Diamond Stability? I Don’t Think So

At the recent conference in Tel Aviv commemorating Israel’s 50th anniversary and the opening of the new rough diamond bourse in Ramat-Gan, there were intriguing statements from Anthony Oppenheimer, president of De Beers’ Central Selling Organisation, and Des Kilalea, a financial analyst who follows the giant mining company for Fleming Securities in South Africa. Taken alone, they might be considered posturing. However, taken together they’re important.

Perhaps the most interesting presentation was by Kilalea. He made a strong case that De Beers stock is significantly underperforming:

“I’m no supporter of investing in a company that has so low a return on assets as De Beers has, particularly if I thought even more of my money would be plowed into assets such as inventory, which I do not believe offer a decent return in the medium term. I’d probably look for a new mining company which can coattail the CSO’s marketing spending and buffer stock management.” It’s unlikely any financial analyst working in South Africa would make such a statement without De Beers knowing of it in advance.

Oppenheimer’s remarks were a marked contrast to Kilalea’s gloomy analysis. He talked about the CSO’s role in maintaining an orderly market. That’s what a cartel is supposed to do. Everyone who spoke at the conference noted the importance of stability in the diamond marketplace.

“The CSO needs support, not an argument and debate,” Oppenheimer said. “You cannot undermine the role of the CSO. You need to act wisely – not take advantage of some short-term opportunity for personal advantage. Diamonds cannot be forever if we only think of today!”

Oppenheimer maintained that De Beers would stand fast in supporting the diamond market. Yet we know that more and more diamond producers are marketing product outside the CSO’s guiding hand while De Beers is spending $200 million annually promoting diamond products.

De Beers has done a masterful job in creating demand and promoting diamonds. The phrase “a diamond is forever” marked the beginning of selling the diamond dream. De Beers pioneered and continued this concept even though competing mining companies appeared on the scene and now benefit from De Beers’ hefty marketing expenditures.

Mayer Herz, treasurer of the New York Diamond Dealers Club and a principal in the cutting firm M. Herz and Son, stated that the other diamond producers were getting a free ride on the coattails of De Beers’ advertising. He suggested these producers should contribute financially to De Beers’ promotion efforts.

Obviously, the move to create a De Beers brand name is a way of differentiating a De Beers diamond from other producers’. If more of the world’s diamond supply comes from mines outside the CSO apparatus, why shouldn’t De Beers try to differentiate its diamonds and those of its client mines from the latecomers’?

What can we conclude? It’s this: De Beers is firing a warning shot at those who appear to challenge its cartel practices. Play ball the De Beers way or fight against De Beers’ marketing muscle. I doubt De Beers will stop managing diamond supply to effectively influence prices. In fact, the company may well be testing the water with branding in England to see if the consumer market will pay more for a De Beers diamond.

Talk of stability is nice, but the reality could well be something else. Stay tuned.