Back To Basics: A Bailout For The DTCJanuary 22, 09
Under a cloak of secrecy, DTC Managing Director
It will be recalled that the European Commission (EC) issued its final approval of the DTC’s SoC marketing mechanism back in early 2003 after it was satisfied that the competition among Sightholders for DTC goods would be fair and transparent. Somehow, it had been assumed that there would always be such a huge demand for DTC goods that the EC mainly needed to intervene to assure an equit
The most serious flaw of SoC, at least from a market perspective, is that the erstwhile cartel’s control of the supply level was moved downward to the distribution level – where supply eligibility was linked to a certain (“Bain”-conceived) behavior pattern of its clients. The DTC therefore retained its traditional rough diamond placing power; it retained its
The Bailout of the DTC
When BHP Billiton Diamonds made history a few months ago by tendering and selling rough at the then true market value (albeit admittedly only a small amount), the wake-up call was thunderous. Finally, some of the banks woke up and belatedly discovered, in the context of client-risk assessments required for the Basel II capital adequacy rules, that many of the DTC Sightholders represented a greater default risk than non-Sightholders.
When, back in 2000, all the DTC Sightholders were summoned to a London theater for the festive launch of SoC under blue and white banners heralding the “Partnership of the 21st Century,” the company announced its politically and legally correct vision of turning the supply-controlled industry into a demand-driven one. That sounded nice, but it didn’t happen. The 2000 vision has now become reality, triggered by a coalescence of a global credit crisis, a choked-up diamond pip
DTC Lost “Rough Placing” Power
For the first time, we are now enjoying a true Buyer’s Market in rough diamonds. From now on – and let’s hope forever – diamond manufacturers or rough traders will not purchase overpriced rough. They will only buy raw materials at prices at which they can sell the resultant polished output – and make a decent profit in the process. Not all DTC Sightholders have truly internalized the magnitude of the opportunity created by the current crisis.
The DTC has done at the present Sight something it should probably have done a long time ago.
It has worked hard to make new and more attractive box assortments – and, with a few Indian box exceptions – it was remark
I want to say this carefully – it seems that in some isolated boxes the gap between the DTC selling price and the true market price (based on the resultant polished) has narrowed. At the current, awfully small DTC Sight, which is still in process while we are writing these lines, the DTC wanted to sell some $200 million worth of goods. DTC clients have until Friday, 5 pm London time to decide whether or not to take the offering. Even as late as noon on Thursday – my press deadline – some clients appeared undecided while others were tight-lipped.
When I argued with one Sightholder
Because of these still lingering h
The DTC urgently needs a “legal bailout.” It needs to be released from the legal constraints imposed upon it by the EC. These constraints were mostly designed and accepted by De Beers in its desire to become legally robust and compliant in every jurisdiction where it operates. Now they are boomeranging.
DTC Sightholders: The Greater Financial Risks
This is a scenario that neither the EC nor the DTC had ever considered: a crisis so deep, so sudden and so broad that clients are paining themselves in finding ways NOT to buy rough – not only because for most of the resultant polished there is still no market, but, rather, the choked pip
In the present reality, the DTC will be un
The DTC always took pride in having, financially, the strongest and best players in the global industry. Today, that fundamental truth has been transformed into a myth. A handful of the largest clients – those who theoretically could purchase the goods rejected by other Sightholders – are technically hardly solvent and survive by the grace of their bankers. They themselves reduce their purchases – well below the 50 percent reductions of the contractually agreed level of purchases.
Throughout this decade, the market was supplied with more rough diamonds than justified by the levels of polished demand. The diamond pip
The reduced purchases by the so-called “supertanker” companies will liberate the liquidity needed to successfully position these companies for renewed growth after the crisis. But they need to survive to get there. The DTC realizes this and has publicly stated that the first three allocations in 2009 will be at 50 percent of the contract levels – and then it will review the needs for the remainder of the year. So what is the value of the contract?
The DTC has no illusions. It is quite unlikely that the goods that are “left on the t
So to what Sightholders can Varda Shine sell her goods? The current SoC system imposes excruciating legal constraints denying her much room to maneuver. Can someone who has a Botswana or Namibia Sight be invited to also take a Sight in London? Can a DTC Sightholder purchase goods from categories in which it doesn’t add value and did not qualify for an allocation? And if a company now purchases rough in categories (bands) for which it didn’t qualify – will that Sightholder continue to receive these goods when the market improves? Will the DTC become vulner
Let’s face the hard truth: the DTC and its clients are locked into three-year contracts that neither side can honor. These contracts totally lack the flexibility to meet the challenges of the current times. These contracts need to be changed, suspended or maybe even cancelled altogether. The DTC urgently needs a “legal bailout.” Actually, this is an interest shared by the entire industry if we want to operate a truly efficient rough market.
European Commission Cognizant of Crisis Contingencies
“Apparently, it needs a woman to clean the mess created by men,” sighed a diamond merchant who was aware of Shine’s visit to the Brussels EC edifices. Hidden in this week’s New Year DTC cocktail speech, Shine actually discloses her agenda. “The DTC is exploring options for bringing surplus goods to the market once every avenue of Sightholder demand has been satisfied.”
In plain English: the DTC wants to sell those goods its clients don’t want to the rest of the world. Basically, it wants to sell the goods to anyone that has the money to pay for them – conceiv
We are not privy to what the DTC has asked the EC to agree to. Varda Shine informed us that “On the surplus goods – we won’t be selling to just anybody. DTC is exploring options for offering unforecast, surplus availability beyond the current Sightholder list once every possible area of Sightholder demand has been met. This would take place strictly on a Sight by Sight basis. We should make it very clear that this would not mean that we are looking for additional Sightholders, nor does it mean we are looking to sell goods outside the ITO [Intention to Offer] system, to which we remain 100 percent committed, where there is demand from current Sightholders. The DTC remains committed to its Sightholders and their needs remain our number one priority.”
The EC Competition Commissioner Ne
One of the main principles of the effects-based approach says, “Fair and undistorted competition is the best way to make markets work better for the benefit of EU business and consumers. Healthy competition, including by dominant undertakings, should be encouraged.” Kroes says she will examine “claims put forward by dominant undertakings that their conduct is justified on efficiency grounds.” An important focus of the Commission's enforcement policy, says Kroes, “should be on protecting consumers, on protecting the process of competition and not on protecting individual competitors.”
These principles will open many doors for Shine – if she has the guts to admit that the changes in SoC are needed to protect the process of competition in the rough market, and that adherence to the current SoC system does not ensure fair and undistorted competition. She might add “at least, not anymore,” to be, and to do justice, gracious to her masters.
These are unusual days – requiring exceptional solutions. The SoC system in its present form has broken down, as it has broken many of its clients. The main financial failures in recent years were all entities associated with DTC Sight holdings. There is still much bad news ahead of us. For instance, in the U.S. some major retail chains have already – or will soon – apply for Chapter 11 or Chapter 7 of the Bankruptcy Code.
It is not clear yet what will be the outcome of Shine’s approach to Brussels. Though the DTC can look after its own interest, it seems that major changes in the SoC marketing framework – or maybe even its
If the market has matured and gotten rid of the insane compulsions to purchase rough just “to position oneself” or “to please someone” or to “curry favor” with someone, the