The David Gleason Column
After a really dreadful year, what price De Beers, South Africa’s diamond giant and arbiter of the world’s rough diamond trade? Well, still not much – and the market underlines this view through the miserable price it continues to mark the counter.
At a conservative estimate, De Beers’s net asset value is probably about R200 a share (arrived at by adding the value of all its listed investments at their current share price to the value of all its unlisted assets, including its vast diamond stockpile, as estimated by its directors). So why is the share trading around R87/R90 – about 45% of its net value?
In a single phrase: world growth prospects is what it’s about. If South Africa has been hit in any area by the South-East Asian economic crisis, it is in its command of the global diamond business.
De Beers mines and buys rough diamonds, which it then markets to the major cutting centres through a preferred system of “sights”, awarded to diamond cutters and jewellers on the basis of their integrity and financial reliability.
Before and after World War II, De Beers’s major marketing thrust was to persuade Americans that diamonds are indeed a girl’s best friend.
The famous marketing line “A diamond is for ever” was spawned out of this programme. And as the United States became the world’s biggest buyer of diamond retail jewellery, it pretty soon became obvious it was a policy which had succeeded beyond the Oppenheimers’ wildest dreams.
The logic of that success meant it was inevitable De Beers would target Japan too. It did, with another resounding success. Only a few years ago, for example, Japan’s off-take of diamond jewellery virtually equalled that of the States.
And that’s where it ended. Since then, Japan’s appetite for diamonds has receded in line with its gathering economic recession.
Two years ago, Japan accounted for 30% of the global trade in retail diamond jewellery; it is now down to 17%. By contrast, the US is presently absorbing more than 40%.
This underlines the extent to which De Beers now finds itself hostage to USfortunes. If the USeconomy’s remarkable growth performance falters – even slows a little – then the logic is that diamond sales will tumble swiftly.
Here is a little-reported statistic from the world’s engine room – over the third quarter (ended September), savings by Americans went negative for the first time since 1933.
What it means is that Americans are enjoying their good fortune by dipping into their assets – many of which, by the way, are held on the markets.
This sobering fact is accompanied by many other indications of a slowing in USgrowth. Demand is slackening, especially in the critical area of industrial inventories; labour costs are expected to escalate rapidly into 1999 and productivity will be impacted by falling growth. That means many companies will ease the strain by reducing payrolls, and when that happens, consumer spending finally begins to contract.
De Beers, meanwhile, under the best management it’s had in decades, has to contend with misery in the Far East and some problems among its cutters in other areas, notably Tel Aviv.
At this month’s Financial Times Diamond Conference in Antwerp, Dutch bank ABN Amro’s Peter Gross said market conditions had never been so difficult.
“Like any other industry,” he said, “one can only produce over time what one can profitably sell in the markets.”
And one of the problems is that diamantaires have been forced to sell their goods into the USmarket on terms distinctly uncomfortable and which include being forced to grant long settlement periods – in some cases up to 270 days. That means they have borrowed to buy the rough from De Beers and, on top of it, are now required to finance their own sales.
There was a time, of course, when De Beers really did control the world rough diamond market. No longer. It is still the biggest player, but that brings with it its own drawbacks.
And very soon now, it will have to deal with new entrants such as BHP’s Ekati mine in Canada (already producing at a rate of about 1,5-million carats a year) and Rio Tinto’s forthcoming Diavik mine (also in Canada, about two million carats a year from 2002).
This year, De Beers will sell about $3,5- billion of rough compared with last year’s $4,6-billion. So it’s hardly surprising the share price languishes so far behind its asset value.
This is a company rich in assets and poor in its returns. For that reason, investors will give it a wide berth until there’s evidence of renewed economic growth on a global scale.