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De Beers CEO Dismisses Uncertainty, Forecasts Growth

Ready to Lead Fragmented Industry, Mellier Tells Rapaport News

Oct 24, 2011 6:10 AM   By Avi Krawitz
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RAPAPORT... Philippe Mellier, the newly appointed chief executive of De Beers, downplayed concerns that negative sentiment in global financial markets will impact diamond demand despite the recent declines in rough and polished diamond trading.

“I don’t see the downturn,” Mellier said in an interview with Rapaport News. “What we are seeing is that retail demand for diamonds is very strong. The U.S. is still growing, which is certainly interesting and unexpected for us, while China and India are pulling unbelievably well.”

De Beers, which is the largest diamond producer by value and second largest by volume, has kept its prices stable in the past three months, while rough dealer trading has come to a near standstill as buyers continue to push for deeper discounts. Goods sold by the Diamond Trading Company (DTC), De Beers sales and distribution unit, are being offered for resale on the secondary market at estimated discounts of around 15 percent, Rapaport Research has showed.

In addition, polished prices have fallen and the RapNet Diamond Index (RAPI™) for 1.00-carat diamonds fell 4.5 percent in the third quarter and declined an additional 2 percent during the first three weeks of October.

While Mellier (pictured), who joined De Beers in July 2011, recognized that there is uncertainty in the market due to the economic environment, he urged industry players to focus on the retail market, which, “is not vanishing by any means,” he said.

Rather, Mellier explained that the recent lull in trading, or “hangover” in the pipeline, resulted from normal seasonal factors. “As long as the retail market is there and is quite strong, I am not concerned,” he said. “After the recent Chinese Golden Week, and the coming Diwali festival, Christmas and the Chinese New Year, the pipeline will have to be refilled. So another good season is looming ahead.”

New Price Plateau

Mellier noted that there is an undersupply of diamonds which spurred the sharp price increases in the first half of the year. De Beers reported that average prices rose 35 percent in the first six months of the year, and Mellier said he expects the uptrend has continued in the second half.

“When you are in a situation of short supply, especially when you have these growth markets pulling, I don’t see any notable trend to bring prices down,” he said. “I strongly believe that the price levels of today are a new plateau, around which prices will be driven in the future. I don’t expect that we will go back to the prices that we had before [this year], because of this imbalance of supply and demand.” 

Most DTC sightholders and manufacturers who have spoken with Rapaport News in the past two months supported the De Beers policy to keep prices stable, even as many incur losses by having to sell the goods to the secondary market at a discount. They reasoned that a DTC-De Beers price decline would bring greater uncertainty to the market.

Production Forecast Intact

Sightholders expect lower levels of supply to the market in the fourth quarter, which, Mellier stressed, is not out of the ordinary. “We know that in a normal year, the first eight-to-nine months are pretty good because you refill the pipeline, while the final three months of the year are much weaker because the pipeline is generally full,” he explained. “The fact that rough sales are going to come down in the backend of the year is a normal phenomenon.”

As a result, he stressed that there is no reason to adjust the De Beers production plan for the remainder of the year. The company posted its strongest production quarter this year in the three months that ended September 30, with output rising 3 percent year on year to 9.305 million carats. Production in the first nine months of the year rose 1.5 percent to 24.839 million carats and is expected to reach around 34 million to 35 million carats for the full year.

Rapaport estimates that DTC rough sales rose 37 percent to approximately $5.63 billion in the first 10 months of the year, with two sights left in 2011. Growth was driven by the rough price increases experienced in the first six months while the volume of supply is estimated to have been the same as last year.
 
Reclaiming Leadership

Given his positive outlook, Mellier criticized elements in the polishing sector which he claimed were fueling a negative sentiment and urged the industry to operate in a more cohesive manner.

“In the polished world you have a large number of players and many of them have different agendas,” Mellier said. “So there is a little bit of irrationality today in the polished price because of internal concerns of individual companies, which has nothing to do with the retail market. Because the retail market is still there and as far as I know, retail prices are not going down, and may even be rising.”

He stressed that the industry needs to behave in a more consistent way and added that De Beers was ready to work as an industry leader to achieve this goal.

Mellier negated the need to create a centralized body to drive common industry projects and goals, such as the proposed International Diamond Board (IDB), which was shelved about two years ago when ALROSA pulled out of the project. He reasoned that as diamonds compete against other luxury goods, people turn to companies, such as De Beers, which have experience and knowledge of the product, rather than boards, to move things forward.

“The idea that De Beers created the industry and is still perceived by many as the name in the industry, means it is clearly in a position to analyze what’s happening and set the tone of what is important for the industry,” he said. “Clearly there is no intention to be the De Beers of a few years back. But there is a need to have someone that embraces the popular industry and says, you know, things are not bad…. This is what we should be doing to support our industry.”

* Picture: Philippe Mellier, chief executive of De Beers (courtesy De Beers).

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Tags: Avi Krawitz, De Beers, diamonds, Jewelry, Philippe Mellier, Rapaport, Rough Diamonds
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