News

Advanced Search

Industry Analysis

May 10, 2004 10:51 AM   By Martin Rapaport
Email Email Print Print Facebook Facebook Twitter Twitter Share Share
Letter to the Editor

A friend — someone I have known for about 20 years — sent me a letter to the editor. He challenged me to publish it and asked that I do not disclose his name because he is afraid that companies he relies on for supply will stop doing business with him. These are his words:

“Snowflakes are falling, floating thick and fluffy; a pristine white blanket covers the ground — and it would appear to the ordinary onlooker that the state of the diamond industry is serene as well. But don’t be fooled, beneath that pristine surface lie mighty, volcanic changes.

It will be too late to react in two, three or four years time, when there are no longer enough people in the industry to sustain a Diamond Dealers Club (DDC) in New York, let alone the diamond communities in Los Angeles or Chicago; or to sustain the supporting service industries and the independent retailers. The situation is not that different than that of the small pharmacy, corner grocery or local hardware store, many of which have disappeared, swallowed up by the giant chains. There is however, one major difference — we are not dealing with pharmaceutical products, groceries or nuts and bolts; we are dealing with a nonstandardized commodity controlled by a firm with monopolistic powers. A firm that may have a legitimate battle with a few other rough diamond producers but which, as the leading player in the world diamond business, cannot simply walk away from its social and moral leadership responsibilities. This is not simply a game for the young leadership at De Beers.

Just as nobody foresaw the results in Iraq a year after the war, nobody can foretell the outcome of De Beers policies. What will happen in the diamond industry when interest rates rise 4, 5, or 6 percent? Who will maintain the pipeline and hold the stock of slow or unsellable goods? Who will fall and who will remain, even among the sightholders?

What is clear is that whole segments of the rough market have been cornered. For example, for some time very few collection goods have been available. It is known, irrefutably, that exorbitant prices are being paid for this rough in South Africa, to be translated within a very short period of time to increasing prices for polished. This is the classic squeeze in monopolistic industries. The rumor is that a few major sightholders and/or dealers are doing the buying at the behest of De Beers. Certainly De Beers has repaid a huge amount of borrowings and could easily be putting a lesser but still significant amount into mopping up rough on the open markets. The small independent cutters cannot find rough to eke out a living and will soon start dropping like flies. What then will De Beers do with rough prices? Which sightholders will fall next? Which retailers and which dealers will survive?

What happens on the diggings, or at the rough tenders in South Africa, is common knowledge and within minutes known worldwide. Control of rough prices for collection goods translates to influence and control over lesser quality goods. The European Commission may have been fooled. Don’t be fooled, this is a monopoly at play!!

De Beers is trying to settle its differences with the United States, claiming that they control only 50 to 60 percent of the industry and that competition exists!!  Far from it — De Beers is more in control of pricing and availability of rough today than at any time in recent history. My guess is that entry into the U.S. is simply a precursor to a refloat of De Beers shares in a few years’ time with massive profits to the current shareholders. This is all part of the game plan and part of the game being played by the leadership at De Beers, but at what cost and to whom?

This brings us to the next point: Where is the leadership of the diamond industry? Why the acquiescence and acceptance of a fait accompli? Who is in the pockets of whom and why? Sightholders writing briefs to the U.S. courts in support of De Beers is understandable — they know on which side their bread is buttered. But where are the industry leaders in support of the little guy? Are the positions of trust to which they were elected too uncomfortable to fill?

Awake people; this is a game, but it is a game being played with all of our lives, a game with the most dire of consequences and we really don’t know where it will end.

The pristine white snow is melting; it is slush and grayish-black mud, just like the state of the diamond industry.”

Name and address withheld by request


Our friend writes from the heart and while we may not agree with everything said, the letter represents the views of many of the small to medium size wholesalers in the diamond market. These concerns deserve to be aired and fairly addressed.

Great changes are now taking place in the diamond industry. Rough prices are skyrocketing out of control with speculation by dealers. Polished diamond prices are beginning to move up sharply with severe shortages developing for the more popular sizes, qualities and price points. Fundamental changes are taking place in the diamond pipeline as the who, how, why and where of diamond distribution comes under the control of De Beers Supplier of Choice (SOC) scheme.

These changes are having a very negative impact on small to medium size wholesalers and cutters. Many are being forced out of business. They are angry and upset. It is natural for them to automatically blame De Beers.

We must recognize that not everything that is wrong with the diamond industry is De Beers fault. If we blame De Beers for problems that are not of its doing we will never discover the real source of our problems and be able to fix them. While we must and will hold De Beers legally, financially and morally responsible for the direct and indirect unintended consequences of their actions, we must be honest with De Beers and ourselves. De Beers-bashing is not a solution for all the problems of the diamond industry.

