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23 april 2018

What will the impact be of De Beers rough auction sales announcement?

23 april 2018

A recent announcement to the diamond trade by Neil Ventura, Executive Vice-President, Auction Sales, at De Beers showed the direction that the mining giant heading in regarding auction sales. He said that the De Beers Auction Sales business has "acted as a catalyst for widespread industry change in selling practices" and now "the vast majority of producers of all sizes, including even producer country governments, have adopted auctions for at least a part of their overall sales mix.

The firm has developed its auction program to enable customers to secure future supply at its auctions by launching a forward contract sales program to enable customers to do so. It then further developed the system from a floating price system to fixed prices. Last year, the miner started selling its own polished diamonds, as well as allowing third parties to sell their polished goods on the De Beers platform.

The miner said that its aim was to provide customers with a ‘one-stop shop’ for its sourcing needs – saying this offers benefits in terms of efficiencies and reduced costs. Although diamond manufacturers – especially De Beers' sightholders – won't publicly comment, off the record they are not exactly delighted by the move.

As one major manufacturer said: "We all know, of course, that businesses change over the course of time. All companies are looking for extra income streams. However, De Beers is known as a seller of rough to several score companies. We accepted that auction sales could play a role for De Beers in testing the market and bringing about further price discovery as they seek to maximize their income.

"But now they are talking about further expanding their auction sales and have already started polished goods sales which is supposed to be our area. We make our comments to the company on an ongoing basis, but as we have discovered over the years, De Beers has changed dramatically. The 'listening ear' that the older generation of diamantaires is not there anymore.

"To both supply us with rough and be involved in polished goods sales is something that many of us are not happy about. Unfortunately, there is very little we can do about it. We have large manufacturing requirements and De Beers provides us with the supply we need. Beyond making our position clear, there is little more that we can do."

That being the case, clients are unlikely to be too happy with De Beers' latest move announced by Ventura. His comments suggest that far from being unhappy with developments, the industry wants the miner to take further steps. "With our most recent customer engagements, we’ve gained some more insight into what our buyers want from us, so we will continue to develop the business in the year ahead, as well as over the longer term. One message that’s come through from our recent customer engagements is a desire for us to develop our supply offering in certain areas so that there is a fuller and broader range of material available for purchase.

"Based on this customer feedback, in 2018 we will be testing the potential to grow our core rough diamond sales business through making some purchases from third-party sources. Currently we look to meet our customers’ needs through selling around 10% of De Beers Group’s overall rough diamond availability, but third-party purchases could help offer some interesting growth opportunity for the business."

De Beers aims to purchase and sell "limited amounts" of rough diamonds from approved third-party sources in accordance with the De Beers Auction Sales Diamond Trading Standard launched in 2016. The move aims to allow the firm "to test whether such an approach can help us better support the needs of our large, diverse and growing customer base."

In comments to Rough & Polished on the size of purchases from third party sources, Ventura said: "This is a pilot where we will be purchasing small amounts of goods (subject to successful bidding at tenders) to fill some gaps in our products based on customer demand. The vast majority of our sales supply will continue to be from mines operated by De Beers Group."

Perhaps not surprisingly, Ventura was unwilling to be specific about where the firm will be buying from? "We will be purchasing from a limited number of third party tenders with suppliers on which we have carried out comprehensive due diligence."

Aiming to put the industry's mind at rest regarding the possibility of a further consolidation in the market as a result of its moves by diverting sales away from other producers to De Beers, Ventura said: "Sales made through our Auction Sales business amount to a small proportion of overall global rough diamond supply. In addition, third-party purchases made by De Beers Auction Sales will be small and ad hoc, and also limited to certain goods.

"This is a small-scale pilot initiative that has been introduced in response to feedback from customer engagements regarding how we could enhance the supply offering via our Auction Sales business. As Auction Sales sells to a wide pool of more than 900 registered buyers, we hope this pilot will increase access to goods that are in demand for many buyers who would not otherwise be able to source them directly."

Ventura emphasizes that the firm's system of control will prevent conflict diamonds from entering the supply chain. "We will only participate in select tenders where we are confident of where the goods have been sourced from and after we have carried out the necessary due diligence in order to ensure that diamonds purchased at these tenders are responsibly sourced," he commented.

Does the industry have reason to be concerned about the latest developments and the 'threat' that the miner is creating a further stranglehold on supply to the market? Clearly, De Beers – as with any other company – will do what is best for it and its financial results. As mentioned above, long gone are the days when clients – even the biggest – along with leaders of the diamond bourses could have a quiet chat with top members of the De Beers hierarchy and expect to have their views taken into account and see the required changes made at least in part, if not in full.

As one former bourse president who has been in the business for just over 40 years told me: "I flew to London on many occasions for my company's sight, and if there were issues that we needed to have discussed for the good of our sights or that had a wider impact on our bourse members, we would be welcomed into the Charterhouse Street offices along with our brokers for a very pleasant discussion where we knew we were being listened to.

"But that ended some time ago, especially when Nicky Oppenheimer decided to sell up. Today, it's all about pure business decisions and there's no room for sentimentality. My feeling is that the changes regarding the auction sales are not going to have a huge impact in the short term, but what happens in the longer term? If De Beers is even selling polished goods – which is supposed to be the preserve of its sightholders – then will the company have any compunction about increasing its supply of goods from other producers which gives it a further degree of control over rough supply and prices?"

By our Israel correspondent Abraham Dayan

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