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(BLOOMBERG) De Beers' Overhaul of Diamond Industry Boosts Demand, Profits

COMMENT - This must be an older article, but it is always interesting to precisely nail down who owns (or owned) what. This article has no date attached to it.

De Beers' Overhaul of Diamond Industry Boosts Demand, Profits

Feb. 2 (Bloomberg) -- De Beers, the world's biggest diamond company, started the decade by curbing its practice of buying competitors' gems to prop up prices, seeking instead to bolster demand in the $55 billion retail market.

This year, De Beers forecasts demand will increase faster than economic growth, and analysts including Jack Jones at CIBC World Markets expect prices to rise after gaining 10 percent last year. Throughout the industry, spending on marketing rose to $420 million last year, double the figure two years earlier.

The initiative by Kimberley, South Africa-based De Beers, together with economic growth in the U.S. and Asia, is also helping competitors in the $8 billion rough diamond industry. ZAO Alrosa, which produces a fifth of the world's uncut diamonds, said sales rose 22 percent last year. Retailers such as Tiffany & Co. report rising demand for diamond jewelry.

``It's a transition from a supply-controlled market to a demand-driven market,'' said Chaim Even-Zohar of Tel Aviv-based industry consultant Tacy Ltd. ``The rough market is very hot and in the present environment there will certainly be room for significant price increases for rough diamonds.''

Anglo American plc, the world's second-largest mining company, and the Oppenheimer family each own 45 percent of De Beers, with a venture of the Botswanan government holding the remaining 10 percent. Ernest Oppenheimer, who founded Anglo in 1917, became chairman of De Beers in 1929 and set up a cartel that supported prices by buying competitors' stones.

Shares of Anglo American rose 8 pence, or 0.6 percent, to 1,249 pence Friday in London. The stock has gained 50 percent in the past 12 months, compared to a 41 percent advance for the nine- member FTSE ASX Mining Index.

De Beers Inventory

De Beers, which sells 60 percent of the world's uncut diamonds, has reduced its inventory by about $1 billion of gems annually for the past three years and should report a ``large'' decline when it releases 2003 sales on Thursday, said John Meyer, an analyst at Numis Securities Ltd. in London.

The company will report sales of about $5.4 billion, said Jones of CIBC. De Beers's sales rose 16 percent to $5.15 billion in 2002. Rio Tinto Group today reported earnings from its diamond business rose 79 percent to $113 million last year, contributing 7.5 percent to overall net income.

Coupled with the decline in inventories, De Beers has been shrinking the number of diamond cutters to whom it sells gems and prodding clients to spend more on advertising. Marketing expenditures by the industry, excluding De Beers, rose to $240 million last year, from $50 million in 2001, Tacy estimates.

The change in the industry's distribution structure has spurred cutters to seek supplies elsewhere, helping push up rough diamond prices. Alrosa, a state-owned Russian company, increased prices by 1.5 percent in January.

Rising Demand

Demand for diamonds has grown an average of about 2.9 percent annually for the past five years, said Gareth Penny, marketing director for De Beers.

Sales are increasing fastest in nations such as China, whose economy expanded 9.1 percent last year, the fastest pace in six years. Demand is also being helped by the dollar's drop against currencies such as the euro. Since diamonds are traded internationally in dollars, declines in the U.S. currency make them cheaper for people in other countries.

``It's extraordinary what the diamond industry has achieved in the last four or five years,'' Penny said in an interview. ``We have been outperforming GDP growth. There was only one year in the 1990s when that happened.''

In an effort to tap that demand companies such as Rio Tinto Group, the world's third-biggest mining company, and Aber Diamond Group have increased production.

Rio Tinto

Rio and Aber are partners in the Diavik mine in Canada, built under a lake near the Arctic Circle. Diavik will likely produce 7 million carats this year, double last year's supply, said Keith Johnson, head of Rio's diamond unit. About 120 million carats of gem, near-gem and industrial quality diamonds are produced worldwide each year.

Rio also owns Australia's Argyle mine, source of about 90 percent of the world's pink diamonds.

BHP Billiton, the world's biggest mining company, is looking to expand its diamond business because of profit margins that run at 35 percent for the Ekati mine in Canada, which it controls. The margins spur producers to mine at full capacity, said Marcus Randolph, head of BHP's diamonds and specialty products unit.

``It's one of the reasons why when demand picks up, you actually see such a strong market,'' he said. ``There's no latent production capacity.''

Synthetic Diamonds

In the future, diamond miners may face competition from synthetic gems manufactured by machines that use high temperatures and pressures up to 800,000 pounds per square-inch.

Companies such as Sarasota, Florida-based Gemesis Corp. may produce as many as 100,000 carats of diamonds larger than one carat within three years, equal to about 8 percent of the current market for large gems, said Even-Zohar of Tacy Ltd.

``This is the real reason why synthetics are such a great concern to the industry,'' he said. ``If the prices of the most expensive diamonds come under pressure, it will impact on all ranges.''

The scale of De Beers' market dominance may also be challenged by a pending European Union antitrust decision on an agreement it has to buy $800 million of stones annually from Alrosa. A decision should come in the middle of this year and it probably won't be favorable, Even-Zohar said.

Diamond Brands

Marketing initiatives diamond miners have undertaken to gain a share of the retail market and protect themselves from charges that gem sales fund civil wars in Africa may help them fend off future challenges.

BHP Billiton has joined other diamond producers in developing new marketing initiatives, introducing the AURIUS and CanadaMark brands in an effort to reassure consumers about the origin and quality of gems.

Other producers are moving into retail. De Beers is partnering with LVMH Moet Hennessy Louis Vuitton SA in a venture that includes a store in London's Bond Street. Toronto-based Aber Diamond in November said it intended to buy a majority interest in Harry Winston Inc., which has supplied jewels to celebrities including Madonna, Elizabeth Taylor and Halle Berry.

Rosy Blue, a company that buys gems from De Beers and accounts for about 7 percent of the rough diamond trade, last year started ventures with designers such as Vera Wang.

Amsterdam-based Gucci launched its first line of jewelry, including diamond jewelry, in 1998. It now has annual sales of $100 million.

That's part of a wider trend for fashion houses to offer branded jewelry. Only about 5 percent of jewelry sales are currently in the branded category, according to Sagra Maceira de Rosen, from J.P. Morgan Chase & Co. in London.

``One of the key initiatives in the diamond world is the branding of diamonds and one of the biggest trends in jewelry is the trend to brand diamonds,'' Rosen said. ``There's a huge opportunity. Everybody is rushing to do jewelry.'

Labels: ANGLO-AMERICAN, DEBEERS, DIAMONDS, MINING

posted by MrK @ 2:10 AM