What De Beers and Alrosa Clients Really Want

RAPAPORT... Ask a De Beers or Alrosa contract client about the biggest problems with the miners' age-old systems for selling rough, and the answer will probably include a comment on prices. High rough prices relative to polished have squeezed diamond manufacturers' profit margins for years. But there's a more complex issue behind the complaints: the lack of customization.The two mining giants sell most of their goods to fixed lists of customers that commit to buying certain quantities of rough in return for guaranteed supply. The stones traditionally come in prearranged boxes that clients can either take or refuse.Usually, each assortment contains diamonds the client wants and others it only buys to fulfill its contract. While De Beers and Alrosa have introduced some flexibility, the core reality remains: To get their hands on profitable rough, midstream players have to buy other goods that lack sufficient value."[The] number-one [issue] is customization. And second is pricing," an executive at a contract client of both Alrosa and De Beers told Rapaport News earlier this month.These two factors are closely linked. Customers have to consider not just the price of the goods they want, but also of those they'll end up storing in a safe or reselling on unfavorable terms. The problem is less acute for rough dealers that make their money trading the goods on the secondary market, as they are generally happier buying and reselling large volumes, sources explained. However, that model doesn't work for most cutting firms, which focus on polishing specific categories. Rough they can't process - either because it's not their specialty or because it's unprofitable - is almost useless to them."If you buy everything [from the miners], then you have to sell the goods you don't need, and you have to give credit to the secondary market and then collect the money," the buyer said. "That is all a big headache now. You don't know who to give credit to and how much to give.Manufacturers like us are not looking to make profits in the market by reselling the goods."De Beers: A step in the right directionBoth De Beers' and Alrosa's current supply contracts expire at the end of this year, prompting a rethink of how their systems operate. De Beers has already reacted to the concerns, unveiling plans to offer separate sales agreements for manufacturers and dealers from 2021 onward and give each business type more tailored goods. Though it did not respond to a request for comment by press time, De Beers said earlier this month it was preparing technology to improve sorting and help it allocate goods to sightholders in a more efficient way.One of De Beers' existing sales concessions, known as the buyback scheme, taps into sightholders' desire for a better product mix as a way of increasing margins. The mechanism lets clients pick out a proportion of the diamonds they have bought and sell them back to the miner at a good price, enabling them to keep only the more profitable rough. The company has allowed this for up to 30% of purchases during Covid-19, instead of the usual 10% - essentially reducing the overall price of a box. This has been especially important during the crisis, as De Beers, like Alrosa, has maintained its high price levels."They [offer more buybacks] in times of absolute distress, when they don't want to announce a price decrease because it's bad for the market," another sightholder recently explained.Alrosa: Catching upDe Beers is better at customization than Alrosa, clients say, largely because it's been in the business longer, has more advanced sorting processes, and enjoys greater independence from governments. Sightholders have been able to buy certain bespoke boxes from De Beers for a few years, though this hasn't quelled all the grievances.Alrosa's contract clients are less satisfied with the Russian miner's relatively inflexible approach. Russian authorities have significant control over its sorting methods and must approve any major changes, a source with knowledge of the company pointed out recently. Before selling, De Beers mixes most of its diamonds from the four countries in which it operates - Botswana, South Africa, Namibia and Canada. Alrosa, in contrast, has less aggregation, inhibiting its ability to customize allocations. In addition, the result can sometimes be small, inconsistent and unmarketable parcels, according to a dealer that buys from the Russian company.Alrosa plans to establish a division responsible for improving customization, and has discussed solutions with clients, said deputy CEO Evgeny Agureev last week, though he argued that low consumer demand was the more important issue for customers right now. With the coronavirus pandemic limiting business activities, change will take time, he cautioned."We also have to make some changes in our sorting, and for this we have to work in normal conditions," he elaborated. "Right now, we have to follow all social distancing rules, and it's not easy in parallel with this to start with reorganizations."Image: Rough diamonds at De Beers' offices in Calgary, Canada. (Ben Perry/Armoury Films/De Beers)