Wednesday, November 9, 2011

Seven billion, and counting

Sometime in the last month or so the seven billionth living person joined us, or so say the demographers.  We also learn that the world population grew by a billion in just 12 years, and probably another billion in the next 12 years or less.  As a reference, about 50 years ago there were three billion people on the planet.  We know the world's resources are strained now to meet the need of 7 billion people, never mind the 10 billion or so expected before the end of the century.

Let us accept for the moment that the world will adapt - somehow.  A little optimism is a good thing.  But according to futurists and prognosticators, that adaptation will come at the expense of many of our treasured standards of living.  While we in the US and elsewhere in the developed world might be struggling to maintain those standards, many hundreds of millions elsewhere in the world aspire to become "Americans", to enjoy the benefits of leisure time and modern conveniences.

We have already seen that movement in so many countries.  The obvious cases - China in the post-Mao period; India and Brazil becoming economic powers; Singapore, Russia, Indonesia, Eastern Europe and even small countries like Vietnam.  Now we have the Arab Spring, engendered and abetted by by the liberating power of the Internet, the rise of Turkey and the success of tyranny-free Kurds.

Great, we say.  The world is finally looking at war and dictatorship as horrors of the past.  The slate is far from clear, but we now apologize for killing innocent citizens.  Seventy years ago we carpet bombed them with impunity. 

At the same time, we are extinguishing the need for people to work.  Technology has radically improved our productivity - but also our need to employ people.  Companies everywhere are finding ways to not hire people, and that is even true in the developing world.  The US has seen stagnant wages for thirty years, partly due to the export of manufacturing but also due to a growing pool of unemployed, which drives down wages.  (Even in our essentially backward industry, Indian factories now have many diamond cutting steps automated; cad-cam has cut the need of jewelry factory help; and many hand-skills are giving way to machine made look-alikes.)  So the outlook is bound to include longer life-spans, falling death rates, and high poverty rates and unemployment.  Occupy Wall Street may only be the first symptom of the problems to come.

To get to the mundane, can we relate this population growth to jewelry?  Is it good news (more customers), or bad news (booming prices, shrinking supply)?  This is a complex issue, without clear answers, but some patterns are beginning to appear.  While this is a subject I would like to explore in later blogs, let's take a look at gold to start with.

An executive from a major Mexican mining company, Penoles, noted to me in a conversation last week that their gold sales in Mexico to fabricators and jewelry manufacturers has dropped to zero.  For many years it had been steady, but now all gold production is exported, mainly to dealers and governments. 

On the surface, we can say this is understandable.  The Mexican jewelry market, which has always been heavily skewed to silver, must have had a relatively small gold component anyway.  But this comment suggests that designers and manufacturers are simply not seeing enough business anymore to make investment in gold pieces viable. 

Is there comparable effect in the US?  Recent reports from the World Gold Council show a 6% increase in global demand, but that is driven by a surge in investment, and by resilient demand from technology companies.  Worldwide jewelry consumption continues to slip (again understandable), from a peak of about 82% of total demand in 2000 to just 50% last year.  Of that, share of total demand in the US and Europe has dropped from about 57% in 1980 to about 13% today.  In the same period, Asian share has gone from 21% to 68%.  US jewelry share last year was about 3%, a faint shadow of its former dominance.

We could be tempted to bring up the spike and collapse of gold prices in the late 1970's as a cycle that might repeat, but that seems unlikely.  Gold production is falling in spite of heavy investment in exploration; governments are buying gold steadily to diversify away from large foreign exchange holdings; and the marketplace for individual investment and recycling has become global, simple and transparent.  The US and European markets are mature and saturated, with very different public motivations for buying or holding gold than existed there 40 years ago.  The developing markets, and especially Asia, are just getting into a full swing of acquisition by a booming newly-rich public.

What does this mean for US retailers?  More next time....

Tuesday, November 8, 2011

More thoughts about Oppenheimer selling to Anglo

We read today that Stephen Lussier's, of De Beers, stated that there will be no changes in De Beers operations.  It would have been destructive to have said otherwise.  Such comments are a necessary part of keeping the boat from rocking.  There is nothing else he could really say.  As the closing on this sale will take time, it is of paramount importance to have "business as usual."  By the time Anglo fully takes over, Lussier's comments will have faded away.

