoiding a landslide in prices. In the end of 2008, when numerous macroeconomic data became widely available for analysis, De Beers gave them a cool-headed scrutiny and concluded that “fundamental drivers of the world’s diamond demand were operating properly and demand will recover in due course”. In December 2008, De Beers’ Chairman Nicky Oppenheimer personally went to New York to rescue local Christmas sales which traditionally yielded the lion's share of proceeds to the company.
The first sights in 2009 were record-breakingly small. For example, in January and February they produced $129 million and $142 million, which was approximately FIVE times less than corresponding sales in 2008. However, in the second half of 2009 the gap began to narrow. All in all, during the 9 sights diamond sales amounted to $2.855 billion. All this is the evidence of a very precise, manual management of sales!
According to analysts, De Beers’ sales in 2009 will hardly be twice as low in comparison with 2008 going down to approximately $3 billion (in 2008 they reached $6.89 billion). However, these figures conceal essential volatility in prices, which is impossible to take into account since De Beers does not publish real prices for diamonds of different grades or standard boxes, as well as indicators for integrated commodity positions.
Economic policy
Being in the focus of diamantaires’ attention, De Beers is willy-nilly carrying the burden of responsibility for duly insight into business processes. Partly driven by corporate reasons, De Beers, however, is building a system of economic measures meeting the interests of all the world diamond community. So it has turned out, that the company’s management missed the beginning of the ongoing crisis and did not nip the dangerous “sprouts” of the impending financial and economic tsunami in the bud. Well, it was an error. But De Beers did not waist its energy and nerve for repentance, sincere or hypocritical. “By their fruits ye shall know them!” The company’s management followed a stereotyped, but effective way of essential and temporary reduction of diamond supply to the market. In particular, De Beers decided to stop its African mines for some time. But as soon as the situation on the market improved, De Beers after a 50-day pause renewed diamond mining and sales in full. On the backdrop of disorder and discord on the nature and consequences of the crisis even among Nobel Prize winning economists, De Beers acting with the British stoicism chose to believe that the current crisis was a usual trouble of cyclic development in the economy where demand for diamonds fluctuated within a general upward-going trend of global economic progress.
Struggling to win their buyers, De Beers preaches an optimistic policy for the future. And though economic ailments in the developed countries of the world have not by far come to an end, the company’s forecasts for 2010 do not suffer of pessimism. De Beers is correctly emphasizing a growing role of emerging diamond jewelry markets like China and India. Possessing a huge population and wantonly growing economy, these countries are quite capable to compensate temporary weakening of traditional markets, in particular that of the United States. Leaning on their long-term experience, De Beers reckons, that, as before, diamond prices will be the first to recover after the period of recession.
In its press release the company said: “In the long-term, the fundamentals of the diamond industry remain strong. With no major new diamond discoveries in more than a decade, and with worldwide reserves at an all time low, diamonds will become more scarce. As demand grows in emerging markets it is likely that sales will outpace forecast diamond supply for many years to come.”
One important action supported De Beers was the International Diamond Board (IDB). The purpose of the project is to stimulate demand for polished diamonds in the environment competitive luxury goods. Incidentally, one year ago this program was launched by ALROSA within the frames of the so-called Saint Petersburg initiative. Tim Dabson, one of De Beers executive directors, outlined three trends that are influencing diamond demand at the consumer level and that need to be taken into account in formulating generic marketing campaigns: the growth of India and China as consumer markets; changing consumer demographics; and ethical consumerism. He stressed that the industry needs to be aware that diamond jewelry has lost its relevance to the younger generation and that Chinese and Indian consumers hold different values than their U.S. counterparts.
Corporate stability is important for implementing far-reaching plans. In this sense, the position of Anglo American which intends to keep its stake in De Beers appears to be essential. It is expected, that De Beers’ diamond strategy will more and more depend on decisions taken by Cynthia Carroll, CEO of Anglo American. She repeatedly declared that “diamonds would remain for us a key business.” It is worth reminding, that in June 2009 Anglo’s Board of Directors decided to reject the offer of a merger with Xstrata, a mining corporation, viewing the merger unattractive since it could undermine Anglo’s positions on platinum, iron ore and diamond markets. And recently Mrs. Carroll said that Anglo American had no plans to sell all or some part of its stake in De Beers which currently makes 45%.
Finance
In May 2009, De Beers started to experience liquidity problems. In the first half of 2009 the company’s shareholders, mainly Anglo American, had to allocate as much as $800 million to relieve the situation. The total debt burden of De Beers amounts to $1.5 billion and is due in March 2010. The company has not promulgated any program saying how it is going to pay back its debts: under the contract with its shareholders De Beers is controlled by Central Holdings, the Oppenheimers’ family firm, which always preferred to stay closed to general public.
“The life-giving crisis” has sharply devalued the reputation of closed business entities. Financial institutions (banks, hedge funds, supervising agencies and so forth) are compelled to reduce shadow operations. To re-structure their loans, debtors have to be unusually frank. It is virtually impossible in De Beers whose power is based on far-from-being-faultless acts, alas, including the “use of iron.”
Analysts from RBC Capital Markets believe that De Beers will not be capable to pay dividends at least in the course of two nearest years. This is clearly realized by the largest shareholder of the diamond company – Anglo American. It is obvious that they are developing a special program for De Beers’ financial rehabilitation and slashing its overheads (for example, last August Anglo American decided to reduce one fourth of the administrative board thus saving about $120 million a year).
Staff
The essential growth of financial influence exerted by Anglo American on De Beers cannot but affect personnel resulting in retrenchments. There are persistent rumors circulating in the diamond community about impending resignation of Gareth Penny, managing director of De Beers (who is incidentally Jonathan Oppenheimer’s childhood friend). Nicky Oppenheimer will soon retire because of age. So the loss of the “old boy net” will only do good to De Beers: in rough times, there is no place to friends and relatives in business.
Apparently, Anglo American’s CEO Cynthia Carroll, a well-known American businesswoman (number 4 among the world’s most influential women, according to Forbes), will become the main person in the picture. Her nickname, Cyanide Cynthia, points to her utter pragmatism and managerial toughness. She is already sitting on De Beers’ Board of Directors and as a supervisor of the Remuneration Committee is perfectly aware of salaries and bonuses of top-managers in De Beers, including the bon vivant Jonathan Oppenheimer, the successor of the Oppenheimer family. Knowing her style, it is possible to expect, that she will be fast to appoint her own people on all key positions. As a result De Beers will become less emotional and effeminate and … more predictable for us.
Conclusion
For one hundred years the De Beers Corporation was supervised by outstanding persons (Cecil Rhodes, Ernest Oppenheimer, and Harry Oppenheimer) who outran events analyzing emerging anomalies in geopolitics and the world economy and promptly establishing new types of business infrastructure and adequately designing the world’s “diamond pipeline.” The current management of De Beers led by Cynthia Carroll will have an opportunity to use a wide range of tools based on the accumulated administration techniques. As Harry Oppenheimer used to say, “success will not accompany those who do not make mistakes (everybody makes them), but those who make them less than their competitors.” De Beers takes an active life-style position - building the market, not running after it!
Rough&Polished
