De Beers Squeezes Diamond Buyers Who Flip Gems: Chart of the Day

De Beers is driving margins on its diamond output higher by squeezing out buyers who sell rough stones instead of polishing them, consulting firm Gemdax says.

The CHART OF THE DAY shows how the biggest diamond company has offered buyers a narrower discount to secondary cash-market prices in the two years since Chief Executive Officer Philippe Mellier was appointed, according to data compiled by Gemdax. The difference shrank to an average 1.1 percent from 5.5 percent. De Beers traditionally sells stones at a discount to so-called sightholders, who cut and polish gems before selling them on.

“We want sightholders that are able to add value and make money,” Varda Shine, CEO of De Beers’ trading arm, said in an interview. “We don’t want people that just flip. We are going to see a much flatter supply chain and we are going to see companies with more value addition doing better than companies which just flip goods from one hand to the other.”

De Beers broke with a tradition of hiring internally when it appointed Mellier, an engineer with a transport background. Anglo American Plc paid $5.2 billion to raise its stake to 85 percent, while diamonds made up about 17 percent of its first-half operating income, according to data compiled by Bloomberg.

The company needs to balance its desire to halt flipping of rough diamonds against the risk of discouraging investment in the industry and hurting prices in the longer term, according to Anish Aggarwal, a partner at Antwerp, Belgium-based Gemdax.

“De Beers made a conscious decision to change their pricing,” he said. “What De Beers is trying to do is push out players that simply box flip. It’s a tempting business model to go for if you have a built-in margin. It’s not a business that requires a great deal of infrastructure or capital investment.”

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