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News > International
De Beers buffs its image
August 25, 2000: 12:48 p.m. ET

Cartel out, competition in at diamond leader that's seen to eye U.S. entrée
By Staff Writer Jamey Keaten
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LONDON (CNNfn) - Diamonds may be forever, but the company that long controlled supply and distribution of the precious gems says it is dismantling its cartel - and even expects to benefit from the new competition.  

De Beers, the South African company that has ruled the diamond trade for decades, faces pressure to change: from shareholders, eager to see more gleam in a stock price that has drooped for the past three years, and from the wider international community, calling for the industry not to trade in "conflict" diamonds - those originating in war-torn African countries.

graphicAnalysts say De Beers is succumbing to the inevitable - that competition has been chipping away at its market control to the point that it isn't even a monopoly anymore. But old names die hard, and the U.S. government still bans the company from doing business there because it's deemed a monopoly.

"This strategic change has been forced on them by the market and it looks like they've made the best of it," says Roger Chaplin, an analyst with Canaccord Capital Corp., who rates stock of De Beers Consolidated Mines as a "strong buy" and tips the New York-traded American Depositary Receipts (ADRs) to rise to $35 from a current $27-3/8.

The new look is the biggest change in sixty years at the 112-year-old company. It has already begun whittling down its huge stockpile of diamonds, a hoard that for years has allowed it to control prices, and says it welcomes more entrants into the diamond trading business. That goes along with a public stance of spurning trade in conflict diamonds, a more customer-focused marketing approach, and a push to boost its market valuation.

Shrinking market share


To be sure, De Beers' market share in diamond distribution has been shrinking, from nearly 90 percent in the mid-1980s to roughly 60 percent today, by its own account. Analysts say its share of worldwide diamond mining is about 45 to 50 percent.

The Johannesburg, South Africa-based company, which has carried the banner of the diamond industry for decades, says that even as more competition emerges, it wants to keep a leading role in its core business: the mining and marketing of rough diamonds.

"We want to be seen as the leader of the diamond industry - not the custodian," Gary Ralfe, De Beers' chief executive officer, said at a press conference unveiling the new strategy.

Shucking the monopoly doesn't mean De Beers wants to get any smaller. The company agreed last week to pay $206 million to buy Canadian miner Winspear Inc., in a sweetened bid after the target company's shareholders rejected an earlier offer. De Beers has also bid for Australia's Ashton Mining Ltd., which owns 40 percent of the Argyle diamond mine there, the world's biggest based on number of carats produced.

Analysts also say the new look is part of De Beers' effort to brace for a possible downturn in what has recently been a hot market, driven by U.S. demand. graphic Last week, De Beers posted unexpectedly strong earnings before special items of $877 million, as revenue at Diamond Trading Co., which sells the gems to jewelers, hit a record $3.5 billion.

Politics have always loomed large for De Beers. In addition to the decades-old U.S. ban, there was a political angle to the decision 10 years ago to split into two companies. With South Africa's apartheid regime nearing its end, De Beers was acting to defend itself in case a new government tried to nationalize it.

That led to today's structure, whereby De Beers Consolidated Mines Ltd. oversees the South African operations, and De Beers Centenary AG manages its activities elsewhere, such as in Botswana and Namibia.

Lately, the hot-button political issue has been conflict diamonds. De Beers insists it has been vigilant about not selling such diamonds over the last 18 months, and gives what it says is a diamond-solid commitment to ensure its gems don't come from war-torn zones. The company has closed offices in Angola, the Democratic Republic of Congo and Sierra Leone, countries that have suffered bloody internal wars. Diamonds have recently been implicated in the financing of arms used in these countries.

Steering clear of blood diamonds


In June 1998, the UN imposed sanctions on trade in diamonds believed to be linked to Angola's UNITA rebels to pay for the long-running war against the government, De Beers' spokeswoman Joan Braune said. De Beers, which insists it never bought any diamonds directly from UNITA, stopped buying all Angolan diamonds in October 1999. The company also says it has not operated for the last 15 years in Sierra Leone or Liberia, two other African countries that have been scarred by war.