Furthermore, we must recognize that what many of us consider “wrong” with the diamond industry is not wrong, but rather legitimate change. The diamond industry cannot retain inefficient distribution systems or support companies that are not able to proactively compete in the diamond production, distribution, marketing and retailing sectors. Firms have no right to expect to be subsidized because they have been in business a long time or because they have “connections” and because political organizations within the diamond industry get them special help. Aside from being inefficient, subsidies are very unfair to those that do not get them.

It pains me to say this because I believe we should always be optimistic, hopeful and proactive, but given the changes taking place in our industry, many people must recognize it is not wise to prolong the agony of defeat by trying to implement a business model that no longer works. Some need to close shop and get jobs with other diamond firms or get out of the diamond business altogether and go into another industry. Blaming De Beers, or anyone else will not help. It is time to change or get out.

De Beers

There is a saying among Jews – just because I’m paranoid does not mean that they are not out to get me. Translated, this means that just because De Beers can’t be blamed for everything does not mean that De Beers should not be blamed for anything.

The relationship between De Beers and the diamond industry has evolved over the past few years and we must ask a few questions. Are the people in the diamond industry better off? Is the diamond industry better off? Is De Beers more in control of pricing and availability of rough and polished diamonds today than at any time in recent history? How is De Beers using its market power? Is De Beers doing anything illegal? Is De Beers an honest, moral and ethical company?

Frankly, this article is not about answering questions – it is about asking them.

The Trade

Representatives of the diamond industry and De Beers have for many years held regular meeting to discuss the challenges confronting the diamond industry and what De Beers and the diamond trade should do about them. The De Beers proactive downstream agenda as reflected in the implementation of Supplier of Choice (SOC) is creating significant displacement within the industry. Everyone is concerned about the fairness of the newly evolving diamond distribution system.

Initially, it was hoped that the elected representatives of the trade would work with De Beers to ensure a fair and equitable post-SOC diamond distribution system. While De Beers has gone out of its way to explain to the trade how SOC works, it has not significantly modified its distribution system to address industry concerns. Furthermore, there has been no transparent, independent auditing of the actual impact of SOC and Diamdel on the trade.

This writer strongly supports SOC, but only if SOC operates in such a way that it allows for the coexistence of a robust, free, fair and competitive diamond market alongside it. For example, if SOC’s distribution scheme reduces the availability of diamonds to such a level that competitive free market pricing is no longer available, then SOC must be stopped immediately. If De Beers was to introduce a new diamond mine, public policy would require the presentation of a publicly available Environmental Impact Study. So too with SOC, we call upon De Beers to prepare a public Economic Impact Study so that our trade can be sure that SOC does not damage the diamond industry.

There is serious and reasonable concern within the diamond trade that legitimate and highly efficient firms are being forced out of the diamond business due to unfair and perhaps illegal De Beers distribution policies and/or practices. In all instances related to governmental authorities, De Beers has taken a nontransparent adversarial approach. They have not worked jointly with trade and government to assure that the new regulatory environment they are advocating is appropriate and acceptable to trade stakeholders. Trade leaders have been discouraged from establishing direct relationships with government agencies. De Beers simply takes what it can from government and presents a fait accompli to the trade.

One must ask why elected members of the diamond trade have consistently refused to meet with regulators to discuss the legitimate concerns of the diamond trade. Indeed, where is the leadership of the diamond industry? Who is in the pockets of whom and why? Where are the industry leaders in support of the little guy?

Leadership

Being a leader in the diamond industry is very difficult. It is not our intention to be the prosecutor, defender, judge or jury of anyone. Readers are encouraged to gain an understanding of the highly complex issues related to the relationship between De Beers and industry leaders. We must recognize that there is often no one, simple standard for right or wrong and that almost all issues have different perspectives and require compromise to effect solutions. We should never judge someone without hearing them out and putting ourselves in their position. Read the paragraphs below to gain understanding, but do not judge.

Jacob Banda, the president of the New York Diamond Dealers Club, has a difficult job. The New York diamond manufacturing industry has been decimated. Costs are high and the type of large rough diamonds necessary to support New York cutting is expensive and almost impossible to obtain. For years, Banda and those before him have pleaded with De Beers to increase rough supplies to New York. Then SOC fell on New York like an ax. New York lost eight out of 15 sightholders.

Banda’s pleas to the DTC did not go unanswered. While the DTC explained that it could not allocate rough to nonsightholders, they referred Banda to Diamdel. And last month in a private deal, Banda arranged for supplies of rough diamonds from Diamdel for some ten New York firms.

