De Beers: Where to now?

Is this famous company facing a final sale?

For all practical purposes, I have been retired now for about 5 years. Even so, I have continued to watch the news on the diamond and jewelry business. After all, I was in the business for nearly 50 years, as a manufacturer and then an industry consultant.

I say all of that because in this post, for once, I actually have experience to lean on when making comments. For those of you who followed my blog in the last ten years or so of my career, you know that I rarely hesitated to state what I felt was happening in the business.

Well, we have come to a time in this business where, retired or not, I feel motivated to once again offer opinion. I know that my commentary here will resound more within the trade, so my apologies in advance if I lose you as I unravel some of the distorted market conditions that now exist.

So what is the big deal? What triggered my sitting down to write this post?

Primarily, it is the news, which really did not surprise me, that Anglo-American plc, the London-based mining company founded by Ernest Oppenheimer (who also acquired De Beers in 1926), was probably going to be sold to BHP, a much larger mining company.

Whether that deal goes through is yet to be seen. Mergers of giant industrial firms happen all the time. It was made fairly clear, however, that the De Beers diamond business would probably be sold off separately, as BHP or other suitors, were not interested in that part of Anglo’s business. The key reason is that the future of diamond mining is not viewed as a growth proposition.

And why is that?

For one thing, the present mining operations in the world, the larger ones, are all aging and declining in output. It would be fair to say that they will play out over the next 10-20 years. Secondly. the outlook for new mines, large or small, is dim. They are hard to find, very expensive to develop, and may or may not yield a profitable production run. The mix of qualities of diamonds that come out of a new mine is not predictable, and these days there is very little room for error, for reasons I note below.

At one time, in the boom years of De Beers dominating the business and developing some large mines, the normal economic swings were readily absorbed. Their distribution system was strong enough and diverse enough to see the great majority of diamonds extracted to be sold, regardless of the quality or size of the stones. De Beers operated as a monopoly until about 25 years ago, and that was a benefit in some ways to the trade, whether we liked monopolistic businesses or not. It was almost always effective in preventing diamond prices from declining, usually by buffering stocks in weaker times, and in the process encouraged dealers to stock heavily and by maximize throughput at fairly thin margins. And many dealers did become very wealthy in the process.

But that all began to crumble when Rio Tinto, a major mining company that happened to own a couple of diamond mines, rebelled against De Beers control of the market. They began to sell productions from their huge Australian mine directly to the diamond cutters in India. Then, when the EU, flexing its anti-trust muscles, insisted that Russian mine productions could not go exclusively through De Beers, the walls began to crumble.

In a market where economic ups and downs are reflected in the price of diamonds, deep inventories no longer make sense - not for De Beers, not for the cutters, and not for anyone further down the value chain. De Beers themselves unloaded the bulk of their “buffer” stocks in the years that followed, and so did many dealers.

The last two decades have deeply transformed the state of the diamond market. Among other important factors like the growing income gap, there are four important trends: the rise of Internet retailing; the Great Recession of 2008-9; the development of lab-grown diamonds (LGDs); and the Covid pandemic.

Internet retailing ultimately flattened the market, and by that I mean that any diamond jewelry retailer now had to confront a wide range of competition for the business. Intensified competition drove margins down in highly competitive jewelry, making inventory management critical.

Even so, local markets for top quality and expensive jewelry remained strong and has even grown. The high end of the market still seeks personal service, and that will always be the case. The broad shrinkage of the great middle class, with its significant discretionary dollars to spend, has been well documented of the last few decades. If the middle market has been impacted heavily, the low end has suffered even more so. Herein lies the appeal of LGDs, further reinforced by ever more prevalent social media.

The Great Recession proved that the top of the market survives everything, the rest of it not so well. In the diamond business, moving bigger and better stones represents the heart of the business—that’s where the big money resides—and that is what diamond mines really depend on to survive. Selling tons of small cheap stones do not make it.

The Great Recession and the Covid pandemic also caused massive declines in employment. Yes, employment has recovered, but the scars are there. People struggled through the two worst economic downturns in decades and, to perhaps a significant degree, changed the way they managed their money. And what groups were hit the hardest? The new generations that graduated during those years, the same important group that now hold a trillion and a half dollars in education debt. I just read that half of those debtors are not making payments. Millions of people.

We see the national debt explode, as Washington tries to manage a string of disasters, wars, and the needs of so many people. Here is one illustrative point to note: In 1980, total consumer debt was $8 trillion. Today it is $18 trillion. This period saw wages fall way behind inflation.

