No more cancer

| May 20th, 2014

No more cancer
"No more cancer"

Reading a report about a study conducted by doctors from the University of California, which concluded that cancer should be renamed to avoid worry, made me wonder, if instead, you could tell the poor victims that they have a common cold.

At what point and or to what lengths, I am musing, is it appropriate to shield ourselves from reality?

I have been pleasantly surprised by some of the messages emanating from Phillipe Mellier, the CEO of De Beers.

Earlier this year, around the traditional sightholders (i.e. buyers from De Beers) annual cocktail party they, the sightholders, were told that in future De Beers would be demanding that all its customers accounts were signed off by some reputable firm of accountants and not some mickey mouse organisation hiding up some back street, which as an aside really does not say much for the much vaunted claim that De Beers Supplier of Choice process was totally objective.

On top of this, it was stated that companies were going to have to put more of their own skin in the game and reduce debt with equity to turnover ratio of 20% being sought.

There were a few other bibs and bobs, which all made sense, to try and bring some degree of rationality into the game, which for many companies has become some endless spiral of increasing debt as goods were sent on some merry go around to generate turnover, which in turn accessed increased debt.

Suddenly, it would appear that De Beers have taken a backward step.

The debt to turnover ratio has, it would seem, been dropped, as has, so I am told, the need to have accounts signed off by reputable firms.

This news comes at the same time that I have been picking up on the tittle-tattle phone line that some of the largest firms are facing serious liquidity issues.

Maybe De Beers has taken fright because of the financial fragility of some of its major clients, whatever the cause it is to be very much regretted.

Monsieur Mellier seemed to have grasped that the current business model is simply stuck in a quagmire of vested interests, which over time has resulted in an increasingly dismal comparative performance by diamonds, compared to virtually any other luxury product and incidentally cost miners and producing countries billions in lost revenues.

Below is a comparison that we have happily trotted out over time and each time we update it the picture does not get any better.

Just as I was rather disappointed by this apparent climb down by De Beers, I read Monsieur Mellier being quoted by Bloomberg as saying that the company planned to raise prices by 5% per annum and that “one of the objectives is more stable prices and to drive volatility out”.

So, we are being told often enough that De Beers’ market share is around 35%, our view is that it is much closer to or above 40%, and as such no longer a monopoly, again a view with which I would disagree.

If De Beers is claiming to no longer be a monopoly how can it come out and say that it will be raising prices by 5% per annum and that it is going to “drive volatility out”?

Also, how can anyone believe that they can drive volatility out of anything?

Has Anglo managed to eradicate volatility from the gold or platinum markets?

To me, such a statement is as stupid as some doctors trying to pretend that cancer does not exist or at least that their patients should not know if they have got it or not.

We seem to be retreating back to the days when De Beers was an unquestioned monopoly with over 80% of the worlds supplies passing through it hands, where it preached the total fiction that it never reduced prices and nearly went bust in 1985 when threatened with being in default of its banking covenants.

Flirting with financial difficulties has not been a one off event for the company, it is only a few years ago it had to ‘ask’ its pensioners to agree to helping the company out as it reconfigured its debt.

My hopes that Mellier was actually bringing real change appear to be being dashed.

There is fundamentally a retreat back to the old model in which all the old lags in the industry will rejoice, as they feather their nests at the expense of growing the industry.

Instead of a much needed dose of what Daron Acemoglu and James Robinson in ‘Why Nations Failrefer to as ‘creative destruction’, as being one of the key elements as to why certain nations who have accepted this uncomfortable fact, have been so much more successful than others.

If De Beers really has reverted, or rather not ditched its old model, I suggest, it starts looking for some new euphemisms for failure, monopoly and bankruptcy, as it certainly would have had a cancerous relapse, or whatever is deemed to be the politically correct word for cancer in the future.

Source Polished Prices

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