De Beers plans to raise diamond prices 5% every year, betting demand will help the world’s biggest miner of the precious stones meet parent Anglo American target for returns.
“We know the long-term trend, we know demand is going to be bigger than supply,” chief executive Philippe Mellier. “One of the objectives is more stable prices and to drive volatility out.”
Rough diamond prices gained about 10% this year after more than doubling in the past five as the United States economy recovered from the global financial crisis and China’s burgeoning middle class bought more of the gems. Anglo American, which owns 85% of De Beers, wants its units to deliver a 15% return on capital by 2016.
“We have a plan to get there,” Mellier said, adding De Beers returned 10% on capital last year. “My team is very focused. It’s our one objective, the objective.”
Diamonds made up about 19% of Anglo American’s $33-billion sales last year. Anglo American chief executive Mark Cutifani, who replaced Cynthia Carroll last year, is reviewing projects from Australia to Brazil in pursuit of savings and cash-flow gains.
De Beers predicts global diamond demand will grow 4% to 4.5% this year. The United States’ market, which accounts for about 37%, is forecast to gain in “high single digits” in 2014, while there is “good momentum” in the Chinese market, Mellier said.
He also expects a revival in India this year after a collapse in the rupee dented sales in 2013. The country’s share of global demand should increase to 10% from about 8% last year, Mellier said.
De Beers has already raised prices 5% and further increases are unlikely this year, he said. That would provide comfort to banks that finance De Beers’ customers. Antwerp Diamond Bank, one of the leading lenders to the industry, said last month it was cutting advances to clients after diamond producers pushed up prices too far.
De Beers sells its diamonds at 10 events each year known as sights. The stones are sold at a price set in black and yellow “sight boxes” to selected customers known as sightholders.
Since appointing Mellier in 2011, the miner has been more aggressive in pricing by cutting the discount between its selling rate and the secondary cash market. De Beers is also overhauling the way it sells diamonds by allocating them based on the financial strength and track records of buyers at earlier offerings.
Anglo American, based in London, bought the Oppenheimer family’s 40% stake in De Beers for $5.1-billion in 2012, increasing its holding to 85% and ending the dynasty’s 80-year ownership. Botswana owns the rest of the business, formed by the British imperialist Cecil John Rhodes more than 120 years ago.
Mellier is the first outsider to lead the company, which produced 31.2-million carats last year from its mines in Botswana, South Africa, Canada and Namibia. The Frenchman is a mechanical engineer with a background in cars and trains and worked at Alstom SA, Ford Motor Company and Renault SA before joining the company.