Industry News
De Beers looks at the bright side of crisis
24/07/2009
By William MacNamara
Sometimes being the king of diamonds means making sacrifices.
Watching as the financial crisis last year exposed the weaknesses of the diamond industry's peculiar, debtdependent production chain, Gareth Penny, managing director of De Beers, realised the company would have to give a lead in taking the painful steps to bring the industry out of near-paralysis.
De Beers, which controls 40 per cent of rough diamond production, shut down its most valuable African mines for several months this year to support a price recovery, allowing clogged diamond stocks slowly to flow downstream to manufacturers and jewellers. By doing so the company absorbed the brunt of industry damage.
"Where you are a leader, there is a requirement to step up to the plate," Mr Penny said ahead of the company's half-year results today.
Those results are expected to be miserable, with knock-on effects for its quasi-parent Anglo American, the mining company that owns 45 per cent of De Beers.
But speaking from the group's Johannesburg headquarters, Mr Penny said the worst was over. He admitted mistakes and said De Beers had learnt lessons from the crisis.
"Like other industries, we were caught up in a mad dash for growth. There were major capital projects happening all at once," he said.
"If we have learnt a lesson it is to be more standard in our use of capital and be less geared than we have been," he said. "
De Beers' $3.5bn (£2.1bn) in debt has become a burden both for it and Anglo, which this year funded its share of $500m in interest-free loans extended to De Beers by its three shareholders, which also include the Oppenheimer family, founders of Anglo.
Now it is talking to banks about refinancing $1.5bn of debt maturing in 2010. "It might be more expensive, but it will happen," said Stephen Lussier, a De Beers executive director.
Demand for diamonds has started to recover, albeit from a low base. But as De Beers ramps up production again, it intends to be a more restrained producer.
"On production levels, we will be taking a more conservative view rather than a view of maximising production," Mr Penny said. "The cost side of the business is crucial."
The company has little choice but to focus on profitable production. Yet the decision to produce lesser amounts of high-quality stones also fits De Beers' vision of the market and its role as guardian of diamonds' mystique.
"The world's diamonds are depleting," Mr Penny said. "We have no vested interest in overproducing. What we are trying to do is say, 'How do we behave in a way that ensures we have a rare product that is irreplaceable?'
"The remark might awaken memories of De Beers' past, when it controlled diamond supply. But the aim of all hard-hit diamond producers today is to hasten the return of a market that holds the prospect of growing demand and not enough supply.
"Our future is about how we create uniqueness, rather than huge production," Mr Lussier said.
The past year's punishing price swings made plain just how much of a commodity diamonds are but Mr Penny was clear: De Beers is not a commodities business. "We are a luxury product," he said.
Today's figures will show how damaging it was for De Beers to absorb pain on behalf of the sector. Could the company help restructure the diamond pipeline to make it less likely to inflict such pain on its main supplier?
Mr Penny said the diamond pipeline was becoming shorter and more efficient by itself, but added: "Can we force structural change? No one can do that, regardless of their position." It seems there are limits to the cards even the king of diamonds can play.
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