As if those shocks were not enough, the advent of LGDs came along. These diamonds (and they are truly diamond in structure) came as a relief, in a way, to jewelers needing to sell affordable and attractive pieces to the public. The history of LGDs is long and rocky (forgive the pun), which I needn’t go into here. For most of its history, production was aimed at producing diamonds for industrial needs. It is only in the past 25 plus years that technology has advanced to where high quality diamonds can be produced, and in ever growing volume. The impact has been felt, deeply.   

The price of LGDs have steadily declined as production has ramped up. Natural diamond dealers, in an effort to maintain and rebuild their sales, have pushed the idea that anyone buying LGDs will see their value go to zero. That has not happened as yet, and the nature of business would argue against that.

But more to the point, LGDs have become popular because a broad range of the public is quite satisfied with buying a high quality, larger pieces of diamond jewelry for a price they could readily afford. This is not applicable to just engagement rings, where relatively larger diamonds are used, but also to every other diamond product. In the past, the public bought earrings, bracelets and necklaces in a range of qualities, from quite poor to very good, depending on what they could afford. Now, the great majority of consumers can buy high quality LGDs in any category at prices that are totally out of the range possible by using even middle quality natural diamonds.

What this amounts to is a “resetting” of consumer expectations, one that will, in my opinion, become a permanent adjustment to the way that the diamond jewelry business operates. And more telling, so far as De Beers and other miners are concerned, is that the viability of many existing mines have been severely affected, in spite of efforts to promote natural diamonds as the right choice for consumers, an effort that thus far seems unfocused and ineffective.

Dealers in natural diamonds have now seen prices plunge by 25-50%, and more, over the last few years, enough to cause many to pull inventories way back, and understandably so. Meanwhile, many retailers have sustained themselves with LGD sales that can underprice naturals by 60-70 percent and more. Some large chain stores have switched entirely to LGDs. And major jewelry chains carry LGDs along with naturals. Is Tiffany or Cartier there? No, at least not yet.

There are other factors affecting diamond sales - marriage rates, low birth rates, changes in personal preferences when it comes to engagements, competing luxuries like travel, safety concerns, cost of insurance, a prevalence of casual living, and on and on.

Here is a fact people have not fully considered. Nobody knowingly throws diamond away. If a person no longer wants a particular piece of jewelry, it is easy to sell it to recyclers of all kinds. So over the last, say, 75 or 80 years, many billions of dollars in diamonds were sold into the world market, predominantly into the US market. Almost all those diamonds are still out there, but I would guess that an ever growing amount of them are recycled into new jewelry. The size of these “stocks” is in the trillions of dollars. And they compete with new diamond productions coming out of the mines. This is unlike any other product we can think of (except for colored stones!). That undoubtedly affects the price of new diamond productions, all produced at ever rising costs.

Add that to the boom in LGDs, and we have a diamond market in a historic transition unlike anything we have ever seen. Yes, we can say the diamond jewelry business will continue and grow. But the diamond mining business? A huge question. All of it points to making De Beers a rather difficult company to sell.

So where could this be headed?

Botswana could just buy it all, though that would probably end the marketing side of De Beers. They would be looking to maximize income, since they fully understand this is a declining asset. That would be the case no matter who buys it.

Any other buyer would have to think of the company as a 10-20 year investment that will have to fully amortize the investment and turn a profit over a fairly short period. That would be reinforced by Botswana pressing for the same purpose. Such a buyer would also have to carefully consider what years of dealing with a government might mean.

A buyer within the industry? I’d guess no. The Oppenheimers sold their ownership of the company for $5 billion years ago (did they understand something was coming?) and that number looks totally out of reach today. Half that? Maybe, but a stretch that even a group of industry companies would hesitate to reach. And I can’t imagine the organization of such an effort! A bit like herding cats.

Some people suggest that another sovereign state might be interested. Russia? Forget that, especially as Russian productions are already under sanctions. A Middle East country? Israel is the only country with a sizable diamond industry, but even then, how could that work?

I am left with liquidation, selling off the mines as best as possible. That is actually equivalent to some single entity (like Botswana) buying the company and simply running the mines to the end. But why would Botswana buy anything but the mines they already have an interest in? What of other mines, some in countries with uncertain politics? Selling off the mines might be the most efficient move for Anglo-American, but it will not yield mega-billion dollars.

We need not guess too much, as this is very complex. It is enough to say that a huge change is coming to De Beers, and to the diamond business as a whole.

Whatever happens, this will mark the end of the remarkable history of De Beers.