Diamond business model begins to show cracks

It is one of the most exclusive clubs in the world, known over the years as "The Syndicate" (the union), "Central Selling Organization" (Central Sales Organization) and "Diamond Trading Company" (Diamond Commerce Company).

Durante más de un siglo, De Beers ha vendido la mayoría de sus diamantes en bruto a un número selecto de clientes, una lista que dice quién es quién en el oscuro mundo de las negociaciones de gemas. Tiffany & Co., Graff Diamonds and Signet Jewelers Ltd.They have subsidiaries associated with this group, which guarantees a constant offer of gems with the pedigree of being examined by De Beers.

In the world of diamond trade, becoming one of Beers' elite buyers is considered essential to achieve success and earn money.Now, it's not so easy.

Beers sells their gems in 10 sales every year in the capital of Botsuana, Gaborone, and buyers - known as "sightholders" - have to accept the price and amounts offered to them.It is a system that originated in the 1890s and is designed to benefit both the mining company and the client, who receives the diamonds at a discount rate.

But the discount has been reducing.In some cases, prices have been higher than the current negotiation rate, which forces buyers to sell with losses, according to people familiar with the subject.Some sightholders now have difficulty earning money with a business that was once highly lucrative.

The problems in the diamond industry are two -sided.High level jewelry sales are stagnant while other luxury offers, such as shoes, bags and vacation centers, extend throughout the world.It is also more difficult for diamond marketing companies to find financing because banks are abandoning the sector after being beaten by fraud and uncollectible loans.

"It is not an easy time, I will not pretend that it is so and I will not pretend to my clients that it is," says De Beers executive, Bruce Cleover.He maintains that demand remains solid, and the millennials will covet diamonds in the same way as their parents and grandparents.

De Beers says that he is also spending more on marketing and improving tracking in the offer chain as part of the efforts to demonstrate that diamonds are not feeding conflicts or abuses against human rights.

Even so, the relationship between De Beers and his shareholders is becoming difficult, since the company keeps high prices even if that means selling less stones.

It is a change for an industry where being one of the chosen buyers was considered for a long time the most important achievement.It was so desirable to become Sightholder that some works from the company's art collection - presented in its offices near Trafalgar’s Square in London and with names like David Hockney and Damien Hirst - were gifts from customers who expected to earn the favor of the mining company.

In a 2015 interview with the Financial Times, the president of Graff, Laurence Graff, said about De Beers: "If you want to succeed with diamonds, you have to approach as much as possible to them".

It is no longer so true.For the eighties and so many buyers that operate from Belgium to Israel and India, the margins of gain in commercial diamonds have become minimal or non -existent.Many frustrated shareholders refuse to buy at current prices, according to people familiar with the subject.

It is impossible to guess how much money some of their clients can lose, which are almost exclusively private companies.For retailers, such as Graff and Tiffany, trade and polish diamonds is a small part of their business in general, so they are less affected.

But for the many specialized companies, the problems have been more difficult to manage.Several have already closed and Eurostar Diamonds, previously one of the largest rough diamond buyers, declared bankruptcy earlier this year.It is worth clarifying that the group has faced previous falls and Beers reduced the sightholders number in the last decade.

While his clients fight, De Beers is also suffering financial problems. La matriz de la compañía, Anglo American Plc, vio una caída en las ganancias del primer semestre de casi 30% en el negocio de los diamantes.Sales in the first six months of the year were at least US $ 500 million less than in the same period of the previous three years.

The prices of raw diamonds have decreased around 6% this year, while polished have dropped approximately 1%, according to polyhedpric data.com.

Sightholders face the reduction of benefits margins from Beers's purchase.The integrated discount they receive has been about 3% in the last year.In some cases, it has been reduced to 1% or have paid more than they can sell in the secondary market, according to customers and others in the industry.

The narrow margins mean that the gain is canceled after a value of added value of 1.5% payable A de de Beers and brokerage commissions of approximately 0.5% to 1%, say.

It is a considerable change since the end of the last decade, when customers could expect a consistent discount of more than 5%, according to these people.

Beers has reached unusual extremes to support its buyers in difficulties.This year, the company more flexible the rules for sightholders, allowing them to reduce their annual fees and differ purchases.It also says that pricing allows customers to obtain good enough benefits after averaging the AUGES and market decelerations.

"I am aware that we have to help them overcome the storm," says Cleaver."There are things that we can do in the rest of 2019 to boost demand and help customers add a little more flexibility in their businesses".

It does not seem that good news is coming.The Dutch Bank Abn Amro, one of the leaders in the financing of the industry, recently wrote to its clients that it would no longer finance purchases of raw diamonds unless it is clear that a benefit on the stones could be obtained.In addition, some diamond boxes sold by its Russian rival Alrosa PJSC this month are being negotiated with great discounts regarding the price to which they allied them, according to people.

"It's a perfect storm: too much supply, not enough demand," says Richard Hatch, metal and mining analyst in Berenberg."I don't think it improves in the short term".