How De Beers went from star to scapegoat

Rob Bates

Here is how fast things can change in the diamond industry.

– In March 2014, Anglo American’s CEO Mark Cutifani, then a year into the job, publicly fretted his company had overpaid for De Beers in 2011. “The acquisition is not delivering what we would expect it to deliver,” he said, adding that he wants De Beers to attain a 15 percent return on capital employed (ROCE).

– By the end of 2014, the commodity-sector malaise had dealt Anglo a heavy blow, and it reported a $2.51 billion loss for the year. But De Beers was, as countless headlines put it, the jewel in its crown. Its profits soared 33 percent, and it was the second-largest contributor to Anglo’s profits that year. It even hit the magic 15 percent ROCE number, outshining the rest of Anglo. As 2015 started, executives predicted further rough price increases once the “indigestion” cleared out of the pipeline.

– Now it’s the end of 2015, and the bottom has fallen out of the diamond business. Analyst Chaim Even-Zohar estimates that De Beers’ second-half sales will likely come in at $1.2 billion–$1.3 billion, a 30-year low. In the last 40 years of diamond history, there has never been such a dramatic fall from first-half sales to the second half, he says.

This week, Martin Rapaport sent out a mass email urging De Beers CEO Philippe Mellier—the first outsider to head the company—to resign. He even suggested going over Mellier’s head and emailing Cutifani, urging readers to let him know “about the intolerable situation regarding profits and liquidity in the diamond trade.

How did all this happen?

The obvious culprit is the economic problems with Asia and generally lackluster world economy. But with squeezed profits and continuing problems with bank financing (as well as several severely over-leveraged companies), the diamond market could not absorb the hit like it would normally. For De Beers’ sparkling results, and the businesses of some major players, were built on sand.

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Source JCK Online