VIP buyers reject De Beers pricing strategy
DIAMOND buyers are leaving stones on the table, prompting De Beers, the biggest producer, to back down on pricing.
After 30 percent of its rough diamonds went unsold at its March sale, the Anglo American unit unexpectedly reduced prices by about 3 percent last week. In February, the company said it expected an increase this year.
The reversal is a sign that chief executive Philippe Mellier has gone too far with his fouryear-old strategy to boost profit by demanding more money from the company’s select group of buyers. That model is coming under pressure as sightholders, as the customers are known, say they are paying more for rough diamonds than they can sell them for.
“People are saying enough is enough,” Nurit Rothmann, an Israel-based broker of rough diamonds, said. “You can’t buy and lose just to be in a VIP club.”
De Beers declined to comment.
For almost a century, being one of De Beers’s customers meant a seat at the industry’s top table and a shot at handsome profits.
De Beers sold rough diamonds below the market price, and in return sightholders were asked to buy all the stones they were offered at the asking price. Rejections were frowned upon, and the best clients were rewarded with an occasional gift, a discounted large diamond known as an “exceptional”.
New model
That model was upended in 2011 when Mellier was brought in. A mechanical engineer, he had spent most of his career working with cars and trains, most recently as the head of Alstom’s transport unit.
He changed De Beers’ strategy, raising prices while being more accepting when buyers rejected some stones. The new model was based on the premise that if all the diamonds were being bought, the company was not charging enough.
The company also agreed in 2011 to buy the Oppenheimer family’s 40 percent stake in the diamond producer, for $5.1 billion (R61.6bn). “They needed someone like Mellier coming in from a
a completely different industry, taking a hard look at the business and saying ‘look lads, the returns we’re making are not enough’,” Kieron Hodgson, an analyst with Charles Stanley in London, said.
The strategy worked. Under Mellier, De Beers almost tripled operating profit to $1.36bn last year by narrowing the discount between its price for rough stones and the secondary cash market.
Anglo reaped the benefit as De Beers’ sales rose 11 percent to $7.1bn in 2014. It was Anglo’s best performing unit, accounting for more than 27 percent of the London-based mining company’s earnings.
While that bolstered earnings for Anglo, the industry’s biggest players are deriving less value from being sightholders.
De Beers has been too aggressive. You can’t sustainably price above the market.
De Beers failed to sell 30 percent of the stones offered at its March sale, according to trade publication Rapaport, amid growing pessimism about demand this year.
Diamond prices
“De Beers has been too aggressive,” Anish Aggarwal, a partner at Antwerp-based industry consultant Gemdax, said. “You cannot sustainably price above the market and supply and demand fundamentals, and they’ve done that now for at least three quarters.”
As De Beers raised its prices, the market has declined. Rough diamond prices fell 1.2 percent in the first quarter, according to data from UK-based WWW International Diamond Consultants, after a 6.9 percent drop in the last three months of 2014, the biggest quarterly decline in more than two years.
“The returns this year will inevitably be lower,” Hodgson said. “I think Anglo has already accepted that, but have shareholders? Probably not.”
De Beers said in April it was cutting production as demand weakened. – Bloomberg