Diamond buyers are leaving stones on the table, prompting De Beers, the world’s biggest producer, to back down on pricing.
After 30 percent of its rough diamonds went unsold at its March sale, the Anglo American Plc unit unexpectedly reduced prices by about 3 percent last week. In February, the company said it expected an increase this year.
The reversal is a sign that Chief Executive Officer Philippe Mellier has gone too far with his four-year-old strategy to boost profit by demanding more money from the company’s select group of buyers. That model is coming under pressure as sightholders, as the customers are known, say they’re paying more for rough diamonds than they can sell them for.
“People are saying enough is enough,” said Nurit Rothmann, an Israel-based broker of rough diamonds. “You can’t buy and lose just to be in a VIP club.”
De Beers declined to comment.
For almost a century, being one of De Beers’s customers meant a seat at the industry’s top table and a shot at handsome profits. De Beers sold rough diamonds below the market price, and in return sightholders were asked to buy all the stones they were offered at the asking price. Rejections were frowned upon, and the best clients were rewarded with an occasional gift, a heavily discounted large diamond known as an “exceptional.”
That model was upended in 2011 when Mellier was brought in. A mechanical engineer, he’d spent most of his career working with cars and trains, most recently as head of Alstom SA’s transport unit.
He changed De Beers’s strategy, raising prices while being more accepting when buyers rejected some stones. The new model was based on the premise that if all the diamonds were being bought, the company wasn’t charging enough. The company also agreed in 2011 to buy the Oppenheimer family’s 40 percent stake in the diamond producer, for $5.1 billion.
“They needed someone like a Mellier coming in from a completely different industry, taking a hard look at the business and saying ‘look lads, the returns we’re making are not enough,’” said Kieron Hodgson, an analyst with Charles Stanley & Co. in London.
The strategy worked. Under Mellier, De Beers almost tripled operating profit to $1.36 billion last year by narrowing the discount between its price for rough stones and the secondary cash market.
Anglo reaped the benefit as De Beers’s sales rose 11 percent to $7.1 billion in 2014. It was Anglo’s best performing unit, accounting for more than 27 percent of the London-based mining company’s earnings.
While that bolstered earnings for Anglo, the industry’s biggest players from Antwerp to Tel Aviv are deriving less value from being sightholders. De Beers failed to sell 30 percent of the stones offered at its March sale, according to trade publication Rapaport, amid growing pessimism about demand this year.
“De Beers has been too aggressive,” said Anish Aggarwal, a partner at the Antwerp-based industry consulting company Gemdax. “You cannot sustainably price above the market and supply and demand fundamentals, and they’ve done that now for at least three quarters.”
As De Beers raised its prices, the market has declined. Rough diamond prices fell 1.2 percent in the first quarter, according to data from U.K.-based WWW International Diamond Consultants, after a 6.9 percent drop in the last three months of 2014, the biggest quarterly decline in more than two years.
Weak sales and lower prices also come amid a shortage of credit after last year’s decision by KBC Groep NV to wind down its Antwerp Diamond Bank, which financed the network of companies that trade and process gems in the Belgian port city.
“The returns this year will inevitably be lower,” said Hodgson, of Charles Stanley. “I think Anglo has already accepted that, but have shareholders? Probably not.”
De Beers said in April it was cutting production as demand weakened.
The company, which produces about one third of the world’s diamonds, sells stones at “sights” held 10 times a year in Botswana, where it operates the biggest mines. Each buyer, including representatives of Graff Diamonds Corp. and Tiffany & Co., is given a box containing plastic bags filled with stones.
While being a sightholder doesn’t deliver the returns it once did, it may be some time before they are willing to forgo the chance to buy diamonds from the industry’s biggest name.
“It still has an appeal, it’s still a really prestigious badge in the industry, but it’s not the be-all and end-all anymore,” said Aggarwal. “Before, the goal was to get a rough supply deal with De Beers. What counts today is what do you do with the rough once you get it.”