Tenders a Tough Sell For Many Diamantaires

It's a thorny issue and the arguments for both sides are well-rehearsed and sincerely expressed. Nonetheless, has the point been reached where much of the diamond industry is being damaged by diamond tenders?

On the one side, small and medium-size firms say they are squeezed out of bidding for goods since they clearly do not have financial firepower to secure the goods. Tenders also tend to raise prices to unrealistic levels. Anyone who has attended any type of auction knows the feeling of euphoria that sometimes sweeps you as you bid for an item that has taken your fancy and you get carried away, bidding a much higher price than common sense would dictate.

All the large diamond producers – De Beers, Rio Tinto, and Alrosa – sell some part of their goods via tenders, which they regard as an efficient sales method. And most of the small and mid-size miners who have become established in the past decade sell their diamonds at tender. Although the producers say they believe tenders are a fair and transparent way of selling their goods to the market, there is widespread opposition within the diamond business.

Small and medium-size manufacturers, who make up the vast bulk of the membership of the diamond trade, suffer from the sale of diamonds at tenders. Not having the financial muscle of the large firms, many smaller companies cannot even afford to attend the international sales, much less to bid against large companies who are able to push prices beyond what their smaller competitors can afford to pay. Some years ago, the WFDB General Assembly called on rough diamond producers to allocate reasonably large amounts of goods for sale outside of the tender system.

WFDB members said they were unhappy with tenders because they prevented companies from being able to organize a steady supply of goods to enable them to fulfill programs. Similarly, purchasing goods at tenders makes it difficult for diamond manufacturers to know what goods they can buy and at what price, thus complicating long-term strategic planning. Indeed, the producers themselves might do well to come to the conclusion that they have a strong interest in reducing the amount of goods sold at tenders or selling via a different channel since they are ultimately reliant on the overall health of the diamond manufacturing industry.

"Producers who sell goods at tender say that it gives them a way to sell their goods at the current market price at the time of the sale, providing an accurate snapshot of the state of the market and prices and that makes it fair to all," a senior official in the Israel Diamond Exchange told me. "I would suggest the prices achieved are fairer to producers than buyers. This is a short-sighted policy and I believe the producers should think again about this way of selling their diamonds.

“It is sometimes not fully realized just how critical the small and medium-size diamond companies are to the overall industry. They frequently buy stones that do not fit the manufacturing needs of the larger firms because they have buyers for individual stones that the big firms do not bother with."

Meanwhile, a major Belgian manufacturer commented, "In my more than 40 years in the business, I have never seen successful tenders – you either pay too much for the diamonds, or you receive diamonds that you do not want or need. Tenders are perhaps the most negative thing that has happened in the diamond trade. It forces those companies that take part to stretch themselves to possibly a dangerous extent."

Not only is he opposed to taking part in tenders, but even declines to buy goods from producers who offer him diamonds that have gone unsold at tenders at attractive prices. "I am fortunate to be in the position to be able to do this; not everyone can. I will not take any steps to encourage tenders even though I could very quietly take the diamonds not sold at tender and manufacture them profitably. Tenders can raise volatility in the market and encourage speculative buying patterns."

And an Indian manufacturer cynically commented that he believed many diamonds offered at tender had already been rejected by the producers’ main manufacturing clients. “They have also been comprehensively mapped so the sellers know exactly what they have in their hands and the precise prices they want to receive. Tenders are not exactly a place to find bargains.”

However, tenders can play an important role in introducing more transparency and visibility into what is effectively quite a closed market. They give producers a snapshot of the state of the market, while providing buyers with the opportunity to see other types of diamonds with which they may not be familiar.

Furthermore, tenders can serve as an effective marketing method for some types of stones, such as Rio Tinto's "Specials," diamonds of 10.8+ carats, which the company has sold exclusively by tender for many years. In addition, it has sold its top 50-60 Argyle pink diamonds every year for the past 25 years or so. Nobody would seriously suggest that these diamonds could be sold in any other way, said a Rio Tinto executive.

To the rejoinder that these are large and expensive diamonds for which there can only be limited interest, from manufacturers or jewelers with significant means, the executive says the industry can profit from tenders because they create a balance between "different but complementary sales mechanisms."

He also points out that the major diamond producers sell, for the most part, to a relatively stable group of customers which contributes to building efficiency in the industry by ensuring a more effective allocation of goods, a leaner supply chain and a more predictable environment, which in turn is conducive to long-term investments in technology and market development.

And De Beers points out that only 10 percent of its goods are sold via its Diamdel unit with 70 percent of that amount sold at tender. Most of its diamonds are sold by fixed contracts. However, using data gathered from auctioned goods enables the firm to receive a precise indication of prices.

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