Two of the more prominent developments in the rough distribution system over the past decade were the disappearance of Diamond Trading Company-supplied rough diamond traders, and the rise to prominence of rough diamond tenders. As Antwerp Facets believes, the two processes were related. Indeed, today, all the large diamond producers – De Beers, BHP Billiton, Rio Tinto, and Alrosa – sell some or all of their goods via tenders, which they regard as an efficient sales method.
Two of the more prominent developments in the rough distribution system over the past decade were the disappearance of Diamond Trading Company-supplied rough diamond traders, and the rise to prominence of rough diamond tenders. The two processes were related. Indeed, today, all the large diamond producers – De Beers, BHP Billiton, Rio Tinto, and Alrosa – sell some or all of their goods via tenders, which they regard as an efficient sales method.
But, while the producers say they believe tenders are a fair and transparent way of selling their goods to the market, there is widespread opposition to the method within the diamond business. That was illustrated by comments made at a discussion of diamond tenders at the general assembly of the World Federation of Diamond Bourses at the World Diamond Congress in Moscow in July. Vociferous criticism by participants indicated the degree to it felt that tenders are serving to damage the industry.
Small and medium-size manufacturers, who make up the vast bulk of the membership of the diamond trade, claim to suffer from the sale of diamonds at tenders. Not having the financial muscle of the large firms, smaller companies sometimes cannot even afford to attend the international sales, much less to bid against large companies who are able to push prices beyond what their smaller competitors can afford to pay. As a result, the WFDB General Assembly called on rough diamond producers to allocate reasonably large amounts of goods for sale outside of the tender system.
WFDB members said they were unhappy with tenders because they prevented companies from being able to organise a steady supply of goods. In similar vein, purchasing goods at tenders makes it highly difficult for diamond manufacturers to know what goods it can buy and at what price, thus complicating long-term strategic planning. Members said that producers themselves had an interest in reducing the amount of goods sold at tenders since they are ultimately reliant on the health of the diamond manufacturing industry.
Commenting on claims by producers who sell goods at tender that it enabled them to sell their goods at the current market price at the time of the sale which was fair to all, WFDB delegates said the prices were usually more fair to producers than to buyers.
It was also warned that the prices seen at tenders could ultimately be detrimental to producers since they might lose potential customers in diamond manufacturers who are unable to buy goods at a price at which they could make a profit. Tenders were attacked by some as a short-sighted policy and producers were urged to reconsider tenders as a sales method.
At the second annual Antwerp Diamond Symposium last November, Antwerp diamond manufacturer Chaim Pluczenik attacked what he regards as the unfairness of the tender system. As head of the workshop on rough supply at the symposium, he said that tenders were an element in the sharp rise in rough prices which had been evident since mid-2009.
His main concern was that diamond manufacturers could not be confident of receiving a stable and fixed supply of rough diamonds since they could not be sure that they would be willing or able to buy diamonds at the prices set by tenders. He said that tenders led to buyers either paying too much for rough goods or receiving diamonds that they do not need. In addition, he said, some companies who take part in tenders may end up extending themselves financially, possibly to a dangerous level.
Diamond producers deflect the criticism by noting that only a portion of their rough output is sold at tender. The Diamond Trading Company's Sales and Sightholder Services Director, Mahiar Borhanjoo, points out that only 10 percent of the company's goods are sold via its Diamdel unit. Of that amount, just 70 percent is sold at tender, he explained. The vast majority of DTC goods are, therefore, sold by fixed contracts.
"I believe that auctions help to put all customers on an even playing field. A niche customer, for example who might be a smaller manufacturer who has a special cut can add more value to a diamond that they manufacture and hence can be more effective in an auction, so the point that smaller or mid-sized players will be out measured is not necessarily correct as diamantaires will only pay up to a certain level for what they need."
As for the argument by many manufacturers that tenders do not allow them to be able to plan ahead in order to fulfill programmes, Borhanjoo said this was one of the reasons why De Beers has continued its commitment to selling the vast majority of its production via the Supplier of Choice Intention to Offer system. "The ITO is an enormous value add to our customers and enables them to plan their manufacturing throughput and customer commitments for a 12 month period. The goods available through Diamdel have been, and will continue to be, an additional and very important part of our overall sales strategy enabling more diamantaires the ability to purchase a portion of the De Beers' overall diamond supply."
Borhanjoo rejects claims that tenders tend to create upward pressure on prices which worsens speculative behavior. "Diamdel has been auctioning for nearly three years, and there is no evidence of speculative behaviour as a result. One has to understand that the top price paid on a very small quantity of goods will not necessarily be the same price one would pay for a much larger amount of goods. Our pricing has and will continue to take that into consideration, amongst many others.
"We have been using the Diamdel auction feedback data for the past three years as one of many inputs into our pricing strategy and thus far, there has not been a direct linkage between the auction prices and DTC list prices and we do not anticipate such a move from our core strategy. As already happens, price patterns at the Diamdel auctions will continue to provide just one additional source of data for the DTC’s dynamic pricing model. It will not be used as a direct short-term pricing determinant as, for the DTC, long-term sustainable pricing continues to be of importance.
"The DTC's bulk supply proposition is very different from the smaller-scale offerings that will be offered by Diamdel, and the price of the DTC's ITO goods will not necessarily 'follow' the auction prices. In a sense, nothing is changing here. Diamdel has been auctioning since January 2008 and, as at present, trends in the auction will continue to be observed by DTC and taken into account in its pricing decisions, which will continue to be ultimately driven by the underlying value of the resultant polished," he added.
Jean-Marc Lieberherr, general manager for Diamonds Sales and Marketing at Rio Tinto based in Antwerp agrees that there is a possibility that tenders can increase volatility and lead to speculation. But he points out that in a relatively closed market they can help provide transparency and visibility. Tenders can provide producers with a valuable snapshot of state conditions at that particular moment in time. Simultaneously, tenders also give buyers the chance to view other types of goods with which they may not work and the prices they are fetching.
In addition, Lieberherr explains, there are some diamonds that can only really be sold at tender events, such as Rio Tinto's "Specials," diamonds weighing 10.8+ carats, and its top 50-60 Argyle pink diamonds which it has sold every year for the past 25 years, at international auction. As a result, he said that Rio Tinto views tenders as a justifiable sales method.
However, these are large and expensive diamonds for which there can only be limited interest, from manufacturers or jewelers with significant means. But Lieberherr justifies the company's policy by saying the industry can profit from it because aims to create a balance between different but complementary sales mechanisms. Lieberherr points out that the major diamond producers, for the most part, sell the majority of their rough stones to a stable group of clients.
Chris Ryder, the former Marketing Director, Diamonds and Specialty Products at BHP Billiton in Antwerp, also believes the auction process gives both the producer and client a fair and transparent basis for establishing the price of stones. It also serves to prevent prices and distribution of goods from being arbitrary.
Alex Shishlo, Editor of the Rough&Polished European Bureau in Brussels
