After 30 percent of the diamonds remained unsold on the March site of this division of Anglo American Plc, it unexpectedly cut prices by almost 3 percent. And in February the company claimed that it expects price growth this year.
This step back is a signal that Philippe Mellier, CEO of De Beers, has gone too far with his program, which turned four years old, aimed at increasing profits due to the fact that from a select group of buyers, companies require more money. This model is under pressure, since sightholders from among the well-known customers say that they pay for rough diamonds more than they can get when selling it.
"People say that they are enough," said Nurit Rothmann, a diamond-based broker in Israel. "It's impossible to buy and incur losses, just to be in a VIP club."
De Beers declined to comment.
For almost one hundred years, being one of De Beers customers meant taking a place in the top ranks of the list of leading companies in the industry and getting a decent profit. De Beers sold rough diamonds below the market price, and in response to this sightholders were asked to buy all the stones they were offered at the asking price. The refusal was treated with disapproval and the best customers were encouraged sometimes with a gift - a big discount for large diamonds from the "exclusive" category.
Mechanical Engineer
This model ceased to exist in 2011 with the advent of Mélier. Being a mechanical engineer, he spent most of his career working with cars and trains, and more recently was the head of the transport division of Alstom SA.
He changed the strategy of De Beers, raising prices, and was more tolerant when buyers refused any stones. This new model was based on the fact that if all diamonds were sold out, this would mean that the company does not take enough from the buyers. The company also agreed in 2011 to buy out a 40 percent stake in the Oppenheimer family in the diamond mining unit for $ 5.1 billion.
"They needed someone like Melee, who came from a completely different industry who looked at the business with an unbiased view and said," Look, guys, the revenues we get are not enough, "said Kieron Hodgson, an analyst from London's Charles Stanley & Co.
Increase of profits
This strategy worked. Under the direction of Melier, De Beers nearly tripled its operating profit to $ 1.36 billion last year, narrowing the gap between its price for rough diamonds and the price in the secondary market for cash.
As a result, Anglo benefited, as in 2014 De Beers sales increased 11 percent to $ 7.1 billion. This unit worked best, providing more than 27 percent of the proceeds of this London-based mining corporation.
While this has increased Anglo's revenues, the largest industry participants from Antwerp and Tel Aviv receive little added value from what are sightholders. Against the backdrop of growing pessimism about demand this year, De Beers could not sell 30 percent of the stones offered on its March website, according to the Rapaport trade publication.
"De Beers has behaved too aggressively," said Anish Aggarwal, a partner with Antwerp-based Gemdax, an industry consultancy. "It is impossible to constantly assign prices higher than market prices and in spite of the main provisions of supply and demand, and they have done this for at least three quarters already."
Prices for diamonds
Since De Beers raised its prices, the market fell. Prices for rough diamonds in the first quarter decreased by 1.2 percent, according to the UK-based WWW International Diamond Consultants, after they sank by 6.9 percent in the last three months of 2014, which was the biggest decline in the period Over two years.
Weak sales and price declines also came on the back of a credit deficit after the decision of the KBC Groep NV group last year to process precious stones in the Belgian port city.
"Income this year will inevitably be lower," said Hodgson from Charles Stanley. - I think Anglo has already accepted this, but have the sightholders reconciled themselves? Probably not. "
De Beers said that in April, it reduced production due to a drop in demand.
This company, which produces about a third of the world's diamonds, sells gemstones on "sites", which are held 10 times a year in Botswana, where it manages the largest mines. Each buyer, including representatives of Graff Diamonds Corp. And Tiffany & Co., a box containing plastic bags containing precious stones is provided.
http://www.bloomberg.com/news/articles/2015-05-12/vip-diamond-buyers-resist-de-beers-pricing-that-boosted-profits
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