With their Diamond Trading Company (DTC) boxes in one hand and Philippe Mellier’s letter in the other, sightholders appeared more interested in their rough allocations at last week’s sight than what the De Beers chief executive had to say.
Perhaps short-term volatility has led to short-term thinking on their part, but they seemed relatively content that this month’s allocations reflected some stability in a challenging market. Most sightholders who spoke with Rapaport News viewed Mellier’s notification that the company is realigning its corporate structure as an anticlimactic internal matter that will have little impact on De Beers rough diamond supply.
To an extent, they are correct. Their allocations will be governed by the same rules at least until March 2015 – when their current supply contracts expire – whether they are part of the De Beers family, or the budding group of companies.
But they should not be blindsided by the possible changes that may emerge further down the road. Sightholders may grow increasingly wary of the restructure as their current contracts draw to a close in just over two years time. By then, there may be little differentiating their status from that of their Diamdel, aka De Beers Auction Sales, counterparts.
The initial adjustment encompasses changing the name from the De Beers Family of Companies to the De Beers Group of Companies, with the separate branding of De Beers wholly or majority controlled entities, such as DTC and Diamdel, being phased out and incorporated into the De Beers Group.
This current first phase of the transformation is therefore subtle but significant, and it must be said, logical. Frankly, with all its divisions, simply writing about De Beers can be complicated and frustrating in its present structure. Does the average educated and interested consumer or investor, or even jeweler realize that a diamond recovered at the Jwaneng mine, owned by Debswana, sent for sorting and aggregation to DTC Botswana, shipped to London for distribution to sightholders, before being branded by Forevermark, is in fact all done by one company?
Branding the respective De Beers subsidiaries under one corporate logo therefore makes sense and enhances all those associated with the umbrella identity, especially given the recognition that the De Beers name evokes.
In that sense, the move should be viewed in the context of De Beers strategy over the past few years to focus on brand-based advertising rather than fitting the industry bill for generic marketing campaigns. There was always some wonder why the company didn’t utilize the most powerful marketing tool at its disposal – its name – more advantageously.
Consumers will now better understand what a Forevermark diamond is – where it came from, who cut it and the value it holds. A centralized brand may also enable De Beers to roll out other sub-brands with greater ease. Furthermore, with a clearer, more streamlined and simplified corporate identity, De Beers should be better equipped to dispel any negative consumer perspectives that remain about the company.
Primarily, however, the restructure is viewed as an exercise to clarify De Beers essence and align its goals accordingly. By realigning the respective divisions, Mellier seems intent on positioning De Beers as a luxury group, rather than just another diamond miner, as this column has defined it in the past. What that means and whether it will encompass new products and business divisions remains to be seen. For now, the streamlined corporate identity should be taken as an attempt to better position the company in the consumer space and back along the pipeline.
“For years we have thought of the consumer as the end of the diamond pipeline – with an ?industry driving their demand without fully allowing their demand to drive us,” said Varda Shine, DTC CEO. “In fact, for De Beers, the reality of a far more competitive landscape is that the consumer must stand at the beginning of our pipeline, shaping our business and enabling us to anticipate the cyclical needs of our sightholders so we can continue to adapt as necessary.”
Is that to say that De Beers has not been demand driven, even in the post-monopoly era? The change therefore represents an overdue shift in perspective that is quite monumental for the company – given its supply-driven past, and its present model.
Whether De Beers rough prices adjust according to fluctuating levels of consumer demand, and resulting polished diamond price levels, will ultimately determine the extent to which the new strategy enables consumers to drive De Beers and shape its business. Sightholders should hold management accountable to their revised perspective accordingly.
Rather, by being more demand-driven, it seems that De Beers is trying to capitalize on its name to augment its stake in the growing luxury space. The verdict is still out whether it can compete with the likes of Tiffany, Cartier and Graff.
However, the restructure also makes sense in the context of De Beers supply and seems designed to enhance De Beers executive committee’s control over its respective mining operations. The mining business has four divisions including an equal stake in Debswana with the Botswana government, a similar partnership with the Namibian government in Namdeb, a 74 percent stake in South Africa’s De Beers Consolidated Mines (DBCM), and full ownership of De Beers Canada.
While each unit garners some degree of independence, a more centralized structure will help De Beers adjust its production in a more cost-effective manner in relation to market volatility. As one De Beers executive explained to Rapaport News, the mining focus is largely internal, tightening the linkages between the mines to better manage how to, when to and where to adjust production.
More significantly, however, is that for the first time a third party will soon be selling De Beers goods when Botswana’s state-owned Okavango Trading Company launches sales, expected in the first quarter of 2013. The sales, which will consist of 12 percent to 15 percent of Debswana’s production, represents exciting times for Botswana but daunting ones for De Beers as it essentially becomes a supplier to a supplier and competes with its own product.
While Botswana owns the 15 percent stake in De Beers that Anglo American does not, the country’s emergence as an independent player in the rough market underlines De Beers need to tighten the controls on its own supply. After all, what added value does De Beers bring to the market and why do its government supply partners even need the company?
De Beers has had a busy few years, independent of some challenging market conditions. Determined to rid itself of the monopolist tag, it has reduced its production capacity by selling mines and enabling other players to emerge. The company has relocated its distribution activities to Gaborone and is in the process of moving its sights there too, signing a 10-year supply agreement with the Botswana government in the process. Add to that a new CEO, the divestment of the influential Oppenheimer family and Anglo American’s subsequent takeover that culminated in last week’s appointment of Anglo American CEO Cynthia Carroll as De Beers chairperson. Not insignificantly, De Beers also introduced greater interaction between the DTC and Diamdel selling units.
Those events laid the groundwork for the business review now taking place at De Beers, baring a clear Anglo American stamp of approval. In fact, it could even be an overall realignment of the De Beers business into the more corporate-oriented Anglo American structure. A strong luxury brand is certainly an interesting prospect for the mining conglomerate’s portfolio but may serve to remind De Beers to focus on what it does best – mine diamonds.
For now, let’s agree that the restructure was inevitable as De Beers adapts to a changing market and its own evolving role therein. What that means for the rest of the diamond market remains to be seen as the company may just be trying to reinvent the wheel. Sightholders will be hoping for better value from their De Beers boxes than their DTC boxes have recently provided. For throughout the process, sightholders will be assessing the value of their De Beers supply, and wondering if the corporate realignment is at all relevant.