According to Avi Krawitz writing for Rapaport at www.diamonds.net, De Beers launched its Diamond Trading Company (DTC) sightholder application process for the 2012 to 2015 supplier of choice (SOC) contract period outlining what it takes to win a sight on its recent online seminars. There were few surprises in the information provided there, especially in light of the economic crisis that the industry has endured in the current contract period, Avi Krawitz says.
Perhaps the most telling moment of the seminars came during the question and answer session as an Indian listener asked whether the current sales negotiations between De Beers and the Botswana government will impact the selection process and availability of rough diamonds to sightholders. DTC’s chief executive officer (CEO), Varda Shine, all but dodged the question, saying that a communication would be made when the information is ready to be made public.
Of course, one would not expect the company to reveal sensitive aspects of the talks, especially at this stage, when they are, presumably, reaching their climax. De Beers and the government are renegotiating the marketing and distribution contract governing production from their joint-venture mining company, Debswana. The previous contract period ended in 2010, but was extended through March 31, 2011.
The government wants to use Debswana rough to boost the development of its trading platform program as it attempts to diversify activity in the local diamond industry and the economy. Diamonds are responsible for about one-third of Botswana’s gross domestic product and make up about 75 percent of its mineral exports.
Officials believe they can achieve that diversification by holding rough tenders in Gaborone, which they started doing on a small scale last year through other mining companies operating there. But they need greater volumes as they want to attract diamond trader traffic to Gaborone and envisage a vibrant rough and polished trade taking place in the city. The plan is also to develop a sustainable jewelry manufacturing sector to complement the mining and polishing activity already taking place.
De Beers will want to show that these goals can be achieved within the framework of its SOC program. In perhaps what was as much a message to applicant sightholders as to the Botswana government, DTC stressed in its presentations that candidates — at least for the Southern Africa sights — will need to demonstrate that they, too, are supporting De Beers efforts at “building the foundation for long-term manufacturing industries in Botswana, South Africa and Namibia.”
Philosophies aside, the question posed in the webinar represents a real challenge for De Beers as it has invested heavily in Botswana to ensure future production through its Cut-8 development at the Jwaneng mine. Simply put, the country will be the driving source of revenue for De Beers in the years to come, even more so than before.
Holding back a portion of Debswana production to sell outside the DTC’s SOC program may represent significant limitations on De Beers ability to ensure a consistent supply of rough to sightholders. If, theoretically, De Beers agrees to make 10 percent of Debswana production available for outside sales, at 2010 production levels, that would amount to 2.2 million carats.
The possibility represents a risk for De Beers at a time when it has emerged from the economic crisis stronger, but also more risk averse, than ever. In fact, quite understandably, the new sightholder application process is designed to minimize the risk that De Beers is exposed to by taking on a client for the next three years.
Firstly, the company placed a strong emphasis on the financial strength of the prospective sightholders. Despite Shine’s assurances that “you don’t have to be the biggest, the oldest or the most famous business, but you have to have a passion for being the best in the segment of the market you serve,” make no mistake: De Beers is looking for the most financially sound diamond companies to supply. To be considered in the initial phases, applicants for U.K., Canada and Botswana sights have to show that they had annual turnover of more than $30 million in each of the past three years, including during the low points of the recession in 2009. For South African sights, the minimum annual turnover is $15 million and for Namibia, it is $10 million.
In addition, the company stressed that aspiring sightholders need to adhere to De Beers best practice principles and enjoy strong business reputations. While there is no disputing that these represent core social values that may have evolved in the new De Beers, the company’s historic position in the diamond industry makes it susceptible to reputational risks that may even stem from its customers. Try as it may, De Beers still fights the perception that it runs an elitist, monopolistic and exploitive empire.
In reality, De Beers today is just another diamond mining company, albeit with a relatively large volume of rough to supply to the select few. DTC stressed that the main benefit to being a sightholder is that it assures a company with a long-term supply of rough diamonds. Manufacturers are well aware of this fact, especially as the market turns to more normal scarce supply and rising demand fundamentals. They also know that DTC assortments represent good value relative to other mining sources.
Manufacturers are therefore well attuned to the impact that the De Beers-Botswana talks may have. While these negotiations will have been completed well before the more intense second round of contract proposal questionnaires (CPQs) need to be submitted, and are unlikely to influence a company’s decision to apply for a sight, they may exercise a significant influence on the outcome of the DTC’s selection process. Having less sightholder supply presents a risk De Beers will not want to take.
