Deja Vu: Another EC Investigation into De Beers
October 25, 07When the European Court of First Instance annulled the European Commission (EC)-De Beers agreement in which De Beers committed itself to cease rough diamond purchases from Alrosa after 2009, we concluded that the EC may have no choice but to reconsider an earlier decision to close all of its investigations of Supplier of Choice (SoC). We made that assessment in our column of July 12, 2007, and indeed, this is what is happening now: a renewed investigation on the market impact of SoC.
On October 10, 2007, the EC announced that it is “verifying the situation in the supply of rough diamonds as to whether there is sufficient availability of rough diamonds outside De Beers’ Supplier of Choice distribution system, following the closure of the [relevant] complaint procedures alleging the existence of effects which might constitute an infringement of articles 81 and 82 of the EC treaty.” In a way, this is strange. The EC should have made such a determination before closing the investigation.
Thus, once more, various rough dealers have been bombarded with questions, which, by law, companies have to reply to. We had suggested in the past that the reopening of the investigation against SoC would be necessary because of technical and administrative reasons, since the investigations were closed as a result of an arrangement with De Beers, rather than on the merits of the case. The EC is now appealing the court judgment, as it definitely wants a permanent prohibition on De Beers from purchasing diamonds from Russia, and now needs the relevant justification to support the appeal.
If we go beyond all of the legalities involved, what actually happened should now be obvious to all: De Beers made a deal with the EC or vice versa. In return for the EC closing all of its investigations against SoC, De Beers agreed not to buy from the Russians anymore – forever. They agreed to that unilaterally, without sharing knowledge or consultations with the Russians. Those who had filed complaints were notified that there was no further need for investigations – as if the Russian deal settled all the outstanding arguments.
De Beers made the deal because it needed to be able to say in the United States that it meets all the stringent competition requirements of the EC. Essentially, it was a very difficult decision, since De Beers badly needs the Russian rough (especially crystals) to fulfill the needs of many DTC Sightholders.
Alrosa had protested against the EC-De Beers agreement primarily on procedural grounds. It wasn’t given a chance to participate in the decision that would forever deny them a chance to sell to De Beers even if both sides wanted to. And the court agreed with Alrosa.
Deal-Making versus Good Governance
You don’t need to be a lawyer to realize that the January 2007 decision by the EC to drop all its investigations against De Beers’ SoC, despite a number of filed complaints, could never have been supported or justified by the reasons given at the time by the EC. The EC had said that there was no need to investigate further because (A) extended powers were granted to the Ombudsman and (B) De Beers agreed not to buy from the Russians.
The most logical thing for the EC to do now is to pursue the complaints that have been filed and closed. However, it doesn’t seem to be doing that. Based on the questionnaire that was sent out to the market, the EC is not really addressing the main argument of the complaints. Market players are asked to estimate the total size of the worldwide rough supply to the market for 2005, 2006 and 2007. Actually, that is an interesting question since people in the market must guess the withdrawals from inventories made by the main producers. Good luck to them!
The diamond companies are further asked to inform the EC of their own rough sales in 2005 and 2006, and their expected rough sales in 2007, 2008 and 2009. This is information most companies could most probably supply easily – if they want to.
And then, the EC comes up with a $10-million question: “Please provide your best estimate of the rough diamonds’ sales values of your ten biggest competing suppliers of rough diamonds for the years 2005 and 2006.” Going through the rest of the confidential questionnaire, and we don’t intend to quote all of the questions, we see that the EC searches for the market share of the ten largest rough suppliers in the market, and it wants to understand the principal channels for distribution of rough of the varied companies.
Relevancy of Questionnaires
None of these answers would really settle the issues that have been raised in the various complaints. The EC doesn’t pose questions on pricing; it doesn’t ask questions about Diamdel or DTC box trading; it doesn’t get into any of the basic issues, which would enable the EC to make a serious assessment of the impact of SoC on the rough market. The dominancy of De Beers goes well beyond market share.
It appears that the EC is not really interested in settling the complaints made in the (now) closed files. It needs, however, to go through the motions. The EC must be able to show that the decision to close the files on SoC was indeed supported by market investigation and not just a result of a deal made with De Beers.
The investigation refers to a “historic SoC” – as many issues have become totally irrelevant, since most of the rough distribution functions are now moving to African countries – out of Europe. The long arm of the EC will find it hard to reach those places. In fact, the DTC is already quite advanced in phasing out its European base of operations.
So why a new investigation? I couldn’t even imagine the repercussions of a finding by the EC that says there is a competition infringement in the market today. What would the EC do? Require De Beers to come up with a SoC 3? Or SoC 4? I find it hard to envision that the EC would succeed in getting the decision, which allows Alrosa to continue to sell to De Beers, overturned. The appeal will probably highlight a range of seemingly illogical or unjustifiable decisions, which would represent an “unintended consequence” from an EC perspective.
As all of the questions in the current investigation focus on market share, it seems that the EC may wish to draw a conclusion that is absolutely imperative to insist that De Beers cannot buy from Alrosa. Frankly, I don’t understand how any of the answers to the questions asked could lead to that conclusion.
In the current SoC 2 environment, there seems to be no logic for the EC to impose selling restrictions on Alrosa – constraints which would be either unenforceable or simply ignored in any case. Indeed, the latest investigation, as well as the EC appeal, seems like exercises in futility. The EC investigations into SoC will surely outlive SoC itself.
Have a nice weekend.