The Big De Beers Buyback
July 18, 24
De Beers is preparing to take dramatic steps to prop up rough sales at next week's Sight 6 in Gaborone.
It sold just $315m at its last Sight and industry experts predict the figure this time could drop below $200m.
In a move designed to support both sales and prices, De Beers has told its 80 Sightholders they'll be offered the option of an "enhanced buyback", which means they can reject up to 30 per cent of some categories of goods they're allocated.
De Beers benefits because it doesn't have to drop its prices (De Beers does reduce "normal" prices but the buyback mechanism gives it the chance to make a one-time price reduction, and switch back to old prices at the next sight) and buyers benefit because they get the stones they want.
When times are somewhat tough De Beers can relax its rules and offer a 10 per cent buyback - generally buying back lower quality goods at an agreed price.
When times are really tough, as they are now, they can offer a 30 per cent buyback.
The last time De Beers offered a 30 per cent buyback was in the early months of 2020, when the first Covid lockdowns wiped out demand. Three Sights were canceled as a result, and Sight 6 raised just $116m.
Total De Beers sales to date are down almost 20 per cent on those for the same period in 2023 - $1.949bn (average $390m per Sight) compared to $2.428bn and the markets are showing no signs of improvement.
These are desperate times and De Beers - which is itself facing an uncertain future - is taking desperate measures.
So how does buyback work, and how does it benefit De Beers in particular and the market in general?
"Let's say we're talking about goods with an average per carat price of $2,000," says Antwerp-based diamond market analyst Erez Rivlin.
"The Sightholder sets aside the goods they don't want, generally the cheaper goods.
"De Beers could, for example, offer $1,100, but the Sightholder knows they can get more for it by selling it themselves - let's say the market price is $1,300 - so they'll turn down De Beers' buyback offer.
"But the market now is stretched and De Beers could surprise them with an offer to buy it back for $1,800.
"De Beers are supporting prices by raising the buyback price. In return they're getting more investment (larger sales volumes) by the Sightholders, who will purchase more goods. At the end of the day, De Beers must have minimum incoming cashflow."
The strategy of buying back rough diamonds at above-market prices supports the price difference that currently exists between De Beers' own goods and the cheaper "outside goods" (non-De Beers).
In other words the Sightholders are more likely to buy larger quantities of rough diamonds if they know they have the option to sell back unwanted goods at a favorable price, which increases De Beers' sales volume and revenue.
And by repurchasing diamonds, De Beers can regulate the flow of rough, preventing oversupply and further price drops.
Buyback does push goods to the market, which means over-supply - but Sightholders get their goods at a lower price.
Yes, De Beers may incur losses in the short-term by buying back at higher prices, but the strategy can help stabilize the market and protect its long-term interests.
Have a fabulous weekend.