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June 2000

On May 30th revolutionary changes at De Beers were independently confirmed to the DRB by reliable sources close to the company. In its breaking story, The Guardian, which sites an unnamed De Beers source, said, “De Beers which controls about 65% of the world c, will abandon its 60-year-old cartel policy of trying to stabilize supply and demand of gemstones and concentrate on mining and marketing.” The Central Selling Organization (CSO) will be dismantled into the Diamond Trading Company and discontinue its role as an “international policeman” for the industry thus giving up its much envied monopolistic control of the diamond market.

The Financial Times reported a softer version of this news stating that the new rules should transform the monopolistic De Beers into a normal supplier. It will move towards transparency. FT said, “De Beers is set to change fundamentally its relationship with its uncut diamond clients by formalizing the terms and conditions governing their supply relationship for the first time.”

At the next sight, on July 12th, De Beers is expected to present 125 sight holders with the written conditions for remaining on the list. It will also formalize its relationships which were otherwise based on understandings; De Beers gave sight holders only what it felt was proper to help keep the market stable. Now, perhaps there will be certain obligations for both sides much like a franchise.

This major change can mean one of two things. The Bain & Co. review may have revealed that it is more beneficial for shareholders. By relinquishing its responsibility to keep the diamond market stable. There will be less capital investment – De Beers will reduce its billions of dollars of inventory – and greater profits with a concentration on mining and marketing diamonds. On the other hand, this could mean just a change of image to gain entrance to the U.S. By not being a monopoly, De Beers’ looks better to U.S. Justice Department officials and also possibly avoids problems with the European Community. However, if De Beers is intent on branding diamonds and turn sight holders into agents it may hinder its case.

Reports indicate that De Beers will stop buying rough on the “open” market. Mining companies, BHP and Argyle, both agree that this will create greater volatility; prices will be much less stable. De Beers has indicated that they will raise prices on cheaper goods like the type that are mined by Argyle and reduce its “special” stones. Other mining companies are expected to follow De Beers’ lead.

In any case, there is no cause for alarm. This does not mean that there will be a flood of diamonds into the market. With its tremendous inventory, De Beers must maintain its interest in the market. It can neither afford decreased prices nor a reduced confidence in diamonds.

Surprisingly, there was little reaction in the price of De Beers ADRs.

A Wholesale Diamond Dealer’s Reaction

At a recent friendly lunch at the Diamond Dealers Club

I dined with a diamond cutter and a major diamond wholesale buyer. We were discussing the state of the diamond business as usual. Everyone agreed that the boom is not over; even the diamond cutter who is not a De Beers sight holder agreed that profit margins have improved. He complained that fine rough is hard to come by. At this point the wholesale dealer made a shocking statement:

“I will not buy any rough or polished colorless diamonds (D-G) for at least 6 months. In fact I will do my best to reduce my inventory by half.”

We looked at him in disbelief. I told him that the Diamond Registry is ready to buy all his 5-8 grainers (1.25-2 ct.) at a fair price.

He explained, “First, I can get diamonds on the Internet for immediate delivery in New York Why should I tie up my capital which brings increased dividends?”

“Secondly”, he continued, “I am afraid that some of the fine colors I buy may have been treated or color enhanced with the improved whitening technology. One day my customer will send his diamonds to a lab that will tell them it was born a “K” color but enhanced. This will cost me legal problems and six months of profit.”

“Finally, I’m not buying at this time because I have full faith and confidence in the brains at Bain & Co. and De Beers. Since De Beers is giving up its single channel marketing which avoided price fluctuations, I don‘t want to buy. ” Bain advised De Beers to reduce its inventory by half and limit its purchases on the rough market.

We suggested that there was a fourth reason that he was hiding, namely that he lost a bundle on the stock market and was a bit over-cautious. Smiling but a little bit wiser we all left knowing his decision was wrong but some of his arguments were right.

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