A True Celebration Without Clouds
January 16, 03De Beers is rightfully celebrating today - the day the European Commission Competition Authorities gave their final approval to the Supplier of Choice regime. The European Commission seems to have a penchant for combining the "good" news, with the "bad" news - and in its announcement approving Supplier of Choice, the EC mostly stresses the illegality of the Alrosa-De Beers rough diamond marketing agreement - which for the time being it formally rejects.
Somehow, we aren't overly concerned about that rejection. It's like a movie we have seen before. It was in July 2001 that the EC issued a Statement of Objections against Supplier of Choice. Then it found that the agreements could not be approved in their original form "as the criteria for selecting the Sightholders as well as the amount of detailed confidential information and contractual commitments required from them could restrict their commercial behavior."
The EC was able to impose some further changes on the DTC plans. These changes include the introduction of an Ombudsman, whose name will have to be approved by the Commission, which was considered the best way to introduce a check into the system as far as the selection of Sightholders and the box allocation was concerned.
In response to EC pressure, De Beers streamlined the sightholder selection process and agreed to give longer notice (6 months) to terminate the supply contract with Sightholders.
Furthermore, the Sightholders will only be able to buy the boxes that they have applied for and after inspecting the stones. It took the EC more than two years to go through the approval process with De Beers. This created considerable instability in the market. Sightholders didn't know whether they were in or on their way out. De Beers had to delay all meaningful decisions until after today. It hampered the planning process of many companies.
The present objections against the Alrosa-De Beers marketing deal is, as De Beers managing director has said, "part of the approval process." There is, however, a tremendous difference between the EC's initial objection against SoC and its present objections against the Alrosa deal. The difference is: the present objections don't really matter.
De Beers and the Russians are trading with each other almost as if it is all legally robust. It really doesn't matter that the EC says that it "is its preliminary view that the agreement under which Alrosa commits itself to selling half of its production through De Beers is in breach of European Union competition rules".
It doesn't really matter that the Commission takes the view "that the marketing agreement restricts, to an appreciable extent, competition on the rough diamonds market by eliminating competition from Alrosa. The Commission also takes the view that by entering into the agreement, De Beers has abused its dominant position in the rough diamonds market."
The EC states today that "De Beers's control over the production of rough diamonds together with the strategic use of its stocks enables it to determine the quantity, the quality and, to a large extent, the price of the diamonds that it releases onto the market every year." It says that the remainder of the market, consisting of players in Angola, Australia and Canada, is very fragmented. That, undoubtedly is true.
But it is equally true that none of the players in the market, none of the competing producers and no players in the downstream, have much to gain from De Beers losing its leadership role or losing its price-setting ability.
With over $35 billion worth of rough and polished diamonds inventories in the diamond pipeline, it is hard to find anyone who earnestly will say: we want more competition so that the price of diamonds can go down by some 40%-70%. There are also no consumer groups "demanding" the dramatic lowering of diamond prices.
Even though the outstanding legal issues remain of considerable intellectual fascination, this is really the time to consider the Statement of Objections of almost no concern. Today, together with De Beers, the industry can go back to doing what it knows best: mine, process and sell diamonds. Move on - and see how well Supplier of Choice will work.