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Rough Marketers

Editorial

Sep 17, 2010 4:36 AM   By Avi Krawitz
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RAPAPORT... Many of the diamond mining companies have spent the past year reviewing their marketing strategies, pulling each in different directions. The latest to announce a new approach was Gem Diamonds, which revealed this week that it will be tendering goods from its flagship Letseng mine in-house, now that its contract with WWW International has expired.

Going it alone will allow Gem to exercise greater flexibility in its selling as the firm seeks to develop its beneficiation business with the stones culled from the Letseng mine. This will enable Gem to capitalize on the attractive profit margins offered by polishing these high-end diamonds. The company is looking for partners to develop the polished business and is hoping to launch a new polished marketing model as part of its strategy.

Gem’s chief executive officer (CEO), Clifford Elphick, has long championed the Harry Winston model through which a retail or polished division can feed price information to the rough business. The company can also hedge market risks by shifting its focus to the stronger of the two markets.

The benefits of such flexibility would have been evident during the 2008 to 2009 downturn when miners were hard hit as rough prices spiraled far more dramatically than polished prices. Rapaport records show that rough prices fell an average of 45 percent between September and December of 2008, while the RapNet Asking Price Index (RAPI) for 1-carat polished stones, for example, fell an average of 14.7 percent in the same period. Conversely, rough has recovered at a far greater pace than polished.

Other companies — mainly small- to medium-sized firms — also have complementary rough and polished businesses. The most integrated of these would be Namakwa Diamonds, which started as a polished and rough dealer before moving into manufacturing and subsequently mining, even if is working with far smaller volumes and values than Gem. Petra Diamonds, on the other hand, sold its polish and cutting facilities to Gem in September 2008 to focus on what it referred to as its “core skills of diamond production.”

The difference in focus between Gem and Petra — which, for a while, were considered the two main up-and-coming diamond miners, given their aggressive acquisitions — is quite apparent. Each has very different assets to exploit.

While Gem’s portfolio is very reliant on the high-value Letseng mine to boost revenues, Petra appears to have a more volume-based strategy, seeking to sell as many diamonds as possible. The company is aiming for annual production of 3 million carats, mainly by further developing its flagship Cullinan mine. Petra was amongst the few miners to keep production at near full capacity throughout the downturn while selling all its output to the market on tender.

The Gem-Petra divide is akin to the different approaches taken by the two largest miners, De Beers and ALROSA. While De Beers historically sought to control the market through the large volumes it possessed, it has now shifted its focus toward ensuring profitability. Conversely, ALROSA appears more volume-driven, having announced with great fanfare that it overtook De Beers as the number one producer of diamonds in 2009. The Russian company maintained near-full capacity during the year but stockpiled its diamonds with the government, while profit-minded De Beers lowered costs by shutting its mines.

The mining firms’ marketing strategies have also moved in divergent directions. ALROSA, which used to mainly sell its goods on auction until the downturn, has forged long-term contracts with its clients so that 70 percent of its output will soon be sold in such a manner. De Beers is placing increased emphasis on its online auctions, albeit while remaining committed to the supplier of choice (SoC) system, and it is expected that the Botswana government will push it to tender a portion of Debswana goods in Gaborone from 2011. Rio Tinto has made a similar move, shifting from its Select Diamantaire program to tendering some goods, while BHP Billiton’s spot price tenders have evolved as somewhat of an industry benchmark.

Clearly, it’s a case of different strokes for different folks. But while their strategies may vary, the companies all maintain a common, bullish, long-term outlook for the rough market while seeking the best way to minimize the impact of another possible downturn, having learned the harsh lessons of the recent recession.

With De Beers leading the effort to keep supply in synch with the lower demand, the respective mining companies have used this period of deflated demand to find their space in the market and position themselves to capitalize on the inevitable increases.

The likely result for the market will be higher rough prices in the long term and increased competition for goods. After all, that is the rough marketer’s goal and job. It will be up to members of the trade to keep both rough demand and the mining companies in check, ensuring that rough price levels accurately reflect the long-term imbalance between supply and demand. Because no matter who is marketing rough diamond production and how they are doing it, the long-term equilibrium can always be manipulated.

Note: This article is an excerpt from a market report that is sent to RapNet members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.

The writer can be contacted at avi@diamonds.net.

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Tags: Avi Krawitz, Alrosa, Avi Krawitz, BHP Billiton, De Beers, Gem Diamonds, Namakwa Diamonds, Petra Diamonds, Rio Tinto
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