Few articles have evoked as many as reactions as our reflections on the impact of potential financial losses that might be inflicted by Sightholders-in-trouble on the banking system and on parties within the industry-at-large. Some of the writers felt that I refrained from mentioning the apparent failure of Supplier of Choice (SoC) and the Sightholder profiles and took me to task for failing to ask the really hard questions. Others felt that the article was biased against De Beers. Last week we shared the views of the dean of the diamond bankers, Paul Goris of Antwerp Diamond Bank. This week, to conclude the reactions, we present comments of the dean of DTC brokers, Gerald Rothschild.

Dear Chaim,

In your article entitled ‘Banking Concerns About Client Profitability you comment:  “DTC’s brokers find it difficult to persuade non-Sightholders to join the application process, to start making presentations etc. Sadly for De Beers, the supplier has long ceased to be the supplier of choice…...”  

I can only speak for this broker, and confirm that what you say is not the case – either for existing or prospective Sightholders. In your analysis there are many significant and valid comments, but you do not mention that, even in today’s more difficult market conditions, DTC represents substantial, and in some respects, unique advantages to its clients.

We are in a position to confirm that:

• Amongst our clients, there are companies who are currently proposing aggressively and substantially to build their ITOs;
• We have received instructions from a number of responsible and professional diamond and jewellery companies in different parts of the world to represent them with the DTC, and to assist with their application for Sightholder Status as from 1^st January 2008.

We are already now engaged in the initial work on these applications, and have firm commitments from the companies concerned that they will be working to submit strong Profiles in 2007.

Although there are difficulties in the industry at present, a trading relationship with DTC represents – in the opinions of these companies and ourselves – considerable benefit in the longer term.

As you yourself have frequently stated, DTC provides continuity, consistency, reliability and standing.   Its role has changed from what it was, but it still represents - and we believe will continue to represent in the future - real commercial benefit.

Yours sincerely,

Gerald Rothschild,

Rothschild Diamonds Ltd

            These comments stand by themselves and speak for themselves. It is both inspiring and remarkable that Gerald Rothschild remains devotedly loyal to the DTC and the marketing system it represents. In the DTC’s Sight allocation scoring mechanism there is no room for loyalty considerations, this quality has lost practical relevancy, but Rothschild’s views aren’t shaped by scorecards but rather by some 60 plus years of intense loyalty to the company, the system, the Oppenheimer Family, and the clients – and not necessarily in that order.

            Gerald, it must be lonely out there.

            The letter stresses the “considerable benefits in the longer time” and the “unique advantages to clients” even though the industry “faces difficult times.” I do not think that I disagree – nor do I think that it was the issue in my article.

            However, what has changed in the perception of some Sightholders and applicants is that in the past, DTC clients would support their rough suppliers in adverse periods, knowing quite well that there was a loyalty presumption and recognition – such support would not be forgotten and, in better days, clients would inevitably be rewarded and/or compensated for having incurred losses. An attractive box or a few “specials,” which would drive pain away faster than any aspirin.

            This underpinned the belief in the benefits in the longer term, this encouraged accepting Sights which, for all kind of market management reasons, may have not been priced in ways which allow breaking even or profiting on the box.

            That element may well be missing today. The computers decide. A new applicant – who never had a chance to display loyalty – but who scores higher, will get supply priority.

If today there was the same loyalty presumption and trust to which Gerald’s letter refers, no Sightholder would “refuse” goods. The DTC would publish record sales figures in 2006!

            Things have changed – and some of Gerald Rothschild’s correct historical assessments may not be valid today. (If common sense prevails – they may become valid again in the future. SoC is evolving, we hope.)

            My article talked about Sightholders who may face financial hardship. We may well be on the even of at least two major financial shocks, involving two present DTC Sightholders. The cumulative impact may well involve a figure above $400 million. In one instance banks will be lucky if they recover 50 cents on the dollar; in the other case the ramifications may be slightly less onerous depending on the creditors’ patience and restraint in avoiding selling-off diamond collateral at basement-bargain prices.

            As at the last moment some white knights may come to the rescue, these scenarios may yet be avoided. It would be counterproductive to say more. The question which, say readers, was not addressed properly is what does this tell us about the implementation of SoC?

            Did all the Sightholder profiles, presentations, verifications, etc. not give any advance indication that troubles laid ahead for some Sightholders?  I wondered aloud whether a Sightholder who postpones paying his suppliers by nine months or so can be said to have an outstanding financial reputation. I questioned the fairness that some suppliers (DTC or other producers) get cash up front, while others need to agree to taking payments far in the future and/or agree to partial settlement.

            It always was believed that when you would do business with – or loan money to – a DTC Sightholder you were dealing with the finest financially robust companies in the diamond business. If that belief is eroded – and if the DTC allows is to be eroded – will that cause a spill over effect on the name and reputation of those others that meet their obligations? There is a noblesse oblige situation. What did De Beers do? What should it have done? And when?

            When one calls himself the “supplier of choice” – and one associates various principles, ethical rules, and behaviours to that term – there is an implied obligation to perform – and journalists and industry participants may hold the supplier to task. Other producers also have their share of problems with clients. The rough prices fell immediately after Rio Tinto signed its clients to a long-term price commitment – they immediately relaxed their requirements. There was somebody to talk to. What we did in our article was raise questions (maybe in a too provocative manner) but it stimulated debate. I really do not have all the answers.

            These words are written on the El Al flight from Brussels to Israel. The captain just thanked us for flying his airline concluding with the words, “We know you have a choice of airlines and we appreciate your choosing to fly with us.” This was followed by an announcement on the “loyalty program” – the various frequent flyer cards and their benefits.

            We all have choices – not all of them are linked to a “loyalty program”.

            Have a nice weekend.