De Beers sparkles in first half of 2010
Most people in the diamond business take a fairly casual interest in the ups and downs of De Beers.
Gone are the days when De Beers accounted for 80% or 90% of global rough diamond supply (it’s around 40-45% today), and in fact most people in the world of diamonds and jewellery don’t actually do any business with De Beers anyway.
That’s because the diamond mining giant sells its rough diamonds to a limited number (less than 100) of diamond cutting companies who then distribute the polished diamonds on to jewellers and retailers around the world.
But my background at De Beers means I still pay more attention than most, so when De Beers published their interim results for 2010 last week I took some time to study the results and to read the extensive press coverage that they generated over the weekend.
Rightly or wrongly, the result that usually leads the story is the top line number for Sales.
2009 was something of an annus horribilis for De Beers and for many in the diamond business (De Beers almost stopped mining for a while: diamond production dropped by over 90% in the first three months of the year), so analysts were looking for something of a rebound in 2010.
And as the chart below shows, sales of rough diamonds by De Beers did bounce back well in the first half of 2010. They’re not yet back to the $3+ billion figures seen in the pre-crisis years of 2006-2008, but 2010 is a marked improvement on the disastrous sales result from early 2009.
On the back of improved sales over the last six months De Beers also pumped up its diamond production, which leapt from 6.6 million carats in H1 2009 to 15.4 million carats in H1 2010.
Looking forward, much now depends upon how those diamonds move through the ‘diamond pipeline’ – they still have some distance to travel once they’ve left the vaults at De Beers.
Diamonds often take months to cut & polish, and then there’s onward trading of polished diamonds (they can change hands several times), setting into jewellery, international distribution, more trading… all before they appear for sale on retailers’ shelves in time for the key Christmas season in the USA – the world’s largest diamond market.
So improved sales for rough diamonds in early 2010 is an encouraging portent as the industry restocks with diamonds following last year’s slump, but that optimism will be tempered by caution and anxiety about just how strong the recovery will prove to be at retail/consumer level.
Uncertainty over the recovery of demand in the US is offset by optimism about sustained demand growth in emerging markets such as India, and more particularly, China. But only up to a point: the US accounts for around 50% of global diamond consumption, and China might be growing fast, but it’s not yet even 10% of global demand.
Back to De Beers. I was impressed by something else in the figures: Net Earnings.
De Beers has cut its costs aggressively over the last 18 months and this has shown up in the figures in a striking way. Net Earnings (before special items) for the half year were regularly topping $300 million before the financial crisis took hold, but in 2009 earnings almost completely dried up – they were just $3m for the first half of the year, as shown below.
But look at the impressive rebound in 2010: Net Earnings are back up to $300m+, and those earnings have been generated from a fairly modest (in historical terms) sales figure.
So the tough medicine of slashing costs has worked: De Beers is generating cash once again – impressive cash for its current level of sales – allowing it to pay down some of its considerable debt and to begin to repay the shareholder loans that it took on to survive through the darkest days of last year’s slump in demand for its product.
The financial crisis took De Beers to the edge of the abyss, but it’s done what all good businesses should do in such circumstances: it turned the crisis into an opportunity. De Beers grasped the opportunity to look at its costs and it’s emerged from the crisis leaner, fitter, and better able to compete as the recovery gathers pace.
De Beers CEO Resigns
Perhaps even more eyecatching and surprising than the upbeat results last week was the news that De Beers CEO, Gareth Penny, is to step down by the end of the year.
Penny has been at De Beers for 22 years and has run the company for the last 5 years. I should declare something of a personal interest here: I worked for Gareth for most of the last decade and I acted as his personal assistant for a period in 2003-2004.
The diamond industry has – in my experience – always been fairly conservative, traditional, and family-based (De Beers is still part-owned and run by the Oppenheimer family). In some ways of course, that’s a strength rather than a weakness.
Change tends to come slowly to De Beers and to the diamond industry. Perhaps that’s inevitable in a business that deals with a product that’s up to 4 billion years old: A diamond is forever, after all.
But the rate of change within the diamond business has increased over the last decade. Not everybody signed up to the changes – they never do – and no doubt some wrong turns were taken in the chaos and upheaval created by the new environment.
Gareth Penny has been at the forefront of the changes that have come to De Beers and to the diamond industry in recent years.
He led a major strategic review at De Beers a decade ago – a review that guided De Beers out from behind the iron curtain of monopolistic practices – and the repercussions of that review are still being felt by the company and by the industry.
For the industry, it meant that many diamond businesses were encouraged to turn around, to look downstream to face consumers rather than upstream to worship at the feet of De Beers.
As a result, lots of money was wasted on ill-conceived marketing initiatives: not every business can or should be involved in consumer marketing. Many businesses in the middle of the diamond pipeline know that their strength is in understanding the needs of their immediate customers rather than trying to understand and reach consumers half a world away.
But lots of money is wasted on ill-conceived marketing initiatives by lots of companies in all industries. And just because some diamond companies invested in some pretty dodgy marketing schemes completely lacking in consumer appeal – well, let’s just say that it became a little too easy, predictable and routine to blame De Beers for one’s own strategic errors.
For De Beers, Gareth Penny’s legacy has included a much greater focus on social responsibility (which in turn changed the broader industry, although there is much still to do, viz Zimbabwe), and also a newfound zeal for legal compliance which led to important deals with the European Commission and the US Department of Justice (although class action suits continue to cause trouble for De Beers in the US).
Penny played a major role in dragging a monopolistic 120+ year old company into the 21st century, and his policies changed not just De Beers but also impacted upon the wider diamond and jewellery industries.
His last couple of years at De Beers were dominated by steering the company through the financial crisis, something he seems to have done remarkably well, but I suspect he would rather be remembered for the profound strategic changes that he launched a decade ago than for the cost-cutting of the recent past.
Well, we can’t always choose our legacy, and in any event, Gareth Penny has chosen to quit whilst he’s ahead, and that’s not a bad thing to do.