Alrosa – De Beers: No Deal Yet
February 03, 05The DTC’s 2004 sales of $5.7 billion took place at a time when diamond prices were an average of 14% higher than in 2003 when sales were $5.5 billion. Though nominally sales increased by 3%, they represent a 9.5% decline (by value) if the price inflation is neutralized (and when the 2004 sales are measured in 2003 prices). It seems that the DTC sold fewer carats at higher per carat values. The De Beers production (in carats) increased 7% from 44 million to 47 million carats, but its end-of-year diamond inventory (diamonds and other assets) of $1.85 billion was slightly higher than the $1.75 billion level at the end of 2003. If that end-of-year 2004 inventory would have been stated in 2003 prices, it would have totaled $1.5 billion. And this “in real terms” inventory decline was achieved in spite of the increased mining production.
What is the purpose of doing these types of exercises? After all, the DTC published splendid figures. The company’s net headline earnings went up 11% to $652 million and its diamond account margins increased from 12% to 14%. De Beers did well. What we are wondering, however, is whether this performance can be sustained if the Alrosa-De Beers deal is not approved by the EC. Is that a likely possibility? No, we don’t think so – but we have received strong signals from Brussels indicating that we should not give the impression that it is a “done deal”. It isn’t.
De Beers managing director Gary Ralfe, in remarks to Sightholders which were widely circulated, also in Brussels, noted that “just before Christmas the new Commissioner for Competition indicated that, subject to a mandatory consultation period, she intended to approve a proposal put by De Beers and Alrosa and, after due process, we expect that this will be made into a formal arrangement with the European Commission.” [As has been well publicized, in terms of this arrangement, the DTC will be legally able to purchase US$700 million of Alrosa diamonds in 2005, but declining by $75 million for every year thereafter, until a bottom of $275 million is reached in 2010 and beyond.]
Though the agreement basically will reduce the DTC to a marketing level of 10%-15% of Alrosa output, Gary Ralfe regards “this as a good outcome and important for the continuing confidence of our industry”.
Even after the publication of the terms of the Alrosa-De Beers commitment, the EC has been receiving quite a few queries from diamantaires on the approval process. In light of the optimism in the market, EC sources informally indicated and cautioned that the EC approvals are far from a done deal (in spite of the claim by some) and that the whole purpose of publishing a notice (hopefully by the end of February) to consult the market is actually to get some feedback on potential problems caused by the commitments of Alrosa and De Beers as they stand, including the anti-circumvention clauses or the monitoring/trustee issue.
EC sources stress that “if players in the market come to us saying that the commitments are a bad deal or have not covered some important elements of potential circumvention or have not addressed the issues at all, then let us go back to the drawing board and envisage another solution to this case. This is totally possible, but only on the condition that third parties will let us know what they think,” we were informed.
“The EC is interested in a transparent process and it intends to issue another press release when the formal notice is published in the Official Journal after which the trade and industry have another month to make comments. The EC finds it important that everyone understands the approval process,” said our sources, who intimated that the EC still encounters considerable reluctance among diamantaires to speak up, somehow fearing repercussions.
To remedy fears among some diamantaires about the ramification on their business when they publicly speak out, the EC sources stress that “confidentiality or even anonymity can be guaranteed and this is not a vain word for us”. So, although the intentions of the EC certainly point to approval, the EC is committed to due process and doesn’t wish to give the impression that it is a “done deal”. It isn’t. And if the deal isn’t approved, it isn’t at all certain that the DTC would be able to make even the “willing buyer – willing seller” deals they are making now.
If the diamond market performs well in 2005, then we would hope that also in real terms (i.e. expressed in 2004 prices), this year’s DTC sales would increase by value. But it will need more diamonds to do so – and much depends on the outcome of the public consultations which the EC plans to undertake in February-March. The DTC will know that answer before May-June, when it has to make the commitments on the number of Sightholders with whom it will sign contracts on July 1, 2005. The significance of the EC decision shouldn’t be underestimated – not by the EC itself either.
Have a nice weekend.