Diamdel or Diamdelete?
February 05, 04The organized diamond industry, in its various attacks on the Supplier of Choice strategy, has been pleading with the DTC to increase Diamdel’s rough diamond sales to non-sightholders. At some point, DTC managing director designate Gareth Penny showed some goodwill and announced a significant increase in Diamdel’s overall annual sales target to some $500 million. In the past few years we estimate that Diamdel accounted for some 7%-8% of overall DTC sales (and some 10% in South Africa).
History will probably never know if Gareth Penny’s gesture to increase Diamdel sales was a spontaneous response to the pressures exerted on him by the World Federation of Diamond Bourses or whether it was an integral part of the DTC’s strategy, but that has now become an irrelevant question.
The Diamdel “expansion” statement has since then become the focus of legal challenges. Now we see (some) of the results of these challenges with Diamdel Chief Des Cavanagh announcing that “contrary to recent speculation on this topic, the volume of goods we receive has not increased as a result of Supplier of Choice and, even if De Beers did decide to increase it, it would only increase in line with a framework agreed by De Beers in discussion with the European Commission, so as not to give rise to concerns.”
That statement represents a dramatic change of policy. The Antwerp Diamond High Council (HRD), which devoted a press release to this statement, was extremely careful to make no “value judgment” in its media announcement. It didn’t say: “we greatly welcome the policy” or “we are greatly upset.” We can see the predicament of the HRD, which for once, made strenuous efforts to be neutral on the very issue it had loudly spoken out on in the past.
The HRD dilemma is shared by many others who would like to have their cake and eat it too. When the final sightholder list was announced, the legal challenges (both in court and with the European Commission) came mostly from rough dealers who, with a degree of justification, claimed that by taking away their sights, De Beers, through Diamdel, may be cornering a larger part of the secondary rough market. In a way, De Beers was seen doing its own “verticalization” by merging the first level of the diamond pipeline with the second one.
The organized diamond industry, especially in Antwerp, views those who have challenged De Beers as quasi-heroes, especially the Horowitz brothers are admired for their waging of an effective, high profile war against the Supplier of Choice system, with one of their main gripes (but not their only one) being Diamdel’s growing role in the secondary rough market.
I have no problem understanding what the Horowitz’s are doing. They are astute businessmen and they are literally not leaving a stone unturned to protect what they perceive as their best commercial interests through legal means. I have, however, a greater problem in understanding some of the industry representative organizations who on the one hand are pleading with the DTC at every opportunity to expand Diamdel sales, but are at the same time quietly, tacitly, but rarely openly, supporting the legal activities aimed at getting the European Commission to reopen the Supplier of Choice approval so that, among other things, there will remain an active competitive market for rough dealers trading in DTC goods.
The DTC was gradually forced into a no-win situation. It knew exactly what it did NOT want to do – and that is restoring the sight privileges to those rough dealers which it had dropped. From its perspective it was bad enough it had to swallow a court order that provided one dealer with continued allocation for a limited period, with the future status depending upon the outcome of the legal proceedings.
Des Cavanagh’s statement, made to an HRD publication, was formulated with the greatest of care. The text checked and rechecked. The hands of lawyers are visible in each syllable. Says Cavanagh: “Diamdel is not a sightholder of DTC; its relationship with the company is not strategic, but rather technical, inasmuch as the DTC acts as conduit for its rough diamond supply from De Beers.” This is absolutely contrary to De Beers assertions made in the past, which called Diamdel a sightholder in its own right (and a sightholder with special privileges in South Africa), but times and circumstances change and it is the prerogative of any corporation to change the nature of its relationships with its subsidiaries, affiliates, etc. – and it is also entitled to change policies or positions.
One statement of Cavanagh is even slightly amusing: “We are a completely separate company from the DTC. This means that no information flows between us and the DTC about whom we supply and how much. Likewise, the DTC does not provide us with information on sightholders. Indeed, following its discussions with the European Commission on SoC, De Beers put in place strict confidentiality measures between us and the DTC to prevent the flow of commercially sensitive information between the two companies”. This probably presents the legally correct position. For the rest, I would call it a statement of policy – a statement reflecting what the company is aiming at; it doesn’t seem to represent today’s or yesterday’s perceived reality.
And that gets us to the crux of the matter. Diamdel was always seen as a place for future sightholders to start working with De Beers. Indeed, historically, new sightholders have always been Diamdel clients before they achieved sightholding status. This was seen as a plus, not as a minus. Ex-sightholders were – and still are – supported by Diamdel in the transition process to a life without De Beers.
One may take the argument a step further. If, as the lawyers advising Cavanagh are saying, there is no exchange of information, recommendations and experiences with certain clients, then, indeed, there is no reason for Diamdel to stay in business. It ceases to have “stepping-stone” value for subsequent admission into the Sightholder Club. That is probably not what the World Federation of Diamond Bourses or the industry at large really wants.
When the WFDB expressed its concern about the plight of the small manufacturers, De Beers, in a written response, reassured the industry’s leadership that it recognizes that “smaller firms will be more adept than the larger players in dealing with niche markets, producing speciality cuts or devising particular marketing plans, and these need to be encouraged. It is part of our strategy to continue to supply manufacturers in the secondary market, through Diamdel and the other dealers.”
What are the possible scenarios? When Supplier of Choice was approved, the EC specifically stated “the Commission will also particularly want to ensure that the [SoC] system does not lead to a restriction in the supply of adequate quantities of rough diamonds to traders in order to ensure enough liquidity in the market. The Commission, therefore, reserves the right to reopen the case should changes in the factual or legal situation as regards any essential aspect of the agreements modify its present view.”
To increase Diamdel sales, as the industry wants, would ensure more liquidity. It has, however, strengthened the legal case of the “disgruntled” sightholders, as Diamdel was seen to have received preference over other sightholders. The Cavanagh statement makes it clear that De Beers is giving greater weight to protecting its hard-earned approval from the EC than to accommodate industry requests for larger Diamdel sales.
The Cavanagh statement also makes it clear that Diamdel shall maintain qualified “Chinese walls” between itself and the DTC. Objectively speaking, if there is no “added value” to a relationship with Diamdel for the client, if it is not a stepping stone to sight-privileges or a stepping-down from sight vehicle – if it is just another rough dealer without growth - then De Beers would be better off closing it down altogether. De Beers has never made it a secret that Diamdel doesn’t make a profit, that, at best, it breaks even. It certainly doesn’t represent a decent return on equity employed. In South Africa it has said it takes a 2% commission on DTC’s box prices – which would hardly be sufficient to cover costs.
There was always an argument that Diamdel’s open market buying activity and its sales activity provides important market feedback to the DTC. Cavanagh’s carefully worded statement says that there is no exchange of information about clients; he didn’t say that there was no exchange of information on market conditions.
In the new organizational set-up “removing” DTC from De Beers, Diamdel may find itself “motherless”. If information feedback is the only reason to keep Diamdel in business, this is a heavy price to pay for market information. There are more cost effective and more efficient solutions to that.
Though there is a danger of reading too much into the Cavanagh statement, it would be my bet that Diamdel in the future will only continue to play a real role in South Africa and the producer centers – and these supplies can also be arranged in a different manner. In the Supplier of Choice’s downstream preoccupation, Diamdel doesn’t really play a role. This vision may well gain added impetus with the appointment of Gareth Penny as DTC’s managing director, who is fully committed to rough distribution with a downstream orientation.
Closing or downsizing may not be the vision De Beers may have had for Diamdel. It may, however, turn out to be the most pragmatic resolution to legal and commercial challenges.