It's the Long Term, Stupid

Whatever the question, the answer is China. The country is the most important factor in the global arena, and where it's not, it will be. There are many questions in the diamond market about the reasons for the Oppenheimer family to sell their holding in De Beers, but the more interesting question is why Anglo American bought it, and how it fits into a broader issue – the recent consolidations and proposed IPOs of a range of leading companies.

There are several likely reasons for the Oppenheimers to sell their stake in De Beers: a mixture of shifting interests, personal needs and opportunity no doubt played a role. If there is a long-term strategy, it’s a personal one, not a corporate one, as the Oppenheimers are a family, not a business.

The broader view is that China is on everyone’s mind. In a statement, Anglo American’s CEO, Cynthia Carroll, said the purchase "Marks our commitment to a highly attractive industry with very strong long-term supply-demand fundamentals." She repeated the phrase, "Very strong long-term supply-demand fundamentals" a number of times. Further, she added that "We think that rough diamonds demand will outstrip supply in a fairly significant way, which will drive rough diamond prices going forward," adding that demand from India, China and the Gulf would soon match demand by the U.S.

Alrosa, the other large diamond miner alongside De Beers, is planning an IPO. It too expects demand to outstrip supply, with China and India leading retail growth.

Like De Beers, Alrosa has the basics for taking advantage of this growth. Just as De Beers has Botswana, so Alrosa has Russia – and both have long-term commitments for supply from these countries, the first step in securing the future. In this context, the on-again off-again talks between Alrosa and Rio Tinto should be mentioned. They are an attempt by Rio Tinto to add a fourth diamond mine to its portfolio.  

And as the two largest miners are preparing for continued and increasing growth in China, so are other leading players. In May, jewelry retailer Chow Tai Fook announced that it was planning an IPO. The China-focused retailer intends to raise $3-$4 billion in the first quarter of 2012 allowing it to double the number of its stores to more than 2,000 by the end of 2020 – with 90 percent of them in China.

Lawrence Graff is also banking on China, a move that will require a heavy investment in inventory. To finance the purchase of the kind of goods the British diamantaire is famous for, Graff is reportedly trying to raise $1 billion in an IPO.

At the same time, Graff is a major shareholder of mid-size diamond miner Gem Diamonds and only recently increased his stake in the company. These moves will secure his position as a major supplier of very high-end diamonds to consumers.

The repositioning by these four leading firms is based on two basic assumptions: rising demand and declining supply. The consolidation and "money gathering" is a means to an end – securing market share in what will soon be the second-largest diamond jewelry market in the world.

It is not just that the U.S. is no longer a growth market for diamond jewelry, there is another factor fueling   this move – Europe. The first reason is that diamond jewelry sales growth in Europe is not driven by Europeans, but rather by Chinese tourists – as a visit to department stores such as Selfridges in London or Gallerie Lafayette in Paris quickly proves.

The second reason is the volatility of the European financial markets. If the U.S. is not providing a great promise for growth, Europe is fueling a great concern for the future, with the threat of a major recession ahead, followed by a reshuffling of the Euro-zone membership.

In the minds of business strategists, this translates to "look for alternative markets."

A final word about the sale of De Beers; the impact of the ownership consolidation on the diamond industry is not yet clear. However, considering that the management team is not likely to change in the near future, in the short-term policies are expected to continue as before and worries about a shift to tenders are likely unfounded. In the long-term, though, everything can change and companies need to be prepared for this change – because it will come.

Have a peaceful weekend.