Friday, October 5, 2012

New broom at De Beers

We read with interest the recent statement by De Beers of structural corporate changes.  Present divisions will disappear, more notably DTC and Diamdel, and operations will be consolidated under the De Beers name.  The release emphasizes that operations continue as before; that the Sightholder designation and its marketing franchise continues; and that operationally everything is the same.

But, of course, it is not the same.  The statement does make it clear (or rather unclear in the corporate speak we have heard before) that the market has changed, and that De Beers must refocus its thinking and planning to be based on the consumer.  If I can interpret, it sounds like business will become more demand driven than supply driven.  That has been the reality anyway for a while.  Now it is being institutionalized.

But this cannot be all there is to it.  Let's speculate a bit, which is all we can do, about the possible/probable motivations.

As for the name changes, we have seen some before.  Some of us can recall that DTC used to be CSO.  At the time, the renaming seemed to suggest that De Beers wanted to go in new directions and had new management objectives.  And we progressed into the age of Supplier of Choice.  Now, once again, this consolidation and dropping of divisional names has to mean that changes are afoot, as even Varda Shine indicates.

First, we should note that concurrent with this announcement came the (expected) announcement that Cynthia Carroll, Chief Executive of Anglo American, is the new chairman of the board of De Beers.  Two other Anglo management executives have also been named to the board.  So the first changes came immediately.  

As I have believed all along, Anglo will bring a different perspective to De Beers operations.  Over all the decades that Anglo has been part owner of De Beers, it has been the Oppenheimer family that has shaped and driven policy.  That is no longer the case, and Anglo will take, I believe, a very practical approach and will seek efficiency and profits.  De Beers, on its own, has wrestled with the changes brought by loss of its monopoly.  The core objective of enhancing the image and value of diamonds through a variety of marketing and advertising programs benefited competitors as much as De Beers during those years of transition.  The ad campaigns yielded to "beacon" programs, which everyone tailgated anyway, and finally to the current Forevermark program.  The intent was always to build demand and to create added-value for De Beers.  But it has always been a question, in spite of some successful campaigns in the past, as to whether the benefits outweighed the costs.  The marketing arm no doubt argued for it, while the mining people probably argued against it.  

Now it is the mining interests that are in the forefront.  De Beers still manages major productions, and its operations in assorting, distributing and selling of rough are essential for many downstream operations.  De Beers certainly does not want to rock the boat.  At the same time, as even the statement suggested, the market has changed.  Major diamond companies now source rough from many sources, even as the De Beers sights remain an important anchor to their businesses.  But, other than Forevermark, added-value programs are gone, and even that one still has to prove its value even though it is hypothetically set up to be self-funded.  

De Beers, and the other major producers, have been drifting further and further towards tenders, and it makes sense.  Using auctions maximizes profits, and it can be done to reflect market conditions - set reserve prices; establish lots that move all qualities, not unlike sights; require deposits; and adjust production to meet sales experience.  Auctions open up the primary sources to many companies that would not qualify, for one reason or another, as sightholders.  As it is, we see sightholders declining or deferring sights without being dropped, and Diamdel steadily selling into the second tier market.  In dropping the DTC and Diamdel names De Beers (Anglo) is saying "sales are sales" regardless of how we generate them, and it should come through one operation.  This will lower need for personnel and tie the mining and sales departments much closer together.  Makes sense to me.

As for the fear that major cutters will not be assured supply, I think sights will continue for a while even if greater and greater emphasis will be placed on tenders.  (I commented on this in my blog of last year called "Tender is the sight.")  At some point, the distinctions will disappear, even if the marketing angle of being a sightholder continues.  As a practical matter, it will be most efficient for cutting operations to be consolidated some, with rough buyers arranging for goods to be cut.  That is already the case to a degree.  Larger factories cutting for many rough buyers and dealers.  Everyone will benefit from that.

De Beers continues to gradually migrate to a new. and very different operation.