I thinking about this kind of distance between actions, I cannot help thinking there has been some pre-planning in the Oppenheimer sale.  There had been some rumblings about a sale at least a year ago.  But there were a few open issues that had to be dealt with first.

First, Nicholas Oppenheimer had to quit the Anglo board, a necessary move as his presence at this juncture would once again tie him to whatever moves Anglo wants to makes.  Second, there had to be a new contract with Botswana.  That happened recently, with a ten-year deal that also rips up most London operations.  Third, there was the recent refinancing of a few $b in debt.  Now, with the De Beers operation "cleaned up" a bit, the move to Anglo raises few questions and does not further erode Anglo's stock prices.  On the contrary, it makes the deal a plus as viewed by the world markets.  (Reuters opines that it all fits well with possible buyout of Anglo by another mining giant.  See the New York Times note about Anglo at http://www.nytimes.com/2011/11/07/business/de-beers-makes-anglo-american-a-better-merger-catch.html?_r=1&scp=1&sq=de%20beers%20sells%20out&st=cse)

As much as all this makes sense, it is still only speculation that the purchase was planned many months ago, predicated on all these moves, even though a number of insiders have been reported to confirm that Anglo management was anxious to make a change.

Interesting, of course, that the industry's own views of the impact of this change are largely ignored by the press - irrelevant, really.  The only view is that rising markets and shrinking production will make diamonds more profitable, etc., etc., etc. We see it as having far more disruptive potential on the industry as a whole.  Nevertheless, my guess is that Anglo will take actions to strengthen profits, and if Anglo sells out to another mining company, we can be doubly assured of that objective.  Forevermark, for one, will be on short leash.

Friday, November 4, 2011

De Beers - end of a remarkable era

The news today that the Oppenheimer family has sold out its remaining share of De Beers to Anglo-American, subject to regulatory approvals, brings to a close a remarkable era, and the extraordinary tale of the Oppenheimer family.  In many ways, the diamond industry owes its success and perhaps its very existence to this family. 

Observers have been commenting for over a decade on De Beers' struggles to transform itself from a near monopoly into a modern commercial operation.  At every turn, it fought to maintain control of its distribution and historical methods, and step by step it has been forced to retreat.  At the core, the issue was whether it could create an effective marketing plan that would create added profits--and justify the existence of a complex marketing and sales organization, the DTC.  European regulators forced it to sever its long-time control of Russian diamond production, and to create a cumbersome and onerous system for continuing its sightholder processes.  Its critical partner in mining, the country of Botswana, steadily acquired a greater hold on De Beers ownership, and share of mining production.  Canadian exploration proved expensive and of limited production.  And South African mines were sold or closed, with remaining operations seeing declining yields.

The sale to Anglo-American, at a relatively cheap price, raises a host of questions as to the future direction of De Beers.  Foremost might be the motivation for Nicky Oppenheimer to take this step.  Some claim that continued control by the Oppenheimer family was in question (Nicky himself stepped down recently from the Anglo board, possibly indicating friction over policy and continued Oppenheimer control of De Beers).  That might be too simplistic.  Perhaps there was a recognition that the major marketing initiatives and distribution systems will not survive.  The Supplier of Choice process for selection of of sightholders has essentially failed in its core objectives. 

And Forevermark, the latest iteration of the beacon programs run over the years, has apparently not generated the kind of acceptance anticipated from retailers, and will probably not have the level of financial support from the industry needed to make it work.  Even then, the initiative might not possess compelling appeal.  Always part of the marketing problem is De Beers' position several steps removed from the consumer.  In an age where lines of distribution have been shortened by disintermediating wholesalers and agencies, De Beers still tried to increase market share and profits by enhancing the value of, and branding, a component in jewelry - its diamonds.  De Beers does not possess the ability or the latitude to do otherwise, and has paid the price.

Now we ask, does Anglo have any intention to continue De Beers policies and marketing?  Has Nicky Oppenheimer sold out knowing the writing is on the wall, and is leaving Anglo to be the bad guy?  The Anglo board has no particular attachment to legend and precedent.  Will we see De Beers be turned essentially into a mining and sales operation? 

Will we see the end of the long history of De Beers advertising?  What will happen with the De Beers partnership wth LVMH on De Beers stores? 

None of these questions, and many more, can be readily answered.  We can only speculate.  But one thing is certain.  This is the end of a remarkable era.