It is quite incomprehensible how De Beers trading subsidiary Diamdel is trying to prove how all the company’s rhetoric about establishing long-term client relations, assisting clients to add downstream value, and becoming a supplier of choice through sustainable relationships can be thrown out the window overnight by creating “the world’s first online auction for rough diamonds.” At the very same time the DTC tries to establish the concept of “customer-centric organization,” cementing the relationships between the rough supplier and all its stakeholders including the producer countries, Diamdel seems determined to undermine these corporate messages by joining the “rough diamond casino.”

What Diamdel may not realize is that the decision to hold online auctions will not just confuse the corporate image of De Beers and its relationship with stakeholders, it will also whet the appetite of the producer countries’ governments who suddenly realize how much money one can earn if one discards long-term sustainability policies. And, as we’ll show below, there is a lot of money to be made.

Unquestionably, through the auction, Diamdel has made this week its most profitable sales in years. But it has opened Pandora’s Box, and those at the upper echelons of De Beers must ask themselves whether it is really worth the price.

For those who have forgotten the classics, in Greek mythology, Pandora was the first woman. Each god helped create her by giving her unique gifts. Zeus ordered Hephaestus to create her as part of the punishment of mankind for Prometheus' theft of the secret of fire, and all the gods joined in offering her seductive gifts.

According to the myth, Pandora was irresistible to men. She would lure her admirers and offer them goodies from a jar commonly referred to as Pandora's Box, releasing all the evils of mankind — greed, vanity, slander, envy, pining — leaving only hope inside once she had closed it again.

Diamdel may not have released all the evils of mankind, but it surely has unleashed a “concept” that holds the potential to generate unintended consequences – a kind of snowball effect that will backfire mostly on the organization itself. According to Diamdel, 16 lots were made available for viewing to potential buyers in several of the world’s major diamond centers. In the end, the lots were sold to 14 buyers from around the world with bidders actively participating in Antwerp, Tel Aviv, India and the Far East.

In a corporate statement, Diamdel’s managing director Neil Ventura says, “We are delighted that the first auction has worked so well and in particular how we have been able to meet the needs of clients from around the world at market determined prices. We are still reviewing the learning from the auction and will be talking to the participants in order to ensure the future auctions are equally successful.”

DTC Lists + 18%
What actually transpired is as follows: At the online auction, three DTC boxes were offered plus some outside parcels and a large stone. The main boxes were chips (three to eight grainers) and melees. At the auction a straight cut (abschnit) of the main boxes were offered in some lots, while the remaining halves were offered separately, subdivided and assorted by sizes. These original main DTC boxes, sold through the DTC’s system, were trading in the market at premiums of nine to 13 percent. Those premiums were needed by the clients in order to successfully manufacture the goods while keeping various downstream marketing commitments. The very same boxes, however, were sold at the auction at three to six percent above their actual market price, i.e., between 12-15 percent above the DTC list (selling) price.

The story on the part of the boxes that were sorted down by sizes is even more interesting. Their sales prices reached 18 percent above the actual sales price of the DTC. In a way, it is like the auctions in Russia, where people are willing to pay huge premiums on goods in the hope that rough prices will go up to make it profitable in the long run. Some diamantaires view purchases there as “buying futures,” or betting on the future. Diamdel refers to “market determined prices” – surely realizing that these aren’t exactly “market prices.”

There is nothing wrong for Diamdel to try to recuperate some of its huge trading losses over the past years by trying to extract the last dollar out of a very speculative market. Indeed, one might congratulate Diamdel on a new initiative. But we are quite puzzled how Diamdel can suggest that it is “delighted that it’s been able to meet the needs of clients around the world.” If this is the way to go, then why not get rid of the DTC altogether, send all the DTC Sightholders, their KAM’s and profile examiners home – and auction all of the De Beers production. It seems to go against everything De Beers and Supplier of Choice (SoC) stand for.

When De Beers decided way back at the beginning of this century that it wanted to sell rough diamonds in a legal manner without violating antitrust laws, it started a successful dialogue with the European Commission’s (EC) Anti-Competition Authorities. I remember that in one of the earlier meetings between Gareth Penny and the EC team, the European officials actually demanded that De Beers would tender all its goods. The EC had considered this the fairest and best marketing system for diamond producers.

De Beers expanded enormous efforts in explaining to the EC that it was impossible to support a manufacturing business in a system where a manufacturer would not know beforehand whether he would have goods to supply his thousands of workers. De Beers explained to the EC that it was the continuity of stable assortments and sustainable prices that enable diamond manufacturers to operate the businesses and to make downstream polished supply commitments. Diamdel was presented to the EC as a training ground for future clients. The task of the company was really to help smaller businesses to get used to DTC assortments and for those players to develop long-term businesses.

The auction this week may have been for a very small amount (something like $5 million at most), but it is the whole idea that is so puzzling. De Beers’ management will have the satisfaction that it literally got the very last dollar out of its clients. For that, maybe congratulations are in order. But it makes one wonder what the company’s mining partners in southern Africa and elsewhere will think.

Couldn’t they do the same thing? Today, Diamdel is selling only a fraction of its available goods online. Will it eventually sell all its goods, which would be the equivalent of some 10 percent of De Beers’ intake, i.e., some $500- $600 million a year?

And then, there is a further intriguing question. De Beers, in its marketing agreements with its partners, has committed itself not to sell the goods above the so-called Standard Selling Values (SSV), on which the transfer pricing (the DTC’s purchase price) between the African producer companies and De Beers are based.

Will these auctions have repercussions on the DTC price lists or on the prices that De Beers must pay to the mining companies? In Greek mythology, after Pandora’s Box has been emptied, the only thing that is left in it is “hope.” What isn’t clear is hope for whom, hope for what…  

Have a nice weekend.