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Supply crunch forces De Beers tactics review
Allan Seccombe
Posted: Tue, 18 Dec 2007

[miningmx.com] -- DE BEERS has adjusted its tactics in its supplier of choice strategy to cope with reduced rough diamond flows into its Diamond Trading Company (DTC) and it has reduced the number of clients it can service.

The Europe Union decided in a ruling, which has subsequently been successfully challenged by Alrosa, that De Beers could no longer buy rough diamonds from the Russian company.

Alrosa’s sales to De Beers will fall from $600m this year to $400m in 2008 before being phased out completely.
evolving our supplier of choice mechanism
In South Africa alone, rough diamond supply will fall to about 12 million carats a year from 14 million carats in 2006 after the sale of four mining operations.

It has one more operation, the million carat West Coast mining operation, to exit, but it is bringing in production from two new projects to keep output around 12 million carats.

Sales at De Beers’ wholly owned DTC, its marketing and sales arm, came off six percent in 2006 despite record output of 51 million carats. South African output fell to 14.6 million carats from 15.2 million in the year before.

DTC has reduced the number of sightholders or buyers of its diamonds to 75 from 93 to tailor its rough stone supply to demand after receiving 120 applications for the new three-year contract period, Faried Sallie, managing director of DTC South Africa, told Miningmx in an interview.

There are four new sightholders based in Namibia, who will buy stones from the DTC joint venture with the government there, bringing the total number of sightholders to 79 for the 2008 to 2011 contract period.

DTC has set up joint venture businesses for rough diamond sales in Namibia and Botswana for the first time as part of De Beers’ commitment to southern African governments where it has operations to step up beneficiation of diamonds within those countries to boost jobs and revenue.

“In this particular sightholder selection process we’ve seen a reduction in (rough diamond) supply and what we’re looking at doing is evolving our supplier of choice mechanism where we have sightholders applying per category and competing within that category,” Sallie said.

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“We are selecting a group of sightholders best suited to deal with the availability we envisage having over the next three years,” he added.

De Beers would also like to encourage sightholders in South Africa to move down the value curve instead of focussing so heavily on the two-to-10 carat stones and bigger, which make up about 75% of annual sales of $500m.

The medium scale diamonds, which are 0.2 to one carat, make up the remaining quarter of the South African sales.

Some 40% to 50% of De Beers Consolidated Mines (DBCM), the South African producer, output can be processed domestically, depending on the cutting and polishing activities of local buyers.

DTC South Africa is letting clients know that there is 200% over-subscription for cetain categories of higher value stones and a 70% under-subscription for certain medium value goods.

“What we’re hoping to do is drive application behaviour in a way that presents sightholders with an opportunity if they move down the spectrum,” Sallie said.

It is up to buyers to decide what of the DTC South Africa offering is financially viable to cut locally.

“We feel that there will only be job creation in the cutting and polishing sector if it moves into the medium scale goods.”

DTC South Africa will not bring extra diamonds in from outside the country apart from the aggregated offering it will compile in Botswana equivalent by value to the DBCM production it has selected to be sold in South Africa.

“We’ll not supplement those carats to increase the amount of carats available in South Africa. We are moving to the DBCM footprint,” he said. “It’s a shift on our part to create a sustainable level of supply in the country and not artificially bolster the industry.”

DBCM is obliged to offer up to 10% of its annual output to the newly formed State Diamond Trader. It will offer sightholders those goods allocated to South Africa excluding whatever the SDT does buy to stimulate the domestic cutting and polishing industry.