Issues: Does Banda’s deal with Diamdel create a conflict of interest regarding his responsibility as president of the DDC to represent the interests of New York firms that are adversely affected by SOC? Should Banda have taken a commission from the rough buyers? When does public responsibility end and private business begin? Would Diamdel have sold the diamonds to Banda, or his clients, if Banda were not the president of the DDC? And if so, why did Banda’s “clients” need him and therefore reportedly pay him a commission? Is it ethical for De Beers through Diamdel to sell to Banda? Is Diamdel a front to “influence” industry leaders so that they do not oppose De Beers interests? Is this why leaders do not represent the trade to the European Commission, the U.S. Justice Department or the parole officer overseeing the De Beers case in U.S. federal court?

On the other hand, Banda should be congratulated for finally bringing more rough to New York. Who says that he will not fairly represent the interests of his members because he did a deal with Diamdel? Who says that there is any unofficial quid pro quo with De Beers? Representatives of the diamond industry have often been or are sightholders and do deals with Diamdel. Why is Rapaport picking on Banda? Are we trying to say that you cannot be an elected official of the diamond industry if you are a sightholder or a Diamdel customer? Isn’t it better to get some real rough for New York then hold pie-in-the-sky discussions with government agencies? Wasn’t Banda elected to make these kinds of decisions? Why are we always giving Diamdel a hard time? Here it is trying to do something good for New York and all we do is complain.

So what are the correct answers here? It is not my call and it is not yours. If the industry is capable of self-regulation, these matters will no longer be swept under the carpet. Issues related to conflicts of interest and public trust will be publicly discussed and fairly resolved by boards of directors and members of organizations.

One thing is for sure — the relationships between De Beers and diamond industry leaders must be more transparent. There is too much room for abuse. Leaders should report their relationships with De Beers to their boards and absent themselves from discussion and decisions about De Beers if there is any potential conflict of interest. De Beers should appoint an ethicist to its board and review SOC as well as questionable policies and relationships so that De Beers can be “above suspicion” and not just claim to be so.

Clearly, all of us in public positions — including this writer — must be careful, for as it says in Deuteronomy 16:19 “Neither shall thou take a gift, for a gift blinds the eyes of the wise and distorts the word of the righteous.” The bible talks about the wise and righteous receiving gifts — not bad guys — even so, Rashi explains that once someone receives a gift it is impossible for them not to be partial to the gift giver.

The Bottom Line

While we mustn’t pre-judge our leaders, it is reasonable to assume that for many reasons the leadership of the diamond industry is not capable of significantly influencing De Beers policies and practices. Instead of giving ground wisely and establishing reasonable compromises in joint dialogue with trade and government, De Beers plays hardball, forcing industry leaders to independently initiate formal complaints and legal proceedings. Leaders are afraid that De Beers and/or its sightholders will stop dealing with them if they take action against SOC. The official industry does not have the ability to proactively oppose SOC practices.

We predict that eventually enough people will be damaged, or think that they are being damaged, that De Beers will be dragged kicking and screaming to court. Even if De Beers decides to hide in London, Luxembourg or South Africa, its sightholders provide juicy targets for eager class action lawyers. The way it is now, it all comes down to a matter of law. If De Beers is violating the law it and probably its sightholders will pay heavily and might even be put out of business. If De Beers is within the law and maintains its current attitude, then why should it pay attention to the whining of diamantaires – elected officials or not?

There is much that can be written about De Beers and the law. At this point, our primary concern is that SOC actions will artificially increase prices and the profits from these price increases will then be restored to the DTC through rough price hikes. If and when this can be proven, the game will be over for De Beers. At some stage sightholders might want to consider their potential legal liability due to the relationship they have with De Beers.

Aside from the law, there is always the Golden Rule. Consider the sightholder looking into the eyes of an efficient and legitimate wholesaler to whom he has been selling very well for many years. The sightholder is thinking about his De Beers account executive’s encouragement to increase added value downstream sales and maintain sight status. Perhaps he is also thinking ‘why should I sell to this wholesaler who will be competing with me when I sell to his retailer customers?’ Before the sightholder tells the wholesaler to go away because he has no goods — let him remember the Golden Rule — do to others as you would have them do to you. It is reasonable to assume that over the long term whatever you do to that wholesaler, De Beers or another mining company will do to you.

It all instances do not misinterpret the Golden Rule. The Golden Rule does not mean that he who has the gold, rules.
Comment Comment Email Email Print Print Facebook Facebook Twitter Twitter Share Share
Tags: De Beers, Diamdel, DTC, Government, Manufacturing, Production, Regulation, Sightholders, South Africa, Tenders, United States
Similar Articles
© Copyright 1978-2018 by Martin Rapaport. All rights reserved. Index®, RapNet®, Rapaport®, PriceGrid™, Diamonds.Net™, and JNS®; are TradeMarks of Martin Rapaport.
While the information presented is from sources we believe reliable, we do not guarantee the accuracy or validity of any information presented by Rapaport or the views expressed by users of our internet service.