De Beers doesn't have corner shop locations nor does it make the rings proffered by many a marital suitor, but it holds a dominant position in the mining and marketing of the precious stones to wholesalers.

Time was De Beers had "take-it-or-leave-it" control of diamonds in the wholesale market: a customer would either take the box of diamonds it offered at a certain price, or get nothing at all, analysts said. Its makeover involves a branding push behind Diamond Trading Co., which will focus on stimulating demand instead of controlling supply in the diamond market.

graphicIn Hatton Garden, London's center of jewelry shops, vendors who praise De Beers for its support of the industry, also say the new look may amount to little more than image-polishing. Some also speculate the moves are designed to help the company gain acceptance in the U.S. market.

"My own personal opinion is that they want to bypass antitrust laws in the United States," said Daniel Richard Caspi of Davril, a jewelry vendor in Hatton Garden, although he adds that De Beers' support for the industry has been "outstanding" up to now. "They've done the lion's share of the marketing - and a superb job of it, no doubt about it."

Canaccord's Chaplin agrees that the issue of access to the U.S. "is there in the back of their minds. They want to be seen as changing completely."

That's not how De Beers tells it, though. Joan Braune said cracking the U.S. market was "not at all" the rationale behind the corporate changes.

The key driver was that De Beers stock doesn't enjoy the same generous valuations of other international luxury goods companies, said Braune. A gloomy three years for ADRs of De Beers Consolidated Mines (DBRSY: Research, Estimates) reduced them earlier this year to just half of their 1997 peak value, although they've staged a rally since the second quarter of this year, amid record sales figures. graphic

"If we were able to work or operate in the U.S., of course that would be a bonus," Braune said. "But we've operated well for a long time without being there."

The U.S. ban means, for example, that De Beers board members are forbidden from traveling to the United States on business. The company has struggled to get a hearing from U.S. Justice Department officials to make their case that the monopoly days are over.

Asked why those talks have been hard to schedule, Chaplin at Canaccord cited the "ingrained antipathy" of U.S. officials. Nicky Oppenheimer, De Beers' chairman, crossed paths earlier this year with U.S. officials at the World Economic Forum in Davos, Switzerland, but there weren't any talks, reports at the time said.

Gentler approach


 Analysts say the erosion of De Beers' market power inevitably is leading it to make other changes.

Charles Kernot, an analyst at BNP Paribas who has a "neutral" rating on De Beers Consolidated Mines, said the prospect of competitors carving out an increasing share of diamond production and trading has forced it to be gentler in its dealings with customers.

"If Russia goes its own way and more diamonds start coming out of Canada, De Beers is going to have to build closer relationships with the people who sell diamonds," he said.

The acid test that the cartel has been dismantled may come down to whether more competition leads to lower diamond prices. De Beers, however, says it has no desire to see prices decline, and in fact expects them to rise as marketing by new competitors complements its own efforts.

De Beers executives want to expand value-added services that will allow the company to raise prices, not lower them. The company has developed a technology that allows for etching miniscule markings on a diamond facet to indicate its legitimate origins. Executives said pilot programs show retail diamond buyers are willing to pay more for that assurance.

Shedding the stockpile


The company's moves to reduce its diamond stockpile - a key step in progressing to from monopoly to competitive player -- need to be sensitively handled to prevent the extra supply from undermining diamond prices. The De Beers stockpile is now said to be worth $2.7 billion - down from $4 billion at the end of 1999.

The wild card for De Beers is what damage, if any, the "conflict diamonds" issue will inflict on the diamond industry's image. CEO Ralfe, who says De Beers got the ball rolling on its corporate makeover before the issue was drawing headlines, told CNNfn.com the company has "no evidence" that sales have been hurt by the bad publicity surrounding conflict diamonds. It is, though, carrying out research to establish whether there might be a backlash against the industry. 

De Beers estimates that only 4 percent of the world's diamonds come from strife-torn areas, and maintains that the diamond business has a broadly positive impact on African economies. Looking elsewhere in the developing world, Oppenheimer has estimated that 1 million people in Mumbai, India are employed in the business of cutting diamonds.

But jewelry vendors are keeping a wary eye out.

""We are concerned - and I hope everyone in the industry is," said Caspi. Back to top

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